Articles

< Back

Whose decision is it anyway?

By Dennis T. Jaffe

In a family enterprise, it’s critical to know where the buck stops (and who has input before it gets there).

In most businesses, it’s not hard to know who makes the big decisions: it’s the owners — and the weight of their opinion is typically dictated by the degree of their ownership. These owners share nothing more than a desire to have the business be successful; if a new owner buys enough shares, they become a decision-maker. However, only rarely do owners feel entitled to have any say on decisions. If they are upset, they sell the stock.

But when a family owns a business, who decides gets a bit murky. Family shareholders share a history and relationship as family members. If your fellow owner is your cousin, little brother or daughter, there are family bonds, history and obligations apart from the business. Take your daughter, for example. Does she expect to become an owner even if she is not one now, and as a future owner, is she entitled to employment or funding for a new business? What if she has strong ideas about where the business should go, thinking of her future ownership? Family roles can also overshadow business realities, as a parent-owner may sometimes feel obligated to agree with a family member who has no formal role or right to decide, or to employ family members who want a job, but are not necessarily qualified.

The Weight of Expectations

Even family members who are not formal owners may expect some form of participation in the exercise of the owners’ rights. From childhood, they are curious about what they are entitled to as future owners and as participants in the use of the family resources. For example, children may receive an allowance, but when does that end? The business looms large in their awareness. Some families expect them to help out while others are unclear about what is expected.

Family obligation leads to further difficulty when there is disagreement. What if the father owns a third of the business and wants to hire his daughter for a marketing position, while his brother and sister, who also each own a third, want their children to work there as well? Faced with conflict, many family businesses avoid the issue by not raising their voice and “letting it slide.” Resentment rises, but the family members implicitly agree not to talk about it. This creates peace in the short-term and kicks the can down the road, leaving the issue potentially unresolved. Emotions simmer and then explode, sometimes over a completely unrelated issue. My colleagues at BanyanGlobal call this “false harmony.” The underlying issue remains hidden and unaddressed; disaster lies around the corner. As a family consultant, I often meet families in which a conflict has festered to the point that it’s been blown completely out of proportion. In those situations, I can’t help but wonder: Why didn’t they address this 10 years earlier?

Every family enterprise or family office has a group of formal family owners — usually members of the older generation. However, they too often feel constrained by their family relationships. Many families have an unspoken practice to not talk about family wealth or financial matters. Members of the younger generation just know that they are not supposed to ask or talk about family money. By not being able to raise the topic, family members who are not — or not yet — formal owners are deprived of the ability to ask obvious but important questions.

Trust Issues

Assets in trust often add another layer of complexity. A family member can be an owner in trust, meaning that he or she benefits from the wealth, but cannot decide or make decisions about it. The trustee — often an employee of their financial advisor, who is not well known or readily available — decides for the beneficiary. The beneficiary, even as a mature adult, is still treated like a dependent, immature child. They must ask for permission to use the wealth. Does the trustee listen to what they want or simply enforce rules for how resources can be used? What if they don’t get along? I find that families set up trusts on the assumption that they need to protect the family from bad decisions, but they do not completely explain how the trusts work, or what rights the beneficiary has. Young family members are confused and put off, but they also feel that it’s impolite or unwelcome to ask questions, let alone ask for changes. Distrust simmers below the surface.

The owners may be trustees. They may also be family elders. And they, too, may feel constrained in their ability to make decisions on their own. They live in the shadow of other family members who also feel that they have a claim to the wealth. For example, what if a family owner wants to buy a gigantic house or yacht but their children feel that their money should be saved or used for philanthropy? Does the owner have a free choice to decide alone? Do the future owners have any standing here? They certainly feel they should.

Voice and Vote

In a family enterprise, secrecy is often dominant, but to really deal with the differences that arise between owners and beneficiaries or owners-to-be, there needs to be more open discussion, dialogue and compromise. They need to pull back the curtain of secrecy and talk about differences.

Owners who have the legal “right” to make decisions must, because they are a family, make the choice to listen to each other and give some consideration concerns that arise. A healthy family enterprise will often talk about the concepts of “voice” and “vote.” Before the owners feel they can vote, they want to learn about and consider the concerns of the rest of the family. So, the voters listen and try to compromise rather than just exercise their rights unilaterally. Young family members want to be included and feel their opinions matter even if they don’t have an actual vote on the final outcome.

But which issues are discussed and decided together and which are delegated to others? The owners’ group, often set up as an owners’ council, which meets separately from the rest of the family, may feel it important to create a clear delineation between decisions made solely by those with voting rights and those made with the input (voice) of non-owning or non-voting family members on some issues. They may create clear policies about employment, or family investment or appointing members of the board of directors, that define how, when and by whom decisions are made.

Rather than follow a strict policy of owners deciding by majority rule, they create a broader, more open and transparent set of policies that allow for voices to be heard from the wider family before the vote comes from the owners. That way, the family respects their personal bonds and obligations alongside their fiduciary responsibility as owners. They create an open climate where a non-owning family members can register disagreement or ask why a decision was made. Many disagreements arise not because family members really don’t see eye-to-eye, but because family members are simply unaware of how things work. An explanation can often make the other person feel better about the outcome even if they do not get their way.

Wealth of Information

The question of who ultimately makes the call is especially important with regard to decisions about how to use the family wealth. While the business may have huge returns, how will it be used? Such decisions are not strictly business choices. More and more families today will, for example, create a family policy for the use of family resources, including vacation homes, planes and yachts. But they also want to provide young family members with funds for education and personal development. These decisions use family resources, which may be owned by a few family members, but impact everyone. Creating a “use of family wealth” policy based on a set of values may add clarity to somewhat confused young people as they grow up and form their own families.

For example, how will the family help them if they want to buy a house or start a business? Sometimes it’s left up to each individual household to decide, but large extended families often create a shared policy that applies to everyone. Similarly, the family can clarify or even set rules for the sale, future ownership and transfer of stock so the family is consistent across households.

One tool that is helpful for families is what we call a decision matrix. A family defines their major business and family decisions, including naming board members, selecting a business CEO and making major investments. For each type of decision, they define which group or individual has the final say, as well as who gets to have input. The matrix clarifies who must be informed or consulted before a decision is made, who is responsible for implementing it and who must be informed when the decision is made. The matrix is useful because many family owners make decisions without a clear understanding of who the impacted “stakeholders” might be. They often neglect to inform family members or specify who is responsible for implementing the decisions. This leads to decisions being made, but not being acted upon, or family members not knowing that important choices have been made.

Looking over my words, they seem so obvious and clear. It’s hard to understand why so many families do not opt to create more clarity and make room to discuss policies and practices. Family ties create a lot of presumptions about matters that families need to know. If the family owners make the criteria for decisions clear and transparent, the rising generation knows where they stand and can make their own crucial decisions about their futures. The educational programs that we offer help families clarify their decision process and make their criteria clear and explicit.