“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.
What does empty structures syndrome look like? Four main inconsistencies typically arise:
- 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.
- 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 the others’ lack of commitment. Those who don’t serve, and sometimes even those who do, disengage from the governance process almost entirely.
- 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.
- 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.
In many empty structure 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 may be 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.
Diagnosing 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:
- Is the structure sustainable?
- Are discussions candid and direct?
- Do pre- or post-meetings dominate decision making?
- Are heart-of-the-matter issues addressed or punted to future sessions?
- Is now the time for leadership to turn over? Is there a mechanism in place for that to happen?
2. 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.
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:
- Find the genuine connections among family members and build from there.
- Discuss together what they’re proud of in the legacy and agree on what they want their children to learn.
- 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.
The goal of an advisor in this situation 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.
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:
- providing the information owners need to understand what they own;
- encouraging owner education on business, financial and ownership topics; and
- consulting owners on key decisions, even when the trustee has the power to make those decisions without consultation.
As an advisor, be careful not 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 controlling the room.
Even excellent governance practices don’t ensure that family enterprises will function well. Lack of psychological ownership and decreased engagement with governance often creep into systems when they get larger. As trusted advisors, it’s incumbent on us to spot these empty structures as they develop.
This is an adapted version of the authors’ original article in the August 2018 issue of Trusts & Estates.