The conventional wisdom with regard to family businesses is that they are more nimble than larger competitors and, therefore, capable of making faster, better business decisions. After observing business families attempting to make decisions over the years, we’d like to respectfully challenge the conventional wisdom.
Let’s begin with a caveat. Let’s stipulate that, when it comes to operations, family businesses typically do have excellent decision-making. Because of the depth of their experience in their particular fields and the fact they’ve specialized in their industries over one or more generations, family businesses are capable of making speedy decisions when it comes to operations. When it comes to other areas — particularly strategy and long-term direction for the family business — their decision-making abilities erode significantly.
Most family businesses in the first generation have one primary decision maker who functions as both owner and general manager of the enterprise. First-generation family business owners are often like battlefield generals issuing directives left and right and watching lower-ranked soldiers execute their decisions. However, when the founder has aged and the successor generation has entered the business in a significant management role, big picture decision-making gets bogged down and, as the senior generation ages, grinds almost to a halt. Why?
Most family businesses that are beyond the peak-earning years of the founding generation make strategic family business decisions by “consensus.” (Remember what Margaret Thatcher said about consensus decision-making: “Consensus is the absence of leadership.”) After many years, we still are not certain exactly what consensus means in the context of family companies. As near as we can determine, consensus decision-making in family businesses really means unanimous decision-making.
This desire for unanimity gives effective veto power to anyone who dissents from a group decision. Think about how destructive this might be for family businesses trying to make important, strategic, long-term decisions that relate to the health and vitality of the future of their company!
Here’s an example. A family business is populated by five family members: Dad, the founder, age 80; Mom, age 77; the oldest son, age 50, who is the president of the company; the next son, age 48, who is the vice president; and the youngest child, a daughter, age 46, who is also vice president. The family has been considering for several years some strategic decisions that could modernize the business and allow them to resume faster growth. Most of the five family business members are either very enthusiastic or somewhat enthusiastic about the idea. The difficulty is that the second son, the vice president of operations, is not enthusiastic about the proposed changes at all, and has made his displeasure known through several heated exchanges. Given the fact that 80 percent of the family members are on board for the proposed initiatives, what is this business family likely to do?
The answer seems simple. Most laymen would observe this situation and say because four of the five stakeholders have made themselves clear that the project should be a go, the decision is a no brainer. However, when it comes to the paradox of family business decision-making, odds are that this family will not move forward with any strategic initiative, at least in the short run.
Why is this phenomenon so prevalent in family businesses? Why would people endowed with good minds and common sense give any one person in a group of five effective veto power over decisions that the group would likely make?
The reason they won’t move forward with their strategic plans is they don’t want to upset the child who is vice president of operations. In their pursuit of family business harmony, families often determine that it’s better to live with things as they are in an uneasy equilibrium rather than undertake a project which one or more family stakeholders oppose. While this may seem shortsighted, it is common behavior.
In this case, four people out of five will put their dreams and aspirations on hold in order to avoid stepping on the toes of the one dissenter. In other words, in order to preserve family harmony and to avoid conflict, virtual veto power is arbitrarily handed out to anyone who diverges from the wishes of the larger group.
If this dissenter continues to veto family business initiatives, he will create much greater conflict than would have otherwise been experienced. As the dissenter’s power grows and he becomes the de facto leader of the company through his willingness to use his veto power, resentment and frustration will build in the other members of the group. Ultimately, this convoluted effort to preserve short-term family harmony actually serves to