When Your House is Not in Order
We often see that the owner room in the Four-Room Model of governance is the last to develop in family businesses. This is often because decisions about the family business are usually initially made in the family room. But as the family grows, the family room is not the most effective place to make important owner-level decisions. In this video, Banyan’s Alison Isaacson shares why this happens, how to spot the problem, and the benefits to being mindful of which room different decisions should be made in, using the Four-Room Model.
Identifying Problems with Decision-making
Sometimes, family businesses don’t realize that their governance structure is lacking until they encounter significant problems with decision-making. When decision-making is not working in a family business, we usually find that the rooms are not designed or functioning correctly. David Ager, cochair of the Families in Business program at Harvard Business School, sees the problem frequently. “I am often invited into family businesses with little to no formal family governance,” he told us. “Most of the time, it is the senior generation that is resistant to the idea of governance because they ‘have managed just fine without it.’ What they have a hard time acknowledging is that fostering unity, building meaningful relationships, and taking decisions in an eight- or even sixteen-person system is far less complicated than doing so in a forty-, sixty-, or eighty-person system. And so, part of the task in launching more formal governance in a family business is persuading the senior generation of its purpose and value.”
We have encountered four main patterns of problems in family business governance. Continuing with the Four-Room analogy, we describe them as lofts, silos, missing rooms, and messy rooms and summarize them below:
The most common problems in family business governance
Problem: Loft
An informal decision-making approach with few boundaries between decision makers. Rules and roles are unclear. For example, the business rarely has an organization chart.
Indicators you have an issue:
- Boundaries are lacking; business decisions are made over the dinner table.
- Exclusion is a problem. If you’re not in the room when decisions
are made, you may have no input, even if a decision affects you. - Fundamental decisions (e.g., shareholder agreements and estate plans) are avoided.
Problem: Silos
Replicates the decision-making approach of a loft but within individual areas, or silos. People avoid any important cross-business decisions.
Indicators you have an issue:
- Owners tend to dig in on why their branch is in the right rather than learn to collaborate.
- The business has difficulty passing ownership to the next generation, which is not prepared to collaborate across silos.
Problem: Missing room
A key forum is missing from governance. Often missing is the Owner Room.
Indicators you have an issue:
- The business often fails to make important decisions because it’s unclear who should make them.
- The board is asking the owners what they want from the business.
Problem: Messy rooms
A room or two has lost its original purpose and function. New people, such as spouses, enter the system.
Indicators you have an issue:
- No one wants to join the family council because it seems irrelevant.
- There’s confusion between the board and the owner council.
*Adapted from the Harvard Business Review Family Business Handbook by Josh Baron and Rob Lachenauer. Pages 72-73