Who decides what in a family office?
The decision rights matrix, what belongs in it, the four bodies authority usually sits with, and the test that reveals whether a family actually has one.
Authority in a family office is allocated by a decision rights matrix: a written schedule stating, for each class of decision, who decides, at what threshold, on what evidence, and who must be consulted first.
In most family enterprises that schedule does not exist. Authority is remembered instead, and it is remembered differently by different people, which is invisible until two of them are asked the same question separately.
Authority usually sits with four bodies: the owners, a board or its equivalent, one or more committees, and the executive. The work is not inventing those bodies. Almost every family already has them in some form. The work is stating which decisions belong to which, and at what size.
There is one reliable test for whether a family has real decision rights, and it is at the foot of this page.
Why remembered authority fails.
Authority that lives in habit works well for as long as the same people are in the room and nothing unusual happens. Both conditions expire.
It fails in three specific ways. It cannot be tested, so nobody discovers the disagreement until a decision is already contested. It cannot be delegated, because a person cannot hand over an authority whose limits they have never stated. And it cannot be handed on, so each generational transfer starts from nothing and the family relearns its own rules by argument.
None of these is a failure of goodwill. Families whose members trust each other completely have exactly this problem, and often worse, because trust removes the friction that would otherwise have forced somebody to write it down.
Where authority sits.
Most family enterprises already have all four. What is usually missing is the line between them.
- The owners
- Shareholders, beneficiaries, or the family in general meeting. Reserved to them: anything that changes what the family owns or the rules by which it is governed. Sale or acquisition of a controlling interest, amendment of the constitutional documents, appointment and removal of directors, distribution policy.
- The board
- The body that governs the enterprise between owner decisions, whether or not it is a statutory board. Reserved to it: strategy, the appointment of the chief executive, approval of the annual plan, and any commitment above the threshold set for the executive.
- Committees
- Standing bodies with a written mandate and a defined limit, most commonly investment, audit and risk, and remuneration or nomination. A committee without a mandate that states what it may decide without returning to the board is a discussion group.
- The executive
- The people who run the enterprise day to day. Everything not reserved above sits here by default, which is the correct way round: a matrix that lists what the executive may do will always be incomplete, and a matrix that lists what is reserved will not.
What belongs in a decision rights matrix.
Each row is a class of decision, not an instance. For each class the matrix states four things: who decides, the threshold at which the decision moves up to a higher body, what evidence must accompany it, and who must be consulted before it is taken.
The evidence column is the one families leave out, and it is the one that does most of the work. Requiring that a capital commitment arrive with a written case, a statement of the conflicts involved and the alternatives considered eliminates a class of bad decision without anybody ever exercising a veto.
Consultation is not approval, and the matrix should say which it means. A great deal of family conflict comes from one person believing they held a veto while another believed they were being kept informed, and neither of them was wrong given what was written.
Thresholds should be stated in the terms the enterprise actually uses, and should be reviewed annually, because a threshold set against an enterprise that has since doubled in size is a threshold that has quietly moved.
Six decisions, four bodies.
Sechs Arten von Entscheidungen gegen die vier Gremien, bei denen Befugnis liegt. Jede Zeile nennt, wer entscheidet und wer zuerst zu erreichen ist. Die Zeilen sind beispielhaft, und eine echte Matrix schreiben die Menschen, die die Befugnis derzeit halten.
- Wie sie zu lesen ist
- Entscheidet
- Anzuhören
- Zu unterrichten
- Keine Rolle
How a conflict of interest is actually handled.
Nearly every family enterprise has a conflicts policy and nearly all of them say the same thing: conflicts should be declared. That is necessary and it settles nothing, because it does not say what happens after the declaration.
A working policy attaches a consequence to each class of interest. A direct personal interest in a counterparty: declare, withdraw from the discussion and from the decision. An indirect or historic interest: declare, remain in the discussion, withdraw from the vote. A family relationship to a party: declare and refer the decision one level up.
The consequence has to be decided in advance, in the calm, because the moment a conflict is live the most senior person in the room will otherwise decide it, and that is the outcome a conflicts policy exists to prevent.
The recusal belongs on the decision record itself rather than in a minute. It then travels with that decision permanently, and can be shown to a regulator, a court, or a family member who was not born when it happened.
Whether your matrix is real.
Take the last three material decisions the enterprise made. For each one, identify the body that took it and the body the matrix says should have taken it.
If all three agree, the matrix is real. If any of them was taken at a different level and nobody noticed at the time, the matrix is a document rather than an architecture, and the enterprise is at best at the Disciplined stage of the Governance Maturity Curve.
A second test, for families who believe they have no matrix at all: ask two senior people separately which decisions require board approval. If the answers differ, the enterprise does have a matrix. It has two of them, held privately, and neither is written down.
Questions this raises.
How often should a decision rights matrix be reviewed?
Once a year, and after any event that changes the shape of the enterprise. A threshold set against an enterprise that has since doubled in size has quietly moved without anybody deciding to move it, which is the commonest way a matrix stops describing reality while still appearing to be in force.
Should thresholds be stated as amounts or as categories?
Both, and for different decisions. Amounts work where a decision has a natural size, such as a capital commitment. Categories work where it does not, such as entering a new jurisdiction or engaging a first external manager. A matrix built only on amounts will route a small but irreversible decision to the wrong body.
What is the difference between being consulted and holding a veto?
Consultation means the decision cannot be taken until your view has been sought and recorded. A veto means it cannot be taken if you refuse. A great deal of family conflict comes from one person believing they held the second while another believed they were giving the first, and neither was wrong given what was written down.
Who should write the decision rights matrix?
The people who currently hold the authority, in the room, together. A matrix drafted by an adviser and circulated for approval will be approved and then ignored, because nobody had to say out loud which decisions they were giving up. The drafting is the intervention as much as the document is.