4 decision-making models in family firms: which is best?

Among their unique characteristics, family businesses pursue both financial goals and non-economic aims such as preserving the family legacy and promoting community development.

This dual perspective can lead to misalignment among family members regarding organizational priorities, while raising important questions:

How should family firms integrate divergent perspectives in their decision-making processes?

What’s the best structure to simultaneously uphold family values and advance business objectives?

These issues and more were the focus of my recent study on the influence of decision-making structures on the family’s ability to balance these competing company goals.

Four common decision-making structures

If the quality of our lives depends on the quality of our decisions, the same can be said of the long-term sustainability of organizations.

By understanding and implementing the right decision-making structure, family businesses can harness the collective strengths of their team members and bolster their performance in both stable and dynamic environments

In this regard, our study analyzed four archetypical yet highly relevant decision-making structures: unanimous approval, individual autonomy, majority voting and lead decision-maker:

  • Unanimous approval: All team members must concur in order for a decision to proceed.
  • Individual autonomy: A single team member can approve a decision.
  • Majority voting: A simple majority is required for a decision to proceed.
  • Lead decision-maker: In case of disagreement, a designated individual makes the final decision (this often falls to a senior family member).

Since empirical data on decision-making structures is difficult to observe in practice, our research used a computational model to simulate the effect of these models on the economic and non-economic performance of family businesses operating in diverse environments.

At the same time, the study assessed the role of goal alignment among decision-makers.

Why decision-making structures matter

Our models revealed some compelling results, including the significant impact of decision-making structure on organizational outcomes, as well as the importance of the broader environment and degree of goal alignment among decision-makers in determining the optimal decision-making structure.

In times of stability, majority voting was found to generate the highest economic performance, allows firms to strike an ideal balance between decisiveness (avoiding stalemates and promoting proactivity) and selectivity (making sure time, money and investments are directed toward the most valuable initiatives).

Conversely, in dynamic, rapidly changing environments, unanimous approval led to the best performance. In times of rapid change or crisis, unanimous approvals enable family firms to channel their scarce resources and attention toward the most critical issues at hand, while leveraging the team’s diverse perspectives.

Interestingly, in fast-paced settings, having a diversity of goals was found to boost economic performance as it compels companies to raise the bar when deciding which initiatives merit their limited time and economic resources.

The same was true of misalignment among decision-makers: while generally detrimental to economic performance, it can be valuable in high-speed contexts when coupled with unanimous approval decision-making.

Practical tips for implementation

What to these insights mean for family businesses? For leaders of family-controlled firms, the first step is to assess the broader environment and adapt their decision-making structures accordingly.

  • Is your business environment stable or rapidly changing?
  • Does your team have the necessary agility to adapt its decision-making process in times of flux?

These questions should be posed continuously and gain even greater relevance in fast-paced situations.

Also key are fluid lines of communications, as highlighted in a previous article given the overlapping personal and professional spheres in family business. To this end, strategic decisions should involve both family and non-family members, who should understand the chosen structure and the rationale behind it.