From the Chairman: Governance avoidance

This article first appeared in The Zweig Letter (ISSN 1068-1310) Issue # 994 Originally published 2/11/2013 Most architects and engineers never studied how to run a business, so the issue of governance becomes increasingly complex with growth. It seems that, while I’m rarely engaged by my clients to work on governance (it’s usually strategic planning, acquisition or merger, marketing and sales, or some other issue the leadership of the firm is confronting), the subject of governance seems to rear its ugly head early in our conversations. Why do I say “ugly?” Because governance seems to be a painful discussion topic for most firms since it involves personalities… and egos… and emotions… and conflicts… and we all know that no one wants to deal with that stuff. So it has been shoved under the carpet or out the door and ignored for years. Sometimes the problems come out as questions about organizational structure; the catalyst may be leadership transition or how to insert a new person from outside the firm into a leadership role; often it’s about the configuration, role and makeup of the board of directors mandated by the firm’s bylaws and whether the board should include outside members. If so, should they be voting members or simply serve in an advisory capacity? (Or, for professional service firms, a board of directors seems so formal, so corporate. Do we really need to have one?) In other words, people nibble around the tactical issues without addressing the core questions – what needs to be “governed” and who’s going to do it? Governance is a tricky issue to address as the role, requirements and the time that the governance function consumes varies broadly as a firm scales from a handful of people through various sizes – 50, 100, 150, up to 1,000 or more in multiple offices scattered all over the world. Fundamentally, governance embodies the following: Leadership · Where is the firm going and why? · Who serves in a governance role and how will they transition over time? · What businesses should we be in and how will these businesses be led and managed? Key roles in the firm · When and who should hire senior people from outside the firm · Promotions to new levels of responsibility and authority · Termination of underperformers · Decision-making responsibility · Who has authority for what? · What are the rules by which we all agree to live? Financial performance · Assuring rigorous process management and reporting · Responsible oversight of the firm’s balance sheet and profitability · Investment decisions about new offices, new practice areas, acquisitions or divestitures, new hires, equipment and training · Compensation, reward systems and benefits Or, to say it another way, the tough decisions on difficult subjects that no one wants to confront, let alone stay with long enough to resolve. Every firm needs to identify where guidance and direction for these issues is going to come from and where the buck stops when a direction needs to be chosen and tough issues confronted. It’s easy when a firm forms around an individual. He or she just calls all the shots. Partners add complexity. They’re never perfectly aligned and must come to terms with each other’s differences to avoid confusion for the firm. Corporate structures in larger firms add another level of potential for conflict over authority and direction. And, of course, generational succession requires the firm’s leadership to come to terms with new personalities and, often, values as governance transition takes place. I know, I know, you just wanted to be an architect or engineer. When you were studying no one ever told you that you were going to have to run a business. There weren’t any courses focused on these subjects, except a perfunctory one-semester 3-unit Professional Practice seminar, usually taught by a practitioner whose total experience in the subject was leading a 10-person firm for which his wife kept the books (and the reality is that most of the firms in this country have less than 10 people in them). Small firms simply don’t have sufficient cash flow to generate a sufficient margin to dedicate some thinking time to these issues, let alone to “professionalize” them. They are, indeed, run out of the hip pockets of one, two or three partners who got together and hung out the proverbial shingle. The problem is that if you start to grow, you find that the time dedicated to governance issues grows as well. You wake up one morning and say, “I just want to go back to doing engineering, or architecture,” decide not to grow (“Gee, wasn’t it wonderful when there were just 10 of us?”), and self-limit your potential. The problem here is that the world has begun to shift. Projects are becoming more complex, larger and sophisticated requiring larger, well-integrated teams of specialists; clients have become regional, national or global. While small, one-off projects still exist and are suitable for small local firms, the work they do is often with unsophisticated purchasers of their service; clients who don’t know how to buy from or work with an architect or engineer, and they tend to be high-risk, low-reward relationships. A handful of small firms have been able to expand their geographic and project scale and reach by developing a unique, world-class, narrowly focused expertise that is unique in the marketplace. But they usually grow to 25 or 50 people, a size too small with clients too sophisticated and responsibilities too great to allow firm governance to be done out of your hip pocket. As you can imagine, there are no one-size-fits-all formulas for governance. I can’t even give you five templates; a menu from which you can find the model that fits your firm the best. Nor is there a model that, once you’ve fitted yourself into it, will guide your firm well forever. In a healthy and growing firm, size, work mix, geographic footprint, personalities (who is best suited to lead various functions) will and should continue to evolve. At Gensler we grew from one office in one city with a handful of people when I joined the firm in 1969, to 2,400 people in 25 offices around the world when I retired in 2003. Today the firm has 3,500 people in 42 offices with a truly global reach. When I was there, our governance structure needed to continually adapt, and it did. As I speak with Gensler’s firm leaders today, their governance continues to evolve. For me, our most difficult times were when we were smaller (offices under 50-100 people; overall firm size under 500) because we had difficulty finding firm role models or leaders who had figured out how to govern. There simply weren’t large, complex firms out there in those days to learn from. We had a great deal of difficulty finding someone to talk to. It’s different today. There are people running around (like me and a few others at ZweigWhite) who have “been there/done that.” We’re here to help you. Call us! Edward Friedrichs, FAIA, FIIDA, is a consultant with ZweigWhite and the former CEO and president of Gensler. Contact him at efriedrichs@zweigwhite.com.