The decision-making process within a family business can be one of the most complex issues confronting consultants when working with a client. This week, we’re fortunate to share an article from Luis Medina, where he examines these complex processes within the context of Latin American family businesses.

Issue:

The decision-making process in any given business is one of the most complex issues before, during, and after a family business consultancy project. If analysed in detail, setting the foundation for a proper decision-making process is probably the most important task a family business consultant faces. Moreover, this complexity increases in Latin American contexts due to cultural patterns that condition family members’ behaviour. Therefore, the objective has to be to structure a decision-making process so that it respects those cultural patterns and is therefore considered just.

Context:

1. Concept of Justice. The concept of Justice has been the centre of what seems to be an endless debate. However, risking its oversimplification, we are going to analyse it in the context of a decision made from two perspectives: from the perspective of the outcome and that of the process implemented for its making.

a. Outcome Perspective: When evaluating an outcome as “just,” there are three preferred parameters: Equity, Equality, and Necessity¹. That is, when an individual perceives a decision as just, it may be because it corresponds to the contribution of each party (equity), because everyone received the same portion (equality), or because the outcome considered the needs of those involved (necessity). Moreover, in connection with this analysis of the outcome, the Relative Deprivation Theory states that feelings of injustice appear when an individual compares his or her share with that of others, and such a comparison is not satisfactory².

b. Process Perspective: The study of Justice from this perspective has evolved into what is known as Procedural Justice, in which it is perceived that a decision is just when the process that was followed to make that decision is perceived by the parties as fair. To that end, one conclusion has been drawn: the control of the process procedures must lay in the hands of parties involved³. Moreover, when that control is successful and the parties perceive that Procedural Justice was achieved, such perceptions positively influence the behaviour of parties towards their acceptance of and compliance with the outcome⁴. That is, if the parties involved perceive that the process followed to reach the decision was fair, it will be “easier for them to accept a disappointing outcome”⁵.

2. Cultural Patterns. Having said that a process will be considered just when its control is maintained by its participants, understanding their idiosyncrasies is essential. On that regard, in the Latin American context, some answers may be found under Familism, a term used to describe specific behaviours that are reported in some cultures (such as the Latino culture) where people’s decision-making process may be affected when a family member in a prominent position within the family is involved⁶. Specifically, in Mexico, Familism has been reported as behaviours of extreme reverence under the concept of Respect (Respeto) at a higher level than usual⁷. For example, if in the context of a family business in Latin America, the decision for purchasing a machine with a loan faces two founding partners, that happen to be brothers and the second generation is present, two scenarios may be faced. In one scenario, due to the standing of one of the brothers within the family (usually the oldest), the other may not express his real opinion in order to avoid a “public confrontation.” In the other scenario, these two brothers face each other and call for a vote, including the opinion of the upcoming generation, then the siblings’ votes may follow their fathers’ lead. Thus, even if having a round of votes to decide may seem an adequate strategy to allow the parties involved to control the process to achieve common acceptance of the outcome, these cultural pressures may produce a very different result, leaving family members with feelings of unfairness, due to their evident “cultural incapacity” to speak their minds.

Analysis of Options:

Thus, the question in the context of a decision being made in a family business in Latin America, then is: what is more important, the outcome or the process that was followed? The adequate response may be that it depends: when the decision to be made involves precise data, then the outcome must be favoured, but when a decision has to be made and there are not objective truths but subjective scenarios and predictions involved, then the process becomes the key⁸. For example, for the decision as to the best machinery to manufacture a product, a precise response is needed; the process to make the decision won’t matter as long as the machine delivers. On the contrary, jeopardizing the liquidity of the company to acquire it needs a process that ensures the partners’ future acceptance of a possible negative scenario; otherwise, they will not perceive it as just.

Recommendations for advisers:

1. Make a list of the most important decisions that are usually faced in the management of the business. For example: profit distributions, loans, wages, hiring, firing, investments, and new businesses.
2. Assign, to each issue, the structure that should be used to make the decision: Business or Family, which may be translated, depending on each case, to Board of Directors or Family Council. For example: “Firing a family member has to be decided by the Family Council”. “New businesses have to be approved by the Board of Directors”.
3. Finally, determine the best decision-making process for each issue. For example: “To fire a family member, members of the council will have to secretly vote. In case the employee holds a first-level position, then the vote has to be unanimous, but nuclear family members must not vote.”

Notes on decision-making processes:

The most commonly used decision-making processes are⁹:

1. Unilateral decision. It is unwise to subject everything to a complex process where a group has to be involved. There have to be people in charge of deciding important issues (previous list made) without prior approval.

2. Group vote per person. Ownership percentage does not matter. This is frequently used in family decisions. Also, I have found it useful to give some people multiple votes, depending on the issue and on the family. For example: In the case of firing a family member, the vote may be cast per person, but it may be wise to allow the founders to be able to cast two votes instead of one.

3. Group decision per ownership percentage. This is common corporate practice.

4. Veto. I have found this strategy to be crucial for founding members to let go of control of the business. To stay on board by participating in important decisions with the possibility of vetoing helps the transition process.

5. Vote by specialist. As said before, there are some cases where a data-based response is needed, therefore, a specialist has to get involved. For example, in the same case on buying the machinery, a lot of conflict may be eliminated if an accredited specialist determines what the best machine is. Nevertheless, deciding on whether such purchase is a sound business decision in terms of sales and liquidity, constitutes a very different decision that may require the involvement of the group.

Group votes, of any kind, could be cast openly or in secret.

Secret voting has proven very effective, especially in cases where levels of Familism are too high¹⁰. However, two issues have to be considered when implementing this kind of process:

1. Legally, legislations sometimes give minority rights to those partners or directors that voted against a decision. In such cases, it will be important to mark the ballots, keeping control of who receives each of them. Evidently, the list should be kept secret by a trusted officer who is not participating in the process.

2. In case the secret vote wins and a proposal is rejected, the secret voters would have to speak up. Considering that they will be protected by the fact of being in the majority, it will be important to express their views; otherwise, absurd voting may appear. Moreover, this may serve the transcendental purpose of making it evident to the generation in control that the upcoming one is capable.

Notes

¹Deutsch, Morton, “Justice and Conflict”, in Deutsch Morton, et al (Eds), The Handbook of Conflict Resolution, 2nd ed., USA, Jossey-Bass, 2006, p. 45

²Ibidem p. 47 and Lind, E. Allan & Tyler, Tom R., The Social Psychology of Procedural Justice, USA, Springer Science+Business Media, 1988, p. 12

³Lind, E. Allan & Tyler, Tom R., The Social Psychology of Procedural Justice, USA, Springer Science+Business Media, 1988, p. 208

⁴Ibidem p. 211 and op. cit. note 1, pp. 47- 48

⁵Op. cit. note 1, p. 48

⁶Halgunseth, Linda C., et al, “Parental Control in Latino Families: An Integrated Review of the Literature”, Child Development, USA, 2006, pp.1282- 1297

⁷Valdés, Guadalupe, “Con Respeto, Bridging the Distances Between Culturally Diverse Families and Schools”, USA, Teachers College Press, 1996, p. 186

⁸Op. cit. note 3, p. 36

⁹Based on my experience of 18 years acting as a lawyer.

¹⁰See Bardis, Panos D., “A Familism Scale”, Marriage and Family Living, USA, 1959; Heller, Peter L., “Familism Scale: Revalidation and Revision”, Journal of Marriage and Family, USA, 1976 and Lugo Steidel, Angel G. & Contreras, Josefina M., “A New Familism Scale for Use with Latino Populations”, Hispanic Journal of Behavioral Sciences, USA, 2033

Bibliography

Deutsch, Morton, “Justice and Conflict”, in Deutsch Morton, et al (Eds), The Handbook of Conflict Resolution, 2nd ed., USA, Jossey-Bass, 2006

Lind, E. Allan & Tyler, Tom R., The Social Psychology of Procedural Justice, USA, Springer Science+Business Media, 1988

Halgunseth, Linda C., et al, “Parental Control in Latino Families: An Integrated Review of the Literature”, Child Development, USA, 2006

Valdés, Guadalupe, “Con Respeto, Bridging the Distances Between Culturally Diverse Families and Schools”, USA, Teachers College Press, 1996

Bardis, Panos D., “A Familism Scale”, Marriage and Family Living, USA, 1959

Heller, Peter L., “Familism Scale: Revalidation and Revision”, Journal of Marriage and Family, USA, 1976

Lugo Steidel, Angel G. & Contreras, Josefina M., “A New Familism Scale for Use with Latino Populations”, Hispanic Journal of Behavioral Sciences, USA, 2003

About the Contributor

Luis Medina, CFBA, CFWA, was appointed as Corredor Público Nr. 10 in Quintana Roo in 2006. He has a Doctorate in Law from Georgetown University Law Center with the thesis: “Effects of Familism on Corporate Practices in Family Businesses in Southeastern Mexico.” His legal practice is oriented to outside council of medium sized businesses on corporate law. In addition, he is professor of alternative dispute resolution in Anahuac University Law School. Luis can be reached at lmedina@correduria10.com.