A client came to me for a consultation with a management case. With the client’s consent, I am publishing this example for professional analysis. For confidentiality reasons, certain data and narrative details have been modified any resemblance to real persons or organizations may be coincidental.
An entrepreneur acquired an operating manufacturing plant with a staffed workforce, established processes, and active contracts. His son was appointed as the plant’s director. The operational personnel were retained. However, the owner placed “overseers” - trusted individuals - above all managerial domains, controlling resources and decisions outside formal procedures. Thus, the financial function came under the control of the owner’s spouse: production, logistics, and warehouses were supervised by brothers and other relatives.
To launch a new production line, the plant took out a bank loan. At the start of the season, the company signed contracts with buyers and received advance payments.
One day, the chief accountant informed the owner of systemic theft: each relative overseeing a domain openly appropriated cash and/or finished goods. As a result, contractual obligations were disrupted. The enterprise had to return the advances to customers, including penalty charges. The bank received loan payments only for the first two months; after that, servicing the debt became impossible.
The owner’s reaction was not a managerial investigation but a harsh conflict with the chief accountant, accompanied by threats of dismissal. The accountant managed to close the financial year properly and then urgently left the organization.
Within a few months, the plant became insolvent. The asset was seized by the bank due to outstanding debt.
The client’s questions:
- Why did the default occur, and could it have been avoided?
- How should an HR manager have acted in this situation?
- Could HR have prevented such an outcome?
To answer these questions, we will set aside the human factor, emotions, motives, and values, and consider the case strictly as a managerial problem.
Let's highlight the main elements of the situation in the problem:
- the management system (controlling system);
- the business system (controlled system);
- credit obligations;
- advances and contractual obligations;
- business resources;
- financial losses (theft, leakage, misuse of resources);
- managerial and operational errors;
- costs and losses reducing available resources.
We translate these components into a set of logical variables with the following notation:
- Cm - management system;
- Cβ - business system;
- L - credit obligations;
- P - advances and contractual obligations to customers;
- F - financial losses (theft, leakage, misuse of resources);
- D - managerial and operational errors (informal decisions, role duplication, conflicts of interest, etc.);
- R - gross business resources;
- E - costs and resource losses.
To symbolically record our judgment, we use the following logical signs:
- “<” / “>” - qualitative comparison of system complexity (more/less);
- “+” - aggregated influence of factors;
- “∧” - logical conjunction (“AND”), simultaneous conditions;
- “⇒” - logical consequence.
The managerial outcome can be expressed as:
(Cm < Cβ) ∧ (L+P+F+D > R-E) ⇒ default
Let's proceed to interpreting the obtained result.
Cm - business management system, let's highlight its characteristic features:
- subjective decision-making;
- supervision through family ties, informal centers of power;
- absence of corporate governance (ownership, management, and control functions are not separated);
- disregard of risk information and framing it as personal conflict - “attacks on relatives” by external actors.
Cβ - business system, that included:
- an operating plant as the material and technical base;
- functional units responsible for production, finance, logistics, warehousing, etc.;
- bank financing;
- advances and contractual obligations;
- penalties for contract disruption;
- dependence on external counterparties and the bank.
We can see that Cm (the controlling system) consists of a small number of elements, simple connections, high determinism, and is closed within the internal family circle.
From a systems analysis perspective, this is a simple control model, even if it looks “strict” or “total” on the surface. Strengthening personal or clan control in this case did not increase managerial complexity; it merely replaced governance with trust and loyalty.
Closed systems tend to degrade over time: entropy (disorder) increases, leading to loss of stability and eventual breakdown (a general systems analogy often illustrated through the second law of thermodynamics).
By contrast, Cβ (the business system) became significantly more complex. The number of elements increased; nonlinear and feedback links appeared; interdependence rose. The business entered the external environment: obligations emerged to suppliers, counterparties, customers, and the bank. Risks and the cost of managerial errors increased sharply.
In other words, the complexity of Cβ substantially exceeded the complexity of Cm, producing the qualitative inequality:
(Cm < Cβ)
The second condition: the point of irreversibility
L + P + F + D represents aggregated pressure on the system, including:
- credit burden;
- obligations arising from advances and contracts;
- direct financial losses;
- managerial and operational errors.
R - E - represents actual business resources after costs and losses are deducted.
The inequality (L + P + F + D > R - E) - indicates that cumulative pressure exceeded available resources.
This is the point at which controllability is lost and the crisis becomes irreversible.
Default occurred when both conditions were met simultaneously (conjunction ∧):
- business complexity exceeded the capacity of the management system;
- financial load and managerial errors exceeded available resources.
Formally, this can be expressed as follows:
(Cm < Cβ) ∧ (L+P+F+D > R-E) ⇒ default
This case aligns with W.R.Ashby’s Law of Requisite Variety:
If the controlling system is less complex than the controlled system, it loses the ability to adapt and maintain stable control.
In other words, it is not possible - without consequences - to manage a more complex system using a less complex one.
Could the crisis have been avoided?
Theoretically - yes. There were two possible paths: increase management complexity or simplify the business.
- Cm = Cβ - bring the management system in line with business complexity. This would require formalizing decisions, separating functions, introducing independent financial control, and removing the family from operational management.
- Cm > Cβ - preserve clan management by simplifying the business: to refuse a loan, not to work with prepayments, not to enter into contractual obligations, simplify production and avoid expansion.
In practice, the owner chose the worst option: attempting to “simplify” a complex system and manage it manually.
What was HR's role in this system and could he have influenced the outcome of the situation?
In this case, HR was not a subject of governance because HR was not part of the owner’s family. Key decisions were made outside the formal structure, real centers of power belonged to relatives, and HR had no access to those centers.
The source of the crisis was not personnel management, but the business governance model. Therefore, any HR actions would either be inadequate to reality or become a tool for sustaining an ineffective management model.
The only thing HR could do was to conduct diagnosis, document systemic risks, and avoid “playing the rescuer” - i.e., not assume responsibility for decisions made by others outside HR’s authority.
Clan management: is it always harmful?
No. There are many successful family companies in today’s world. Their sustainability is ensured not by family ties as such, but by an institutional and adaptive governance system: owners set strategy and values while stepping away from operational control.
Examples of well-known family companies include Walmart (the Walton family), Samsung Group, Toyota Motor Corporation, Ferrero Group, Bosch, and others.
Response to the client
- The crisis occurred due to a mismatch between business complexity and the management model used.
- In this situation, HR could only identify and document systemic risks and avoid taking responsibility for managerial decisions made by others.
- HR could not have prevented the crisis because the root causes were outside HR’s sphere of influence; trying to solve it with HR tools would have produced only an imitation of change.
Note
The formula presented in this article is used solely to demonstrate causal relationships within the managerial situation and does not claim to be a mathematical proof.
When analyzing this management task, the author relied on the following concepts:
- systems approach;
- law of requisite variety (W.R. Ashby);
- organizational life cycle (I. Adizes);
- organizational structures and roles (H. Mintzberg);
- bounded rationality (H. Simon);
- classical management (P. Drucker).