AD

‘How to decide’ could be the most important decision a family business has to make

Governance is a gigantic concept that encompasses global issues down to family dynamics. Examples might be: who determines if a war crime has been committed, or who is going to do the dishes. When you boil it down, it’s about how decisions are made. Whether it is the United Nations Security Council leveling sanctions, or parents setting house rules, it is about who has the desire, power and authority to make, and ultimately enforce, decisions.

Conflict, even war (the largest of conflicts), can erupt over who has a right to decide. Sometimes the governance issue supersedes the real issue at hand. The struggle for power can surpass all else and be the “pink elephant” in the room. Humanity has established all kinds of “formulas” to handle governance – charters, constitutions, trusts, legal agreements, courts, boards, and so on. They all represent a form of answering this critical question: “Whose decision is it, and how are they going to decide.”

Employment and Position
Family businesses face additional complexities when the decision-making process is unclear and at odds with the family and the business. One classic situation is when Johnny needs a job and finding him employment would be good for the family, but bad for the business. Johnny needs the job because he has repeatedly underperformed in school and in the workplace and it is unlikely that his performance will improve working for the family business. And yet, the family wants to see Johnny be successful and earn a good living. Whose decision is it and how will they decide?

Employment decisions can be tough enough, but possibly the biggest decision family firms face is the question of who the next CEO will be. The corresponding ancillary decision is who will become the next head of the family. Usually, that decision is made by the outgoing generation and normally without significant input from the next generation. Realistically, the next generation will ultimately “correct” any decision made without their consent and take the corrective action necessary in the future.

Money
Compensation and profit distribution decisions pose another prickly area. Monetary rewards and how they are determined can derail family relationships. Fair vs. equal or need vs. performance are common sources of dispute. What to do with profits, or how to mitigate losses, is another pink elephant.

To further complicate matters, how to fund growth is another battleground. Should company capital be used? Should recapitalization be invoked? Should outside investors be brought on board? Even if outside lenders are used, the decision of collateral and/or personal guarantees looms large.

C Suite
The executive suite (or C Suite, referring to “Chief XX Officer”) is charged with strategic planning, operational efficiency, tactical oversight, human resource effectiveness and financial accountability. Who occupies the C suite, and where they sit, is further blend of decisions that effects everything else.

Decision Placement
We have only touched the surface of decisions that family businesses face and attempted to highlight the complexities they can induce. Each critical decision deserves its rightful attention, and to avoid conflict those decisions should have a path. Some kind of decision tree (there are a number of templates available online) should be developed, and decisions should be placed in the proper “jurisdiction.” A template might call for Johnny’s employment to be decided by the HR department in accordance with the Family’s Entry Policy. Profits would follow a Distribution Policy enforced by a Board of Directors. The Board of Directors should oversee the Executive Suite and monitor performance while making the “global” business decisions.

It is critical that everyone, and each level of decision-making, knows the proper level of authority and that they are empowered to that level. Otherwise, decisions made will likely be derailed.

Keep in mind that in a family business everyone wears multiple hats, and it is imperative that everyone wear the right hat at the right time. The parent hat wants Johnny to find employment, but the CEO hat says “not here.”

Determining whose decision it is, whether individual or group, is vital to good outcomes that become enforceable.

Deciding
Decisions are made in a variety of ways. The basic division is either by an individual or by a group. If the decision tree points to an individual, one would hope that King Arthur would get input from the Knights of the Roundtable. That the decision-maker would do some vetting on facts and opinions. Good leadership teaches us that getting input is likely to lead to better outcomes and buy-in. “The Buck Stops Here” sign on President Harry S Truman’s desk (by the way, that was supposedly developed as a response to “pass the buck”), was intended to take responsibility, not to indicate unilateral dictator-type of decision making.

Your decision tree will put some decisions into a group setting. It’s a good thing for many reasons: prevents “group think” if the group is diverse, improves buy-in, avoids conflicts caused by unilateral decisions, and promotes shared responsibility and accountability.

Groups need to decide how they will decide, and votes aren’t always a good answer. Unless votes are unanimous, there are dissenters. Dissenters are often the breeding ground for conflict. What if votes wind up in a tie, what’s the tie-breaker? Unanimous votes are the definition of consensus and that usually provides the best results. If everyone can’t agree, even after a good vigorous debate, then a negotiated compromise might yield a better result than a divisive vote. Shades of grey might be better than black or white.

Setting the Stage
Certain decisions for a family business made by the correct group prevent conflict and yield better results. Think of a real Board of Directors (or Advisors) with true outsiders establishing a Compensation Policy for the exec team, or how to distribute profits. Picture the Family Council supporting the VP of HR when she tells Johnny he isn’t qualified for the job.

For best practices on good governance, you should contemplate doing the following:

  1. Develop a realistic decision tree that addresses the variety of decisions your family business will encompass.
  2. Identify those individuals, or groups, who occupy the roots, trunk, branches and leaves on your tree.
  3. Fund the individuals and groups on the tree with the right people and empower the decision makers with the tools they need to fulfill tasks at hand.
  4. Share the tree with all involved.
  5. Teach your team how to use the tree and honor the outcomes.
  6. Ask often, “Whose decision is it and how will they decide?”

Richard Segal

Rick Segal is the principal at Segal Consulting. He holds an Advanced Certificate in Family Business Advising with a Fellows status from the Family Firm Institute. Rick is the founder of the Family Business Council and its affiliated study group. Reach Rick at [email protected] or by visiting www.segalconsulting.biz