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If Your Family Business Has Grown Your Decision-making Style Needs to Grow Too

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What Shall We Do? Here's How to Decide: If Your Family Business Has Grown Your Decision-making Style Needs to Grow Too.

Ellen Frankenberg, Ph.D.

Successful family businesses make sound decisions. The quality of decision-making cuts across all the major issues that entrepreneurial families face: succession planning, estate planning, business planning, family strategic planning, and even the decision whether to sell or pass on the business to succeeding generations.

Yet many entrepreneurs that I have met in my consulting practice don't seem to think of decision-making as a complex set of tools, designed to be used effectively in a variety of ways. Knowing which decision-making tool to use in which circumstances can not only prevent interpersonal conflict, but can also enhance the growth of the business.

For instance, there are times when a unilateral decision works best. A founding entrepreneur, who takes multi-tasking to a whole level, needs to make decisions quickly. She really is the only one who knows all the data, has built the relationship with the key customer, and can expedite delivery on time. The ability to make tough decisions independently - when no staff or board is available - is one of the hallmarks of a successful founding entrepreneur.

Since unilateral decision-making works so well in the early stages of building a business, some very successful entrepreneurs keep using the same tool, the same screwdriver again and again, without picking up the electric drill that will do the job much better under new and different conditions.

In second generation family businesses, a common decision making style is unilateral decision-making with individual consultation. Dad still retains the final vote as Chair of the Board, but he confers with other managers, or family owners, usually one by one, collecting new data, but allowing himself to choose privately among other perspectives, while he clearly retains the authority to announce the final decision.

As sibling partnerships mature, second generation leaders expect more consultation, and become less tolerant of unilateral decision-making. When two or three siblings, each with mature skills and responsibilities, begin to discuss tough issues informally, the chemistry of the decision-making process has already been profoundly changed. The mixing together of their ideas creates a new brew; no one of them can do it unilaterally the way Dad did it. Even if Dad still retains the voting stock, and the final say so, the decision-making process has shifted to team consultation with veto power.

The decision-making style that pervades a business will determine whether it continues to grow or merely survive. According to the Family Firm Institute, the average life span of a family owned business is 24 years, or roughly one generation. The 30% of family businesses that do survive into the 2nd generation have learned how to move beyond a unilateral decision maker to some kind of collaborative teamwork.

Innovation, a major key to growth beyond the first 24year business cycle, probably happens most readily in companies where new ideas are welcomed, and debate is fostered. If the senior generation can overcome a natural fear of conflict, and allow brainstorming and alternative solutions to percolate, a different kind of company will emerge - and probably a more successful one.

Some senior executives retreat back into unilateral control ("Because I said so…") and wonder why team commitment has dissipated, and strong employees decide to leave. Developing new decision making tools is not about rejecting Dad, and all he has done for the company; it's about choosing the right wrench from the toolbox of decision-making, and capitalizing on all the strengths around the workbench.

As the company becomes more complex, with three divisions headed by three cousins, each with significant technical know-how, smart family leaders will develop yet another decision-making strategy: delegation to a team of experts, with review. Complex decisions on whether to develop operations in Singapore or Saigon require that much of the ground work be done in country, by those who can analyze the financial, logistical and cultural implications of one choice compared to another. This is probably not the kind of decision to bring to a vote among family owners - unless they possess remarkably similar funds of knowledge.

Our democratic heritage notwithstanding, sometimes the last thing to do with a complex decision is to bring it to a vote.

One family business I know, faced with a significant buy-out offer, could not reach agreement among the five siblings and their two parents, who had decided to vote as seven equals. Their attorney, in a well-intentioned effort to block further conflict, asked the seven owners to email to him their "final" vote. He announced the result by email as well - 4-3 in favor of rejecting the offer.

Rather than reduce conflict, this decision-making method intensified it. For years following, speculation persisted about why individuals voted as they did, and whether the vote was manipulated after the fact. Divisions within the family intensified, with the CEO, who had openly opposed the buy out, forced to fend off various coalitions challenging his leadership.

In a decision this significant, family members who were risking their financial and professional futures had not been offered the skills and the opportunity to work together long enough to clarify their final decision together, or build consensus as a group. Especially in a closely held company, 4-3 votes will prolong conflict, rather than resolve it.

Sometimes voting does provide clear-cut direction at significant turning points in a company's development. Bylaws may require votes for specific decisions. Voting provides a "fair" fallback position, if consensus cannot be reached and a decision must be made, especially if, beforehand, everyone agrees that it is time to vote, and also agrees to abide by the outcome.

"Straw votes" taken at various stages of discussion can help build consensus and prevent surprises, so that participants can refine their positions gradually. According to most social psychologists, if each person feels that his/her position was adequately heard by the group, even if the vote goes another way, the odds for support of the final decision increase.

Most family businesses prefer to make significant decisions by consensus, since they want the whole family to enjoy the 4th of July picnic together. But typically they haven't developed the skills to reach consensus, so they do nothing - they don't update the buy-sell, or write down a succession plan, and the company stands at risk.

Consensus does not happen by accident, even with the best of intentions. A fine book by David Straus, How to Make Collaboration Work, based on his 30 years' experience researching human decision-making, describes a complex set of skills and choices required to reach consensus. He reports that, in his experience, a group can reach consensus 75% of the time, if they build the process carefully, step by step.

Identifying those decisions that are best made unilaterally (taking immediate action after a tornado hits the warehouse) and which require a full scale process of consensus building (responding to a significant buy-out offer) is step one. According to Straus, choosing the best option for making a particular decision depends on how important the decision is to the stakeholders; the amount of time available; the capability of the decision-makers; the potential of the issue to build a stronger team; and the significance of the decision.

Straus describes a six phase model to reach consensus that can work well for family businesses:

  1. Perception: Is there a problem? How do you feel about it? What will be the benefit of discussing the problem openly? What level of agreement is necessary in this situation?
  2. Definition: What is the problem - in one sentence? Does everyone agree on the definition of the problem?
  3. Analysis: Why does the problem exist? What are its causes?
  4. Generation of Alternatives: Which solutions are possible? Creative? Preposterous?
  5. Evaluation: What criteria must a good solution meet? Which alternatives are better or more acceptable than others?
  6. Decision-making: Which solution can we agree on? Which alternative can we commit to implement?

Given the habit of unilateral decision-making that contributed to the early success of most family businesses, the first hurdle is to decide to spend the time and energy to build consensus for those decisions that require it. Because decision-making is a heuristic, trial-and-error process, the whole group needs to stay focused on the same problem long enough, and explore enough alternatives in each phase of the process, so that each member can not only agree, but also support the outcome. The process is emotional as well as analytical, especially within a complex family business system.

Especially when the members of the group will continue to live and work together in the future, the goal of a consensus building process is not only to resolve a specific issue, but to enrich communication and understanding, so that future problems can be resolved more effectively and alienation is diminished.

For major decisions that require consensus, having a professional facilitator, or process leader, in the room reduces stress and potential conflict. All the parties are then free to express their convictions clearly, while an objective professional manages air time fairly, introduces additional tools as needed, records the group memory of issues as they emerge, and keeps the members focused on realistic solutions.

In a complex family business system, major decisions will involve all three structures of governance - The Board of Directors/Advisors, the Management Team and the Family Forum. Each group may utilize different methods of decision-making.

Boards of Directors that include family representatives as well as outside advisors may follow Roberts' Rules of Order quite successfully, if they work through significant issues systematically, using delegation to a team of experts, or committees, with review most frequently. Their by-laws may require them to vote and record significant decisions.

The Management Team may function best using some variation of team consultation, including the clear understanding that the CEO will make the final call, if consensus cannot be reached, and/or time is limited.

Some key decisions - such as whether to sell the company - will be made within the Family Forum, a gathering that includes all the family owners and stakeholders. Although they may confer with management and outside advisors as needed, major decisions about the future of the company rest ultimately within the circle of ownership. If family owners develop over time the knowledge and skills to resolve lesser problems, decision-making by consensus about major decisions will become the method of choice, so that whatever decision is made about the business, the family remains united.

Decision-making by consensus within a family business system requires not only agreement about a definition of the problem and how to resolve it, but, eventually, agreement about the mission of the family and a shared vision of the future of the company. Families that have already built consensus about their core values and priorities will resolve future issues expeditiously, because they know how to use all the tools they have already purchased through hard work and commitment each step of the way.

 

Dr. Ellen Frankenberg, President & CEO

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