The owners of family businesses wield profound decision-making power. There exist sizable family businesses in which not a euro can be spent without their approval. When this power is channeled appropriately, it confers a major competitive advantage. Many family business leaders can make big bets at a moment’s notice, without having to run decisions through multiple layers of management and bureaucracy.
But if power is wielded ineffectively, the business will suffer. Some family business owners exercise too much control, stifling innovation and making it hard to attract and retain great talent. Other family businesses step back from major decisions, leaving a vacuum that may be filled by executives looking to their own interests. A number of family businesses nearly were destroyed when decisions were left to nonfamily managers who wanted to run the company down and buy it at a fire-sale price.
Governance in a family business is all about finding a middle ground between micromanaging and delegating responsibility, and it becomes more challenging as the family and the business grow. A simple framework to guide decision-making is the four-room model. Imagine the family business as a home with one room each for the owners, the board, management, and the larger family. The family business owners set high-level goals and elect the board; the board oversees the business and hires (and if necessary fires) the CEO; and management recommends business strategy and directs operations. Because the board and management report to the family business owners, the first three rooms are in a row, with the owners’ room on top. The family’s room, which is critical for maintaining family members’ emotional connection to the family business, sits alongside the other three, underlining the importance of family influence and unity throughout.
In a well-run family business, each room has explicit rules about who belongs there, what decisions are made there, and how. People’s roles vary from room to room. For example, a nonfamily CEO can run the management room but shouldn’t decide how the family business owners will use their dividends. Nonowner family members, for their part, can’t walk into other rooms and make decisions. Governance based on the four-room model makes the hierarchy and boundaries clear.
Time and again, family businesses slide into chaos for lack of a good decision-making process. Too often the problem becomes apparent only after disagreements have begun to destroy what years of collaboration built.
The four-room model helps owners maintain control over the most important issues and delegate other decisions. It establishes a process for revisiting decisions as goals evolve for the family or the business or both.
On the local scene here in Malta there exist many advisory firms that can serve as neutral bodies in determining the best way forward for governance in the family business.
( All factual and statistical information presented in this blog has been obtained from an extract of an article from the harvardbusinessreview.com ) Follow us on our Facebook page and Family Business Office website at www.familybusiness.org.mt
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