Power-sharing and decision-making structure can hamper firm performance.

When a civil engineering firm has a good governance model, things are prone to run smoothly. When a design firm has a bad governance model, things can often get out of hand. Governance is about power and control and how it is shared in an organization. It is about how decisions are made and who makes them. The basic concepts of governance for design firms are the same as for any organization. The challenge is that all of the owners are usually employees, and all of the board members usually work for the CEO/chairman of the board. What this means is that design firms are more prone to bad governance than most organizations. In addition, there are not a lot of models to use as guides in building a strong governance process in design firms. This makes it difficult to determine how to make improvements.

My work with design firms has shown that a lot of firms are operating with a bad governance model. While I do not have any supporting statistics, I estimate that only 20 percent of the firms have great governance models, 50 percent have acceptable governance models, and 30 percent have bad governance models. Most of the firms in the bottom third probably sense that something is wrong but do not realize the cost associated with bad governance. Some of the firms that only have acceptable models may also be paying the cost.

While many areas within a firm may be impacted when governance is not working well, the following discussion focuses on three areas: failure to build an ownership culture, inability to make decisions, and lack of a smooth leadership transition.

Ownership culture
If a design firm is to remain viable as an independent entity, it must have a strong ownership culture. Like most other professional service firms, design firms work best under an owner/operator mentality. When the firm does well, the owners do well. Work hard and you too can become an owner. This is particularly true for the younger men and women in the firm who aspire to get ahead in their careers. Retaining these key employees is an ongoing challenge for most firms; telling them that their career path could include ownership provides the brass ring that most are looking for.

When they are approached about ownership, however, one of the factors that determines the attractiveness of the offer is how well the governance model is working. When there is a bad governance model in place, people wonder what they might be buying into. If the firm does not have a functioning board that provides strategic direction and management oversight, new owners may find it difficult to make the investment and commitment to the company. Often they feel that it is not really a business, but rather just a practice of a few key individuals. If they are not going to be one of those key individuals, why invest?

Founder firms struggle with this more than others. Founders often run the company like it is their own company—and usually it is. If they want others to buy the firm from them, however, they need to stop operating in this manner and become accountable to those they bring into ownership to be successful in the transition.

Decision making
At its root, governance is about power and control and how it is shared within the organization. When a bad governance model is in place, making decisions is difficult, since managers lack a clear understanding of who has the responsibility and authority to make decisions. The cost of not being able to make decisions is three-fold. First, opportunities are lost. The company needs to have a way to make decisions in a timely manner or it may lose out on projects, recruiting, or business opportunities. Second, when it is not clear who makes the decision, everyone believes he or she should be involved. The more people involved, the more time is wasted. Furthermore, decisions are often never made. Finally, there is the cost associated with the image that the staff has of leadership. "Can’t these guys agree on anything?" is often heard at the water cooler. In these cases, it is hard for the staff to respect management; this sometimes leads them to look for opportunities at other firms.

It is too bad when this happens. Usually, a firm has people who are capable of making the required decisions. Without a clear understanding of responsibilities, however, others feel that they too need to be involved in decisions. It is not always necessary to make a perfect decision, but it is important to make a decision and move on.

Leadership transition
Every four or eight years, when a new U.S. president is inaugurated, news commentators are quick to observe that our ability to change the country’s senior leadership without a hiccup in the way government is run is a testament to the strength of our political system. In other words, our strong governance model makes leadership transition a smooth process. This is also the case in companies. When a company has a bad governance model, however, the transition to a new leader is difficult and often of great concern to people who work there.

Without a good governance process, determining how decisions are made and power is shared depends on the individual, not the process. This makes it much more difficult, and in extreme cases impossible, for new leaders to become effective in their roles. The new leader and other members of the management team waste a lot of time trying to establish a new framework for decision making. In extreme cases, the new leader may be reigned in so tightly by the other owners that he or she effectively has no power.

Good governance
All this talk about bad governance may have you wondering what good governance looks like. When a firm has a good governance model in place, it brings such a high level of sophistication to its management that people notice the difference. With good governance, shareholders feel comfortable that someone is looking out for their interests. In addition, they know that there is a level of accountability between management and the board to ensure that the firm is performing at the highest possible level.

Some of the key elements of good governance include the following.

• Shareholders, board members, and management have a firm understanding of their roles. Given that the men and women filling these roles are often one in the same, it is important to understand what hat they are wearing when they make decisions.
• Board meetings feature open and honest discussions. Each board member realizes the duty he or she has on the board and feels free to challenge the CEO in board matters. A seat on the board is important real estate and should not be squandered on those who are not willing to accept the role.
• Board membership is not limited to "the club" of senior owners. While there may be a core of senior management on the board, others should have an opportunity to participate as well.
• Information flows between the board and shareholders, and visa-versa.
• The board speaks with one voice. It is not uncommon for a healthy board to have disagreements and heated debates. But when they come out of the board room, each board member needs to get behind the board’s decision.

Turning liabilities into assets
When a company has a bad governance model, it is not able to realize its full potential as an organization. It operates with a weight tied to its ankle. Bad governance is a liability, but it doesn’t have to be this way. By focusing on the elements of good governance, it is possible to turn a liability into an asset. Good governance has value, and it is worth the investment.

Doug Thompson, a management consultant serving the design industry since 1991, focuses on strategy and governance. He can be reached at doug@thompson-strategy.com.