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All in the Family

In a first-generation family business, a founder typically renders verdicts swiftly and surely. Yet when that entrepreneur turns control over to children or other family members, decision-making gets a lot more complicated.For starters, it’s a shift in personalities. Though an entrepreneur intuitively knows what’s best for his or her business, second and third generations are not likely to make the same informed, seat-of-the-pants decisions.

Multiple owners with different viewpoints further complicate the decision-making process. Suppose that a brother and sister inherit equal shares of their father’s widget factory. The daughter, who has been involved in the business since childhood, wants to spend $500,000 for new machinery. Yet the son, an inactive shareholder, views the proposed investment as a waste of money because it will reduce dividends. Such dueling perspectives can quickly destroy the business — and divide the family.

To keep your family business running smoothly, it’s crucial to implement a decision-making framework.

3-D decision-making

In a family business, decision-making responsibility can be divided into three dimensions:

  1. Management issues.
  2. Ownership issues.
  3. Family issues.

It’s important to think about these different domains because the cast of characters changes in each realm, especially for multi-generation family businesses. For example, some family members may not be active in management, and as such, they shouldn’t get involved in certain decisions such as daily operations of the business or employee relations. Certainly, decisions made in one realm must support rulings in another. Yet family issues too often overlap and blur with business issues, generating conflict that damages the family, the business or both.

Family councils: a forum for growth

One of the best tools for preventing and managing conflict in family enterprises is a family council.

A council establishes appropriate expectations and boundaries for family members. Among its many functions, a council can be used to:

  • Clarify roles for members regarding business ownership and management issues.
  • Set participation policies: Who gets to work in the business? What’s expected of them? How do members get out of the business? (Often there’s a perception that if you’re in the family, then you’re in the business. Not everyone may want an active role — or be qualified to play one.)
  • Bolster communications, which eliminates backroom deals and promotes harmony.
  • Establish and implement values, mission and vision.
  • Educate members — not only about family traditions and history, but also business literacy.
  • Aid troubled family members and resolve conflicts.
  • Set expectations for how the family behaves in public.
  • Decide what role and image the business will play in the community — and who will talk to the press.

Because entrepreneurs tend to be skeptical of anything that smacks of bureaucracy, they are often averse to a formal structure. Yet the formality of a family council is the secret to smooth decision-making. Without structure, families will deal with their problems in factions or one on one, which can distort communications and cause minor issues to escalate into major ones.

Especially for family members who aren’t active in management or ownership, a family council offers both a connection to the business and an appropriate forum for learning, hearing what others think and aligning decisions. Rest assured, if you don’t provide a place for inactive members to get involved, they’ll decide for themselves where to step in, such as calling the owner to fuss about the cleanliness of company delivery trucks or restrooms. A council provides a forum for enhancing the business rather than picking it apart.

This framework for decision-making can also defuse negative emotions and memories. “Personal issues often come to the forefront in high-stress situations, such as one sibling suddenly saying: You did this to me when you were 14,” points out James McKenzie, president of Monk Office Supply, a second-generation family business in Victoria, British Columbia, that generates more than $10 million (U.S. dollars) in revenues. “It’s amazing how memories can come back and affect the business at hand — even though a lot of it is subconscious.”

McKenzie, who bought his brother’s share of the business in 1990, believes that a family council would have eased the transaction. “When another brother left the family business earlier, there were some hurt feelings that I think a council would have helped me to deal with better,” he adds. “It would also have provided my mother with a more realistic view of the business — she heard things from my father’s side.” McKenzie plans to launch a family council as his children get old enough to participate in the business.

Getting started

Set regular meetings of the family council — at least four times a year.

Decide who attends. Are spouses included? It’s a good idea; otherwise in-laws may feel resentful and pull family members away. At what age will children be permitted to sit in on council meetings? (You may decide to hold a portion of the meeting with only shareholders present to wrestle with specific ownership issues.)

Pick a neutral setting. In a first-generation family business, it’s okay to hold more casual meetings, but as the family grows, you’ll need to make get-togethers more formal. There’s a psychological advantage to real estate: Control of the meeting will tip toward whoever’s hosting it.

Agree on how to agree. Will you make decisions by consensus or take a vote with majority ruling?

Families often try to avoid voting because they want to feel as though everyone’s needs are being met. Yet in addition to being efficient and preventing issues from being mulled over and over, voting gives people input. Sometimes people simply want their opinion to be heard, regardless of which way the vote swings.

One method that many families find useful is known as “Martha’s Rules of Order.” In contrast to a straight “yes” or “no,” participants can cast four different types of votes: abstain, in favor, opposed, or opposed and can’t live with this. It only takes one “opposed-and-can’t-live-with” vote to kill an issue — otherwise majority rules.

For more effective family-council meetings:

  • Establish start and end times.
  • Have an agenda and send out missives prior to meeting so that people can study and prepare for the topics to be discussed.
  • Decide who will run the meeting. In the beginning, it’s wise to hire a facilitator. Families often behave better with an outsider present.
    In addition, there are ground rules and negotiation tactics that a professional facilitator can teach. To find one, contact the Family Firm Institute (www.ffi.org or 617-789-4200), which publishes a free directory of family-business consultants.
  • Write an account of the meeting, and distribute it to all family members. Why so much formality? It promotes accountability. By establishing meeting deadlines, selecting a leader and documenting your activities, you enhance the credibility of the council.

The fun factor: As important as structure is to a family council, it’s also crucial to weave in some fun. In fact, experts recommend that council meetings be one-third decision-making, one-third education (i.e. detailing the terms of the estate plan) and one-third recreation. G
o to an amusement park after the meeting or host a picnic and softball game. A little fun goes a long way to smoother decision-making and negotiation. It also builds solidarity, especially with in-laws.

One caveat: Don’t hold a family council in conjunction with a holiday. Thanksgiving or Christmas may seem like an ideal time since everyone is together anyway, but that’s the time you want to reinforce family traditions.

Successor forums

Another invaluable tool for decision-making is the successor forum. Structured similarly to a family council — except parents don’t attend — successor forums give the next generation of owners a place to work together as business partners before the real pressure starts. Discussions might include:

  • How a successor will be selected for a leadership role.
  • How to continue to involve inactive family members.
  • How children will be exposed to the business.

A successor forum allows members to dig deeper into a particular issue, then report to the family council. It also promotes team building.

Each generational transition is filled with landmines. Yet it’s probably most lethal at the second-generation stage because that’s where you have siblings who know precisely how to push each other’s buttons.

When it comes to power, there’s often a waiting game: The senior generation waits for the junior generation to show they’re ready to make decisions, while the junior generation waits for permission. A successor forum keeps the junior generation from feeling trapped in a command-and-control system.

The power of participation

Granted, letting go is tough for founders. After all, you’re used to being in control, and you probably worry that the younger generation might mess things up. (It also might be hard to accept that the next generation could one-up your accomplishments.)

Remember: Decision-making isn’t an event, it’s a process. By bringing others into that process, you’ll get a tremendous amount of buy-in — the type of personal buy-in that significantly alters the energy and motivation of your team. What’s more, making decisions together will also enhance your family life.

A decision-making process establishes shared expectations and a sense of consistency for family members, especially as your business grows to encompass multiple generations and owners. It will also make your life easier. A process is easier to replicate than a personality.

Writer: TJ Becker