Overloaded Structures

How to meet the needs of increasingly complex business families

Sue was exhausted. Five years after helping to design and launch her Family Council, and two years after assuming leadership of it, she felt she had no more to give. Her life had become exponentially more complex in that time, adding two children and starting a full-time job. As a result, it was increasingly impossible for her to dedicate the necessary one day per week to the Family Council. And while she was still willing to make time for the effort, none of her siblings or cousins were willing to step up to the leadership plate. Something had to change.

Bob was anxious, too. Forty years into a career as a CFO at a growing founder-managed oil and gas business, he was feeling pressure from all sides. Simple requests to help the founder with tax returns and estate planning had morphed into demands for guidance related to the intertwined trusts of the founder’s three grown children and their offspring. Bob was increasingly pushed into areas beyond his expertise. On top of the increasingly complex lease arrangements and multi-party land-ownership contracts, Bob felt he couldn’t say no to the founder’s children’s escalating requests for help. Would they fire him when their father retired if he pushed back?

Because these governance structures are built over time, families often either don’t see, or choose to ignore, the signs of overload.

At first glance, these two vignettes may seem unrelated. But, in fact, they both represent a similar phenomenon that affects many business families: “overloaded structures.” This is a term we use to describe situations where business families grow in ways that add a level of complexity that outstrips the ability of existing governance and professional infrastructure to manage it. Because these governance structures are built over time, families often either don’t see, or choose to ignore, the signs of overload. But the consequences of not addressing the problem can be devastating.

Where do “overloaded structures” come from?

In cases like Sue’s, the problem arises when family or owner governance activities need a level of support beyond what family volunteers can provide. Often this is because the family has grown, the list of issues needing attention becomes too long, and the volunteers’ own lives have less room to meet the increasing demands as they juggle family and professional responsibilities. Family volunteers (for example Family Council or Owner Council members, those who support philanthropic activities, or those who plan events or work on other family projects) can no longer be the “glue” that holds family governance and communications activities together.

Family volunteers can no longer be the “glue” that holds family governance and communications activities together.

Overloaded structures can also develop in “proto” (or embedded) family offices such as the one that Bob was leading. In these situations, non-family leaders carry a mostly invisible family workload that can interfere with their corporate responsibilities. And that workload only increases over time as family members get older and live more complicated lives, and as business ownership gets more complex.

Bob and Sue’s experiences are indicative of the three typical warning signs that say it’s time to address overloaded structures, according to the Harvard Business Review Family Business Handbook (Baron and Lachenauer, January 2021). Based on their conversation with noted family office advisor Kathryn McCarthy, Baron and Lachenauer suggest that you might have a problem if:

• Pressing needs are not met. You have identified issues that need professional management – such as the diversification and liquidity of your investments, the interface between the company and family members who either do and don’t work in the business, or the issues related to shared assets such as family vacation homes – but you don’t have people to manage them.
• Professional expertise is lacking. Your family’s assets and needs extend beyond what, say, a competent CFO within the business can manage: for example, you need sophisticated trust management services.
• Family and/or owner governance need support. Who calls the shareholder meetings? Who ensures that family members are informed about important developments? Who will take responsibility for educating and mentoring the next generation? Even when a family member plays a leadership role on these issues, it can be helpful to have professional support to organize the calendar and logistics.

Some families choose to address overloaded structures by reducing the overload – simplifying governance and setting clearer priorities. Reducing unnecessary complexity helps but can be difficult to sustain. Many families in this situation choose to create a single-family office that can provide critical expertise, effective management, and sound administration for governance.

Why you can’t ignore the warning signs

Overloaded structures can be highly destructive. Often those family members crunched by personal and family demands end up disengaging entirely, or resenting others who have been less involved. This discontent can be damaging to family unity and cohesion. And without volunteer support, governance structures can lose their utility as effective communication forums, becoming “empty structures” and leading to further breakdown and splintering.

On the other side, when non-family members unknowingly find themselves in an overloaded structure the outcomes have the potential to be even more dysfunctional. If informal job demands outgrow someone’s skillset, mistakes in legal or other technical areas can occur, which can have a negative financial or legal impact on the business. Beyond the possible errors, overloaded structures can cause non-family executives to become caught in the middle of family tensions as they navigate conflicting needs and demands of multiple generations. The anxieties and downside risks of this position cause many valued non-family executives like Bob to choose an early exit.

How can families build out new infrastructure?

So what can family owners do when they realize they have “overloaded structures?” First, it is critical for the family to step back and acknowledge the changing dynamics. The natural evolution of successful family businesses brings additional complexity – this is normal.

At this stage family owners need to consider how to bolster their governance and shareholder services infrastructure. This is most often achieved by adding capabilities to the organization through a single-family office (SFO). When most people hear of a family office, they often think about investment professionals managing a large sum of money. But not all family offices are investment offices: in the cases we present here, the purpose of the family office is to help with managing the governance, tax, business, and financial demands of growing family and owner groups. These SFO’s can start small and, if needed, evolve in formality as the family owners’ needs grow.

In Sue’s case, the family built a “governance” office designed mostly around engaging the family, managing the administrative tasks, and providing education, coordination, and communication services for the family. In Bob’s case, the family built a “support” office designed to formally separate and contract for tax, accounting, trust, transaction, and estate planning services that were no longer appropriate to deliver from within the business. In both cases, the family successfully matched the needs, availability, and interest of the family with the infrastructure of the enterprise – creating support that, in effect, is what we call “fit for purpose.”

Regardless of what type of SFO you create, it is important to take the long-term view and align on a vision, long-term objectives, and tangible metrics to evaluate your success.

Regardless of what type of SFO you create, it is important to take the long-term view and align on a vision, long-term objectives, and tangible metrics to evaluate your success. And be sure that you build in good governance and accountability for the new family office. Lastly, remember that “businesses move in days and weeks, while families move in months and years” and take it one step at a time. Going slow at the outset to assure that family owners are aligned will enable you to move more quickly and confidently later on – as you support an increasingly diverse set of stakeholders, many with different interests, in an ever-changing world.

Conclusion

Family business are complex organisms that evolve constantly. Keeping the family owners cohesive, aligned, and organized requires considerable effort and a lot of proverbial “glue.” Growing business families can easily fall victim to “overloaded structures,” leading to resentment and disarray. If you see these signs, act quickly to explore creating a family office so that the growing needs of the business family can be met.

Originally published on LinkedIn on 10 June 2021