Eric Becker has served on several boards, including that of Cresset, a Chicago-based private wealth management and family office firm that he co-founded and chairs. His board experience ranges from companies such as the Chesapeake Spice Co. to nonprofit organizations such as the Positive Coaching Alliance. Becker, who is also the author of the Board of Directors Best Practices Guide, shares what family offices interested in forming boards should be thinking about.
What are the most important functions of a board of directors for a family office?
Among the many responsibilities of a board, the key functions include management oversight, succession planning and making sure there is an audit, compensation and investment committee and structure.
What questions should family office members ask if they’re wondering whether they should start a board?
Family offices have essentially three choices: no board, an advisory board or a fiduciary board. No board is not necessarily a bad thing, but the family needs to be OK with not having that diversity of opinions and guidance. Advisory boards are great in that the board members are not taking on any liability; they are just giving advice. I’m a huge fan of advisory boards. A fiduciary board is like a corporate board in that it will focus on how strong the leadership team is, help to guide succession planning and step in if something were to happen to the family office founder or leader. That said, advisory boards are the most common type of board and are relatively easy to implement.
What are some options for structuring a board of directors?
First, if it’s your business, be honest with yourself as to whether you want to maintain control of the board. If so, that requires a certain number of board seats to retain that control. Also, determine how many board seats you want allocated to independent board members. I believe independent board members bring tremendous value to a board, as they are driven only by what’s best for the organization, without conflicts of interest. Plus, they often bring unique areas of expertise, such as a deep background in technology or digital transformation, for example.
I like to use a matrix of the different talents and experiences I need on a board and match existing and prospective directors with that matrix to identify any gaps or opportunities.
What about figuring out board composition?
I’m a fan of smaller boards, from five to seven people, which provide an appropriate diversity of opinions but allow everyone to still have a voice. If the goal is to grow the family office for future generations, an advisory board or a fiduciary board likely makes the most sense. Having an odd number of directors is preferred in order to avoid being stuck with any potential tied votes.
You’ve talked in your Board of Directors Best Practices Guide about constructive tension at board meetings. Can you elaborate?
Constructive tension is all about providing just the right amount of support for an organization’s leadership team while also appropriately challenging them. When you don’t do it right, bad things can happen. If a board member is not sufficiently challenging, you are likely not adding value to the organization’s decision-making engine. If you are overly challenging, you are likely creating too much stress and anxiety for the organization’s leadership and could end up killing really good ideas. So constructive tension is a fine line that board members need to be able to walk.
What should board members do if they ever find themselves at an impasse?
When a board hits an impasse, one of the worst things that can transpire is for prolonged arguments to be allowed or for one board member to dominate the conversation. In that instance, the board should take a pause and find someone else on the board or in the organization to take the time to find the right group of people to analyze the problem and provide a recommended solution.
What are some signs of a high-functioning board?
A high-functioning board exhibits a high degree of collegiality and accountability among members. It should have defined operating processes and a “board wheel” that has a schedule of activities and events that happen every year, such as budgeting, compensation alignment, discussions on risk, etc. High-functioning boards are also very communicative with a strong culture that supports and encourages directors to make a difference and appreciates what everyone brings to the table in terms of experience and leadership.
Here’s a ‘fading’ market that we’re watching closely
By ALEXANDER LIS
Despite the grim headlines, we see some investment opportunities in the office space sector.
Have you heard the news? The “way we work has changed forever,” and so commercial office space is in a free fall.
Of course, you’ve heard that already. The bad news seems to be everywhere for commercial real estate. The pandemic’s work-from-home revolution — or at least a hybrid version of it — has fundamentally changed the math for office space landlords. Time to look elsewhere, right?
At Social Discovery Ventures, paradigm-changing declarations like “office space is dead” always make us pause to take another, closer look. One area the crowds have left behind but where we still see some opportunity is Class A office space. Recent renovations may be the key to separating the winners from the also-rans in this still-challenging market.
Indeed, it’s hard to find an asset class more avoided by investors and lenders right now than office real estate. Remote or hybrid work seems to be the new normal, office vacancies keep climbing, and some banks are in trouble over delinquent loans for office properties.
We often try to identify lucrative opportunities in markets with strongly negative investor sentiments. As a starting point, we believe that not all office properties are equally affected by the work-from-home trend. Recently renovated Class A properties are still in high demand. And given the shortage of capital in the space, investors could enjoy double-digit yields even for high-quality properties with long-term contracts and low vacancy.
We expect that in the midterm, investors will realize that not all office properties are created equal. We don’t expect any rebound for high-vacancy Class B properties, but we think that the properties with consistently low vacancies and healthy contract renovation are well-positioned for upward rerating and lower cap rates.
We also think there are some persistent and unsustainable gaps in expectations between the commonly accepted narrative that the “workplace has been transformed forever” versus the facts on the ground. Consider these three examples:
OCCUPANCY
- The common view: Office occupancy went flat at around 50%. People don’t like to go to the office, so the vacancy will remain permanently elevated.
- Our view: Indeed, workers don’t like to go to the office. But employers actually do want them at their desks. That’s why there is a growing gap between people who are looking for remote positions (50%) and companies that are offering them (15%). Given the cooling labor market and a growing number of layoffs, bargaining power is expected to shift to employers again. Plus, employees working from home have a 35% higher chance of being laid off.
DELINQUENCIES
- The common view: Delinquencies in offices are growing steadily, and higher vacancy rates result in operating problems for all office properties.
- Our view: There is a flight-to-quality trend among tenants. Recently renovated Class A properties in premier locations account for about 80% of demand. Landlords owning such properties enjoy healthy growth in net operating income and a strong tenant pipeline.
INVESTMENT
- The common view: Investment activity in the office sector has effectively stopped. Investors are not ready to take any office risk.
- Our view: Investment has dried up — yes! And that’s precisely why trophy properties are becoming available at double-digit cap rates, which we consider to be a compelling opportunity.
The one potential downside of this emerging back-to-the-office trend: Watch your investments in golf courses. How else do you explain a 52% increase in golfing since 2019 — with virtually all of that increase coming from people playing on weekdays?
We’re joking, of course. But employers are not amused, especially as they see that lack of workweek visibility playing out in a 20% loss in productivity, as several reports have noted, and the back-to-the-office-mandate drumbeat continues to pick up.
Which is one more reason we think the paradigm-changing assessment ultimately might be closer to: “The way we worked changed for a while.”