If you were deciding for yourself, which way would you prefer to make decisions about things you own? Would you prefer to make them by reflection and choice, or by accident and force?
The way of deciding
Any self-respecting person prefers the first option – making decisions by reflection and choice. Certainly this is true for things you own with other people, and especially family members. Owners of a family business would rather decide after time to think about the decision, and the opportunity to choose. So would owners of a family investment, or family vacation property, or a family foundation. Being party to a decision made accidentally, or being forced into a decision, makes people anxious, irritable, angry, and resentful. Even worse is inheriting a decision made by accident or force. A big reason family enterprises run into trouble is that their owners do not reflect on the decisions they make and they do not actually choose. Instead, whether by circumstance or by people around them, the owners are put on a path they do not really want.
Hamilton, the man from the musical
It turns out this issue – the issue of owning by reflection and choice – has deep roots in America. It’s a subject just right for the Fourth of July. How is that? Well, signing the Declaration of Independence on July 4, 1776 was just the beginning. After defeating the British in a Revolutionary War that lasted seven years, the American colonists still had to govern themselves, by themselves. The colonies did not sign on to the Constitution until 1787, and the Bill of Rights not until 1791. What kind of Constitution to have was the debate of the day, and in this debate no arguments were more influential than those in the Federalist Papers, a series of newspaper articles. In the very first paper, Alexander Hamilton – yes, the same guy who’s the subject of Hamilton, the Broadway show – poses the issue this way:
Hamilton puts his finger right on the sharp edge of the question. Whether you’re talking about a nation, a state, or a family enterprise, deciding by reflection and choice is the desirable alternative. And opting to make decisions in this way is itself a choice. It takes work.
Conduct and Example
How do you get there? By conduct and example, says Hamilton. The family enterprise setting illustrates this. If the owners are to make important decisions together, their conduct matters. In making and carrying out decisions, they must conduct themselves like people who have the most important things at stake. Their example also matters. Here are some common challenges:
- Family CEOs, in dealing with owners who do not work in the business, face the challenge of getting the non-working family members to understand constraints and trade-offs pertaining to the business’s distribution of cash to its owners. The family CEO conveys the situation partly by his or her own example of living under constraints.
- Grantors, in setting up trusts that own valuable interests in a business or real estate, face the challenge of communicating why the trust was created, how it will interact with the other owners, and how its beneficiaries should integrate it into their lives. The grantor does so by showing, in his or her own conduct, care for the beneficiaries.
- Owners, both those who work in the business and those who don’t, face the challenge of differentiating ownership and employment. Working in the business is not the same as being an owner. The owners show the difference between the two by distinguishing what they do as an employee and what they do as an owner.
These challenges are not easy. But they are the kind of thing owners must address if they are to preserve their ability to govern themselves based on reflection and choice, and not be swept away by accident or force.
What if it doesn’t work?
Hamilton asks whether people “are really capable or not” of deciding based on reflection and choice. He doesn’t say they inevitably are. He suggests you can know whether they are only over the course of time.
Again the family enterprise context bears this out. Natural events of life inevitably make an owner’s decisions challenging. Aging and death of a key family member, changes in markets, innovation by competitors, miscalculations in investments, failure to involve the right people – all these put pressure on how owners make decisions. There is no time when the owners can kick back and put their enterprise on auto-pilot. If they are going to own valuable assets together, they must keep working at it.
That’s why it’s worth it
Every family enterprise creates an impact that ripples out in concentric circles. Starting at the center, the owners have an impact on the CEO and the board. The management has an impact on the employees, who have families. If the enterprise is a business, it has customers, vendors, suppliers – all of which have their own sets of owners, management, and employees. And that’s just for one city. The enterprise has this same effect in every community where it does business. And so the enterprise goes, its impact rippling out. So much depends on decisions the owners make. That’s why decisions made by reflection and choice, as exhibited by the conduct and example of the owners, are essential. It’s not too much to say that an enterprise’s owners, and the decisions they make, are the essence of America.
Happy Fourth of July.