If your family firm is growing, your decision-making process must evolve along with it.By Ellen Frankenberg
Successful family businesses make sound decisions. The quality of decision-making affects all the major issues that entrepreneurial families face: succession planning, estate planning, business planning, family strategic planning and even the decision about whether to sell the company.
Yet many entrepreneurs I’ve met don’t think of decision-making as a complex set of tools, designed to be used in a variety of ways for different purposes. Knowing which decision-making method to use in which circumstances prevents interpersonal conflict. It also enhances business growth.
There are points in a company’s life cycle when unilateral decision-making works best. The ability to make tough decisions independently—when no staff or board is available—is one of the hallmarks of a successful founder. She is the only one who knows all the data, has built relationships with the key customers and can expedite delivery of the company’s products or services.
Since unilateral decision-making works so well in the early stages of building a business, some 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.
Unilateral decision-making with individual consultation is common in second-generation family firms. Dad still retains the final vote as chairman of the board, but he confers with other managers or family owners. He usually meets with them one by one; he collects new data and considers other perspectives privately. 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 make decisions 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.
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 second generation have learned how to move beyond unilateral decision-making to some kind of collaborative teamwork.
Innovation, a major key to growth beyond the first 24-year 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—and probably a more successful one—will emerge.
Some senior executives who retreat back into unilateral control (“Because I said so”) wonder why team commitment has dissipated and key employees decide to leave. Developing new decision-making tools is not about rejecting Dad; it’s about choosing the right wrench from the toolbox and capitalizing on all the strengths around the family workbench.
As the company becomes more complex—for example, three divisions headed by three cousins—smart family leaders will develop yet another decision-making strategy: delegation to a team of experts, with review. Complex decisions—say, about 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 vs. another. This is probably not the kind of decision to bring to a vote among family owners. Our democratic heritage notwithstanding, sometimes the worst thing to do when faced with a complex decision is to take a vote.
One family business I know, weighing 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 e-mail to him their “final” vote. He announced the result by e-mail as well: 4-3 in favor of rejecting the offer.
Rather than reduce conflict, this decision-making method intensified it. For years thereafter, speculation persisted about why individuals voted as they did, and whether the vote was manipulated after the fact. Divisions within the family intensified, and the CEO, who had openly opposed the buyout, was forced to fend off various coalitions challenging his leadership.
Faced with a decision this significant, family members who were risking their financial and professional futures did not have the opportunity to work together long enough to clarify their final decision together, or to 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 points in a company’s development. The by-laws may require votes for specific decisions. Voting provides a “fair” fallback position, if consensus can’t be reached and a decision must be made—especially if everyone agrees beforehand that it’s time to vote and agrees to abide by the outcome.
“Straw votes” taken at various stages of discussion can help build consensus and prevent surprises. They enable participants to refine their positions gradually. According to most social psychologists, if each person feels that his or 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. After all, the entire family will be together at the annual Fourth of July picnic, and everyone wants to enjoy it. But typically family members 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 doesn’t happen by accident, even with the best intentions. A fine book by David Straus, How to Make Collaboration Work, describes the complex set of skills and choices required to reach consensus. Straus reports that a group can reach consensus 75% of the time if they build the process 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 buyout offer) is Step 1. According to Straus, choosing the best method for making a particular decision depends on the importance of the decision to the stakeholders, the amount of time available, the capabilities 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 for reaching consensus. This model 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 it 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 to the problem are possible? Creative? Preposterous?
5. Evaluation: What criteria must a good solution meet? Which alternatives are better or more acceptable?
6. Decision-making: Which solution can we agree on?
Given that unilateral decision-making contributed to the early success of most family businesses and has often become a habit, the first hurdle is to decide to spend the time and energy on building consensus for those decisions that require it. Because decision-making is a heuristic, trial-and-error process, the whole group must 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.
For a group of people who 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 also 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 or advisers, the management team and the family forum. Each group may use different methods of decision-making.
Boards that include family representatives as well as outside advisers may follow Robert’s 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 with the clear understanding that the CEO will make the final call if consensus cannot be reached, or if 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 managers and outside advisers 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 will become the method of choice for major issues, 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 what the problem is and how to resolve it, but also—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.