Governance/Decision-making Article

Empty Structures Syndrome

By Marion McCollom Hampton and Nick Di Loreto

It’s a paradox: Some family owner groups in the third, fourth, fifth generation and beyond have sophisticated governance structures and a history of embracing world-class family business advisory help. They may have even been awarded global recognition for best practices in governance. But, a growing sense of dissatisfaction has crept in among the family owners. As an advisor, you can feel it too – low attendance among family owners at meetings, a disinterested and quiet room even if attendees show up and a sense that members are just going through the motions and rubber-stamping decisions. Decisions don’t feel representative of the family’s interests. Something just doesn’t feel right, as if the glue holding the system together is disintegrating. What’s going on?

“Empty structures syndrome” is a term we use to describe a situation in which family owners have come to feel little authority over, or psychological ownership of, their family business governance. This malaise may occur in the family, board, management and/or owner domains and can go in one of two directions: increased tension and overt conflict or apathy and owner disengagement. Either situation, if left unaddressed, can ultimately lead to a splintering of the stakeholder group. As an advisor, neither scenario is one in which you want to find yourself. Not only do you risk getting blamed for the dysfunction or caught in the crossfire of family tensions – the prospect of litigation can be enough to make  any  advisor  want  to  keep  his  head down – but also it’s not very rewarding to work with clients who seem apathetic as you try to guide them through the predictable challenges of owning assets collectively. Are you dealing with empty structures syndrome in your work? Here’s how to recognize when empty structures may have taken over.

Four Main Inconsistencies

What does empty structures syndrome look like? Four main inconsistencies typically signify empty structures syndrome:

  1. There are well-crafted mission, vision, purpose and/or values statements. There may even be detailed rules, processes and decision structures, but concern or dissent is growing in the family owner group about the family’s common purpose. Mistrust and suspicion about other family members’ values are on the rise.
  2. There may be sophisticated programs and procedures for owner development and meeting planning, but there’s decreasing interest to serve on boards and councils or participate in meetings. Those who continue to show up feel burdened and disappointed at others’ lack of commitment. Those who don’t serve, and sometimes even those who do, disengage from the governance process almost entirely.
  3. Formal decision groups exist to represent individuals’ interests and enforce rules and guidelines in existing structures and beyond, but these groups decline to act when members break the rules, in small or large ways.
  4. Communication guidelines and forums for discussion exist, but regular leaks occur. People avoid addressing the real issues in the forums designed for open discussion. Instead, they share complaints with like-minded individuals, telephone-game style, often in pre- or post-meeting huddles.

Increasing Family Tensions

Consider one family (all identifying characteristics have been changed): The first generation patriarch established an investment management company in the late 1970s. Through tax planning and gifting, he transferred ownership in trust to his four children in the late 1990s. As part of that process, he established a board, including his most trusted non-family advisor in a non-voting role, to make investment decisions. But in practice, he retained all decision-making power.

Over the years, he approved two investments that benefited his two eldest children without consulting their siblings or the board. No one challenged the patriarch. Later, when the patriarch’s health began to fail, he withdrew from the board, leaving the four siblings and his trusted advisor to manage investments. The board met regularly, but only to review a list of investments and the performance of other current investments.

Fast forward: Two years after the patriarch passed, one of the younger siblings proposed an investment that would unequally benefit himself and his sister, to the detriment of the two elder siblings. The investment also violated one of the unwritten rules established by the patriarch. The trusted advisor was caught in the middle, listening to complaints not only on both sides of the conflict within the board but also from the wider family, with whom he had established strong relationships over the years. The wider family saw this investment proposal as payback for the earlier decisions that favored the older siblings. Despite many informal objections, the board failed to block the investment. Reacting to this impasse, one of the older brothers stopped coming to board meet- ings, while the other hired a lawyer to closely review the books. The trusted advisor was at a loss for what to do.

Ultimately, nothing came of the objections. Today, the family continues to grumble about the lack of leadership on the board, and several have wondered out loud if it’s time to take their own portion of the portfolio elsewhere.

Reason for Increased Tensions

In the above example (and in other empty structures situations), governance becomes obligatory: The family continues to go through the motions, acting as if occupying the governance roles and holding meetings equate to having a collective, energized purpose as owners and family members. But, the structures don’t reflect the needs and priorities of the current generation. And often, no one is willing to say this.

Even worse, and even if the family’s trusted advisors are seen as neutral, the governance structures are perceived as politicized, controlled by an individual, a generation or a branch. So, family beneficiaries and owners don’t trust the structures and subsequently don’t use them for the most important functions: cross-generational and cross-branch communication. Tensions mount because the most important conversations aren’t happening.

What’s Missing?

When we see this situation in our practice, we ask: What purpose should be served by the governance processes? What were these structures and practices set up to achieve? In many cases, we can look back to an earlier time and see that governance was designed to serve a purpose defined by the prior generation. In the example above (and in many other family enterprises), the real purpose of governance (meaning, the underlying emotional purpose) is to reassure the patriarch that the family will stay together.

The problem is, when a family owner group gets larger and more diverse, the purpose of governance – and of collective ownership – is defined quite differently by each family owner. At this stage, no one person has the patriarchal authority to say what the purpose is, and if someone tries, others see these statements as political, serving the generational or branch interests of the speaker. What we see, of course, is that family dynamics influence how purpose is expressed and taken up. In the face of a generational transition, purpose (and in turn, governance) needs to be redefined and so re-energized.

Let’s be clear: These families often retain a sense of connectedness even if they feel alienated from the governance structures that are supposed to facilitate their collective ownership of the business. The spark is still there. They may enjoy each other’s company. They may feel loyal to the business, to the employees and executives and to the customers. They almost always revere the family business history and legacy.

But, these feelings rarely generate a connection or sense of common purpose strong enough to align the family’s diverse interests. What they’ve lost is the compelling reason to exercise the discipline of governance when that discipline might create conflict. They wonder if doing what’s best for the whole (the business, the family) will be what’s best for themselves and their families. They certainly don’t have the confidence that the structures are strong enough to survive a direct expression of the different interests within the owner group. As a result, without parental referees, many family groups disengage to get along. But, there’s hope for families who are locked in empty structures, and advisors can play a critical role in helping them find a way forward.

Identifying an Empty Structure

Even when advisors have thought through and meticulously prepared governance and shareholder documents, it doesn’t always follow that the structures and processes that have been set up will actually work for the family in practice. Don’t assume just because there might be a family or ownership council in place that the group is functioning well. Advisors can play an important role in recognizing empty structures and setting the family on a more productive course:

  1. Ask each entity within the existing governance groups to self-assess at least annually. Some questions to consider include:
  1. Ask stakeholders about how satisfied they are that the current governance is meeting their needs. In addition, pay close attention to the conversations about these issues among the family stakeholders. Informal and private conversations can often surface tensions that aren’t addressed in broader groups.

Of course, identifying empty structures is only the first step. Advisors often can also help facilitate a discussion with families to help reinvigorate their governance structures and re-establish their ownership over them.

Re-energizing Governance

Usually, when there are empty structures, no one has asked the current owner group: “What’s your purpose?” Tweaking or overhauling governance should come only after the owner group has engaged in a process to answer this question. Advisors can guide families to consider, discuss and begin to define (or redefine) their purpose. In our experience, we’ve found that these stakeholders often become energized and begin the process to redefine their purpose – if they’re able to accomplish three major tasks:

  1. Find the genuine connections among family members and build from there.
  2. Discuss together what they’re proud of in the legacy and agree on what they want their children to learn.
  3. Commit together to something larger than individual interests, something that connects them to the family business legacy but goes beyond. These commitments usually include some shared community and/or charitable causes.

Your goal, as an advisor, can be to start the conversations on purpose and legacy. Once those are clarified, then you can help the family refresh its governance structures to serve that purpose and legacy for the current generation of owners – and the next one, as well. Your mutual goal should be to strip away any unnecessary elements of governance and to build support for areas of need. Don’t shy away from asking challenging questions and addressing tough issues that arise. Sometimes, the most effective way for a group to refresh is to address the proverbial elephant in the room, even when that communication requires difficult conversations.

An additional way to re-energize governance is to be sure that the right people, with the right mandate, are having the right conversations about the right issues. A comprehensive governance system creates clear separation among the roles and responsibilities of the owners, board, management and family members. While that may sound straightforward, it can be tricky to get it right – and any confusion can accelerate the onset of empty structures. Roles and boundaries that made sense for one generation may not work for the next, or the business may have evolved far beyond what the original thinking anticipated.

When working with family members who own a business together, we’ve found it helpful to use an analogy of a “four-room model” as a framework to clarify the often-muddled roles of family participation in the family business. The model creates separate forums for the different types of conversations and decisions belonging to each of the four rooms: the owner room, the board room, the management room and the family room.

There must be clear boundaries between the appropriate dialogue and decision-making processes from one room to the next. Especially in family businesses, in which one individual may play multiple roles, it’s important to know what perspective he’s coming from during different conversations. Re-energizing the formal and informal governance structures in a family enterprise can help redefine and realign the right roles and responsibilities that make sense for the current and future generations of ownership and their vision.

Avoiding Empty Structures Syndrome

The best way to solve empty structures syndrome is to be cautious as you design governance in the first place.

As advisors, finding ways to keep family owners feeling empowered is critical to having an engaged ownership group. With all the good intentions in the world, even a great trustee can unintentionally trigger passive behaviors in family owners by not:

In addition, if trustees are too invested in taking care of the beneficiaries, they often reinforce passive and disengaged behaviors. They can unwittingly make the owner group dependent by efficiently setting the agenda, running all meetings (and keeping them to a minimum) and restricting who gets to see what information. And, when trustees do meet with the owner group, it’s essential that they don’t over-structure the time together. As an advisor, don’t take up all of the air in the room. Leave time and space for the owners to contemplate decisions and contribute to the conversation. Accept less efficiency for the benefit of deeper understanding and personal connections. Even when the intentions are good, the energy for participants to be engaged tends   to get sapped away when someone in authority is con- trolling the room.

Final Thoughts

Even excellent governance practices don’t ensure that family enterprises will function well. Lack of psycho- logical ownership and decreased engagement with governance often creep into systems when they get larger. In fact, empty structures might be a natural development within family business systems if collective interests aren’t revisited, purpose isn’t redefined and governance doesn’t evolve with each new generation. As trusted advisors, it’s incumbent on us to spot these empty structures as they develop. When we do, we can shape our own roles to strike the right balance between competent guidance and unintentional enabling, spark the client conversations necessary to define their collective purpose, and help our clients re-energize their governance structures and practices.

First Published : August, 2018. Trust & Estates Magazine