• Service: Enterprise, Family business
  • Type: Business and industry issue
  • Date: 5/3/2012

Fairness in Family Business Decisions: Getting the Process Right 

Getting the Process Right
Imagine that a business leader is agonizing about an important decision for the future of their family business. After careful analysis he/she takes a decision, only to face stiff resistance from some family members and disengagement from most others.

The content of the decision is not the issue but rather the fact that the decision is perceived as unfair because family members were not properly heard and did not voice their preferences and expectations.

Fair process is often neglected in favor of an attempt to reach fair outcomes. Many business leaders, particularly the ones running family businesses, should consider a broad range of stakeholders (shareholders, family members, and future generations). They often focus on the content of decisions and their outcomes – can they be fair to everyone involved? However, Family Business is inherently unfair – family members from the same generation may have fewer shares than others, for example. So, instead of focusing on the illusion of fair outcomes that attempt to please everyone and sometimes serve no one, business leaders are better served by focusing on fair process.

Decision making and fairness in the family business

Research in organizational sociology has shown that fair process matters for the creation of trust and engagement in businesses and families.

People may accept and enact decisions that they don’t like or don’t agree with if they feel that the process of reaching that decision was fair. This insights helps explain what makes democratic processes seen as legitimate even when many people, sometimes even a majority, dislike the result of an election.

Yet, fair process does not mean that one should hold a vote for each family decision. Far from it.

Fair process is a system for decision making that ensures Engagement, incorporates Expectations, and offers Explanations to everyone affected by the decision (Kim and Mauborgne, 1997). More specifically, in the context of Family Business, fair process incorporates four distinct elements that should be pro-actively enacted (Van der Heyden, et al 2005):

Communication – it is critical to give voice to everyone affected by the decision. People need to be able to present their views and expectations.

Clarity – explain what is being decided, what are the parameters of the decision and any rules that apply. This will reduce rumors and political behaviors.

Consistency – for the most common decisions, elaborate rules that explain what should be done in different situations, and apply these rules consistently for all decisions and over time. Don’t allow for exceptions.

Changeability – create a platform in which prior established rules can be re-visited to allow for the evolution of the business and family governance given the changing context. Rigidity helps no one.

The decision process for business leaders

A commitment to implement these principles of decision-making will increase the trust and confidence of everyone involved in the family business and can lead to superior performance.
One reason for superior performance is that people may accept better difficult solutions, even those that bring negative outcomes for a few people or that hurt everyone in the short-term (as, for example, a decision to reduce the dividend pay- out to invest in growth of the family business). Another reason is that the involvement of more members in the decision process may actually lead to fresh perspectives and an expanded solution space.

The time and effort dedicated to establishing fair process in the family business is an excellent investment, leading to increased engagement and cohesion of the family.

Fairness in Family Business: Getting The Process Right (PDF 0.4 MB)

Filipe Santos

Filipe Santos
Filipe Santos is Associate Professor of Entrepreneurship at INSEAD. He is the director for the Maag International Centre for Entrepreneurship and the academic director of the INSEAD Social Entrepreneurship Initiative.

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