Making decisions in family businesses

ROB LACHENAUER, The decisions facing business families can be gut-wrenching – and the implications of these decisions can be huge both for the future of the family and also of the business: "Who should the next chief executive be – my daughter or my son?" "Should we buy our cousin out of the business?" "Can nonfamily directors be trusted to make key decisions for our business?"

To help our clients, we use a simple analogy for how and where strong family businesses make decisions. Just as we separate the bedroom from the kitchen in our homes, successful family businesses build out and furnish four rooms: the owner room, the boardroom, the management room and the family room.

Discrete decisions are made in each room: management directs operations; the board monitors the performance of the business and hires/fires the chief executive; owners set the high-level ownership goals for the business and elect the board; and families build unity and develop family talent – to name a few of the most basic decisions made in each room.

The source of decision-making power also varies across the rooms. In the owner room, power is based on who controls the shares, either directly or through trusts. In the boardroom, directors influence one another in a peer-to-peer setting. Chief executives run organisations that are hierarchical and generally make decisions based on financial returns. Families usually operate by consensus and make decisions based on their impact on legacy and stewardship.

The four-room model helps set decision boundaries.

A nonfamily chief executive, for example, stays in the management room and doesn’t tell the scion of the business family where to go to college. Similarly, executives make many daily decisions on how to implement the business strategy but do not decide the dividend policy. That’s up to the owners.

Family members can’t just walk into any room; there has to be a process for channelling family wants and needs to the appropriate rooms.

The four rooms are not randomly configured; there’s a clear hierarchy. Management answers to a board that ultimately answers to the owner group. The family room is not perched atop of the other rooms, as the other rooms don’t report to the family. Rather, the family room runs adjacent to them to symbolise family unity, which is so important for maintaining decisiveness across the full family enterprise and for developing the talent of family members who, if qualified, can move into other rooms.

The family room is also important in that it provides a forum for addressing family conflicts and stresses that can spill into the other rooms.

The four-room analogy is a simple but dynamic way of rethinking decision-making in family businesses that can be transformative. As a chief executive client summed up the transition to the four rooms: “I’ve become 50 per cent more efficient. When my second brother, who no longer works in the business, comes into my office now and complains about some executive decision that I’ve made, I say, ‘Jack, are you talking to me as an owner? This issue is not in your bailiwick. This is the management room.’

"Now I have one conversation at a time – and sometimes more conversations than I ever thought were necessary – and I am making a lot more progress." This is the eureka moment that is the reoccurring theme in our work. Josh Baron is a partner and a co-founder of BanyanGlobal Family Business Advisors and author of Great Power Peace and American Primacy: the Origins and Future of a New International Order. Rob Lachenauer is chief executive and a co-founder of Banyan Family Business Advisors, as well as co-author, with George Stalk, of Hardball: Are You Playing to Play or Playing to Win? Sebastian Ehrensberger is chief executive and founder of Rhodion Advisors, BanyanGlobal's European affiliate.