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5 Models for Family Business Decision-Making

thinkingWhere to travel for vacation, how to spend that year-end bonus, what to watch tonight—the average family regularly makes all kinds of decisions of various magnitudes for itself. But while conflicts at home sometimes lead to bitter arguments and strife, few disagreements compare to the gravity of decisions made in a family business. Choices faced by a family business may involve consequential issues such as…

  • what values the business stands for
  • whether to sell the family business or not
  • who takes over the business after the first generation retires
  • how to divide family business assets
  • what disciplinary actions to take against family member employees
  • which nonprofit organizations to partner with or support

…and much more. Indeed, a poor decision made in a family business may not only cause discord between siblings, spouses, and parents and children, but it could spell the end of the company. In short, it’s not just relationships—but also jobs—that are on the line.

This profound level of responsibility is one of the reasons I advise my family business clients to clearly define roles in their organizations early on the business life cycle. Roles enable members of a family business to set boundaries, thereby establishing a standard of authority and accountability. If everyone working at a family business understands who is in charge as well as where and when leadership discussions are appropriate, decisions occur faster and feel more equitable.

That said, there is more than one decision-making model. Successful family businesses differ from each other in the leadership styles they adopt. If you are considering how to structure your family business’s decision-making, familiarize yourself with these five models of organizational structure:

Autocratic Decision-Making

In an autocratic organization, one person (typically the owner or CEO) is responsible for making decisions that affect the entire company. When authority rests with one individual, choices can be made immediately and without contest, and the business can rapidly change course in response to operational needs and industry and market forces.

As you may imagine, this approach is especially advantageous for emerging companies, which sometimes need to pivot in a matter of days, as well as companies in the midst of crisis. However, the benefits of an autocracy also constitute its drawbacks. The lone leader is confined to a single perspective, which may be fallible and hard to predict, and—if you believe that absolute power corrupts absolutely—grow distorted over time. Autocracies provide few opportunities for heuristic leadership development among future generations, as autocrats typically make decisions behind closed doors.

Democratic Decision-Making

Democracies disperse power throughout an entire organization or a specified group of leaders. Decision makers take a vote and usually the majority wins, although one or several individuals may have the ability to veto the decision. Votes may also be weighted differently, depending on varying levels of seniority or ownership in the company.

Democracies are a popular organizational model, and one that most of us in the US become familiar with at an early age. One of the primary functions of a democracy is to keep power in check—that is, to ensure the business keeps moving in the direction of all members’ best interests. At the same time, a democracy may deteriorate into a highly politicized system, where members vote not from their sincere positions on the issues at hand, but to curry favor with potential allies long-term or block their opponents out of spite.

These problems can be amplified in a family business, where relationships run deep and have inextricable personal components. Or, fearing conflict, members of the organization may agree to follow a democratic process if only to divest themselves of individual responsibility. Others may feel unfairly excluded if they lack voting rights, while some may not possess the leadership ability necessary to have been involved in the decision-making process in the first place.

Consensus-Based Decision-Making

Noting the difficulties inherent in any democracy, some family businesses choose to follow a consensus-based decision-making model. This approach assumes that, given enough time and information, every member of the organization will eventually reach the same conclusion and choose more or less unanimously to pursue the same course of action.

It is not easy to reach a consensus, and the more people involved in the decision, the harder it becomes. Essentially, a consensus-based model shifts the bulk of conflict to the front end of the conversation; it demands that everyone air their doubts, criticisms, questions, and complaints at the outset. It is thus an exceptionally honest model, as well as an exceptionally slow one. If and when consensus is possible, the family business can move forward in harmony and shared confidence—but be aware that it will frequently take a lot of time, debate, rhetoric, and compromise to get there.

Collective Decision-Making

Collective decision-making combines some of the benefits of autocracy with the transparency that stems from organization-wide participation. Through a collective model, the family business’s leader or leadership group retains the sole power to make decisions but reaches out to others for insight and input along the way.

Collection decision-making emphasizes communication and careful consideration. It allows others to participate in the process without taking on the ultimate responsibility for the decision. As a result, future leaders get exposed to the realities of executive governance and see how their own contributions shape the company’s bottom line—without taking on the corresponding culpability.

Nonetheless, collective decision-making is another slow—and at times, painful—process. It takes time to gather all that data, and a proliferation of points of view can lead to indecision and inaction. Meanwhile, some members of the family business may feel as though their viewpoints don’t matter enough, or that the decision maker unfairly favors certain individuals’ suggestions.

Holacratic—or “Flat”—Decision-Making

Holacracy is a newer form of governance that opposes traditional hierarchy entirely. Instead, Holacratic organizations (often referred to “flat” organizations) agree to and institute a process that vests specific roles with specific responsibilities in specific contexts. Instead of tasking one person, a group of leaders, or the entire business to come up with a solution for each and every problem, the Holacratic decision-making model splinters authority and reframes discussions in terms of operational needs and benefits,

In very simplistic terms, Holacracy stands opposite to many family business’s worst nightmare: an environment in which leaders make decisions entirely based on favoritism and family dynamics. Holacracies disrupt the human tendency toward preferential treatment, but they do so at a cost: they’re difficult to implement and maintain, and focus much of an organization’s energy on incremental, internal changes. When complete authority belongs to no one, how do disparate teams stay dedicated to a single objective?

Every decision-making model comes with its challenges and advantages—it’s up to you to choose a style of leadership that corresponds to your unique objectives, beliefs, family makeup, and business composition. In my next article, we will continue exploring the idiosyncratic nature of every family business through a discussion of ways to incentivize family member employees. Until then, you can find more family business guidance on the Offit Kurman blog.

By the way, if you are located in the Baltimore or Frederick areas, consider joining the Family Business Roundtable—a monthly meeting that brings together family businesses in your area to exchange worthwhile ideas and useful advice. Click here to learn more.

 

ABOUT MICHAEL N. MERCURIO

Mike_Mercurio_WebsiteNEWBusiness attorney and M&A lawyer Michael N. Mercurio serves as outside general counsel on matters related to business law, M&A, and real estate law. As a strategic partner to firm clients, Mr. Mercurio regularly counsels entrepreneurial individuals and assorted entities on all aspects of business and commerce, with a core specialty in mergers and acquisitions—both from the sell side perspective and buy-side perspective.

 

 

 

ABOUT OFFIT KURMAN

Offit Kurman is one of the fastest-growing, full-service law firms in the Mid-Atlantic region. With over 120 attorneys offering a comprehensive range of services in virtually every legal category, the firm is well positioned to meet the needs of dynamic businesses and the people who own and operate them. Our eight offices serve individual and corporate clients in the Maryland, Delaware, New Jersey, and Northern Virginia markets, as well as the Washington DC, Baltimore, Philadelphia, and New York City metropolitan areas. At Offit Kurman, we are our clients’ most trusted legal advisors, professionals who help maximize and protect business value and personal wealth. In every interaction, we consistently maintain our clients’ confidence by remaining focused on furthering their objectives and achieving their goals in an efficient manner. Trust, knowledge, confidence—in a partner, that’s perfect.

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