The owners of a family business wield profound decision-making power. We know of sizable ones where not a dollar can be spent without the owners’ approval. The following is excerpted from Josh Baron and Rob Lachenauer’s Harvard Business Review article Build A Family Business That Lasts taking a look at a model of governance for family business owners.
When channelled appropriately, this confers a major competitive advantage, facilitating the nimbleness needed to capitalize on opportunities as they arise. Many family business leaders we know can make big bets on a moment’s notice, without having to run decisions through the multiple layers of management and bureaucracy found in many public companies.
But if this power is wielded ineffectively, the business will suffer. Some owners exercise too much control, stifling innovation and making it hard to attract and retain great talent. Others step too far back from major decisions, leaving a vacuum that may be filled by executives looking to advance their own interests. We saw one business nearly destroyed when decisions were left to nonfamily managers who wanted to run it down and buy it at a “fire sale” price.
Governance in a family business is all about finding a middle ground between micromanaging and abdicating responsibility, and it becomes more challenging as the family and the business grow.
We suggest a simple framework to guide decision-making: the four-room model. Imagine an architectural blueprint of your business as a home with one room each for the owners, the board, management, and the larger family. The owners set high-level goals and elect the board; the board monitors business performance and hires (and when necessary, fires) the CEO; and management directs operations. Because the board and management report to the owners, the first three rooms are stacked, with the owner room on top. The family room, which is critical for maintaining members’ emotional connection to the business, sits alongside the three other rooms, underlining the importance of family influence and unity throughout.
In a well-run 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 owners will use their dividends. Nonowner family members, for their part, can’t walk into other rooms and make decisions. Basing your governance on the four-room model means that the hierarchy and boundaries are clear.
Time and again, we’ve seen 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 had built. At a regional chain headed by a family member we’ll call Steve, the lack of a governance structure left his self-described “cowboy” instincts to run unchecked, sparking resentment in his sister and cousin, who were equal owners. Once the family recognized the problem, it turned to the Four-room Model and created an owners’ council, which Steve was required to consult for decisions of a certain magnitude. This allayed his co-owners’ concerns while forcing him to plan big moves more carefully, and the business—along with the family—got back on track.
Applying the four-room model helps owners maintain control over the most important issues and delegate responsibility for other decisions. It establishes a process for revisiting decisions as goals for the family or the business, or both, evolve.
Josh Baron is a cofounder and a partner at BanyanGlobal Family Business Advisors and an adjunct professor at Columbia Business School. He is a co-author of The Harvard Business Review Family Business Handbook (Harvard Business Review Press, 2021).
This article was co-written with Rob Lachenauer who is a cofounder and managing partner of BanyanGlobal. He is a co-author of The Harvard Business Review Family Business Handbook (Harvard Business Review Press, 2021).