Headless chickens

‘Intermittent reinforcement’ is the term used by psychologists for unpredictable rewards for certain behaviours. The example often cited is slot machine gamblers. The slot machines are programmed to provide ‘variable ratio reinforcement’. The jackpot is hit frequently enough to keep the gambler playing, but unpredictably so he or she never tires, gets bored, or stops to remember that the casino never loses.

When a pigeon or rat is fed with a pellet, on a ‘variable ratio reinforcement schedule’ for every peck of a button or pull of a lever, such is the strength of the conditioning, that it does not stop to eat the pellet, it continues to peck or pull with food uneaten.

On a recent business trip to the Bahamas, we visited the new Baha Mar hotel with its enormous gambling hall, full of casino tables and slot machines. I watched as people worked six or seven machines at a time, filling in the slots, pulling the handle not waiting to see the drums roll, just fill the slot, pull the handle and move on to the next one.

But it is not just in the gambling hall that we can observe this sticky behaviour, it can be observed in sports; football, tennis, golf and in making money.

It is the thrill of the ‘variable ratio reinforcement schedule’, which become the fun, the end goal is almost irrelevant. Ask anyone who loves football which is more important the win – regardless of the opposition, or the game against a tough opponent?

Business and investing is also unpredictable and the rewards are never consistent. Making money is not a science, it does not follow set rules, it is an art, picking the winners from the losers, watching their successes or failures, observing, learning, and trying again. It is all part of the fun – but it is also addictive.

Most successful business founders I know need to be reminded that running a business is not just a game. They have responsibilities for managing their wealth for their family and future generations. It is not enough to set up a ‘Family Office’ and let it ‘do its own thing’, it needs direction, goals and management – which for many business founders – is not much fun.  However, without it, as I say in my book ‘When you are Super Rich who can you Trust?’ entropy sets in.

The solution to entropy is ‘mindful management’ which I call Family Governance.

Imagine three people come together to build a hotel; one is an expert on food and beverage, the other hospitality and the third in hotel management and design. They all three invest together with two outside investors, and stick at it until the hotel is successful with near 100% occupancy rate all year round.  Then one day, the expert in food and beverage becomes ill and wants his wife to take over from him, which the other two do not want. What do they do? According to the company’s memorandum and articles they need to call an extraordinary meeting of the shareholders, and put it to the vote. Notice must be given of this meeting it cannot be held surreptitiously, the meeting must be quorate and the matter needs to be formally discussed and aired and a decision made. This is good corporate governance in operation.

Now imagine a similar situation in a family. The family business is owned by a trust, and one of the family members who works in the business wants his wife to take over from him. The trustees do not know much about the running of the business to know what decision to make in the best interests of the business. They know they need to act in the best interests of all the beneficiaries – but in this case the beneficiaries are divided. The Family Office can provide no help and the Family Constitution simply says that the business is to be operated by such family members as are fit and able, but says nothing about the spouses of such family members.

How do the trustees make a decision, without getting a legal or third-party opinion? Many ownership structures when faced with such a difficult decision run around like a headless chicken –  turning a simply decision, into a family crisis.

What most family ownership structures need is a Family Headquarters Structure. A structure which provides a process to resolve such difficult issues, against a binding constitution which sets out high level goals and parameters. In this way, difficult decisions can be taken with the minimum of fuss, cost or emotion – good family governance.

If you have comments or would like to discuss matters relating to restructuring, control, trusts and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here: