The evolution of firm governance

September 2009 » Columns » BEYOND WORDS
Doug Thompson

In my nearly 20 years working with architecture and engineering (A/E) firms, I have had the opportunity to observe many organizations and study how they work. I have learned that, when it comes to leadership, one size does not fit all. The uniqueness of management teams and ownership structures creates variations in an organization’s design. However, a few concepts apply to all organizations, and one of these is governance.

Governance is about how power and control are shared within an organization. Professional service companies, such as A/E firms, face a challenge because owners wear multiple hats — shareholder, board member, and manager. As firms grow and the ownership evolves, the governance roles that leaders play also need to evolve. During each step in this evolution, powerful forces create a strong tendency for leaders to slip back into old roles. Confidence to move forward comes from knowing that others are performing the required tasks associated with the role.

Consider a start-up firm established by a small group of engineers. Everyone is a doer, working on projects and meeting with clients. Once the firm reaches a certain size, however, someone needs to step back from the company’s day-to-day activities and dedicate a great deal of time to managing the firm. Nevertheless, a sense of gravity seems to pull the manager back to the project role, back to his or her comfort zone. Confidence to move into a management position comes from the knowledge that others can handle projects successfully.

At some point, owners realize that they need to spend more time discussing strategic issues. In a small group, all of the owners will be included in such discussions. Although such a group probably exists already — from a legal perspective — as the board of directors, company growth means expanding the board members’ roles to include oversight and strategy. Despite that broad goal, gravity will pull the owners back to discussing management-related topics. To move on to more strategic discussions, owners need the confidence that management issues are being addressed separately, when they — or others in the firm — are wearing their management hats.

As the governance model evolves, more owners are added. At some point, the number of owners will exceed the number of seats in the board room. This is a big step since ownership is no longer synonymous with “sitting at the table.” Moving forward requires that this transition occur successfully. Shareholders must overcome the feeling that being an owner means that they should also be on the board. Confidence comes from knowing that the board is discussing the right topics and reaching the best decisions.

Building a board that gives shareholders this confidence is one of the greatest challenges in the evolution of A/E firm governance, and there are two primary components of building this team.

The first is talking about the right things. The topics for discussion in the board room are not all that different than those discussed by the management team. The topics include finances, risk, leadership development, ownership transition, and strategy. However, these discussions take place at a higher level.

Consider, for example, financial concerns. Often boards receive thick packets of financial data. Members either wade through the material looking to digest every detail, or their eyes glaze over and the discussion moves quickly to the next topic. The board does not need to get into the details; rather, board members should hold onto a handful of key indicators that they understand fully, realizing the impact they have on the firm’s success. Analyzing the details is appropriate when these individuals are wearing their management hat, not their board member hat.

The second component of a successful board is perfecting the way issues are discussed. Having open discussions is just as important as getting the right topics on the agenda. The toughest challenge is overcoming the hierarchy that exists outside the board room. Around the board table, everyone is equal — one vote per seat — and dissent is not a bad thing. Too often, however, members defer to firm management seniority. This leads to conflict avoidance, but means that issues are not fully vetted. Discussing important problems this way diminishes the board’s quality, as well as shareholders’ confidence in the board’s decisions. Although decisions do not need to be unanimous, all board members must support a decision once it is made.

From my vantage point, struggles with firm governance are usually related to evolution of ownership and management. When firms fail to recognize the need to transition to the next level, they have a difficult time making decisions in a timely manner and building a strong ownership culture. However, when they are successful in making the transition, they find that the organization is more likely to reach its full potential.

Doug Thompson is a management consultant for Thompson Strategy Consulting, which specializes in governance for A/E firms. He can be contacted at doug@thompson-strategy.com.


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