A family business organization chart? It seems like on oxymoron. Organization charts, structures, formal management tools—those are only for very large public companies with skeighty-eight divisions, right? Isn’t the very absence of formality and bureaucratic structure one of the great virtues and joys of working in a family enterprise? Families place more value on trust, integrity, teamwork, and loyalty than on structure.
But when the company grows from an entrepreneurial venture into a larger business entity, informality spells trouble. The young son, an assistant manager of the factory, may ask Mom, the chief financial officer, for additional vacation time to go on a golf trip to Scotland, instead of discussing it with his supervisor. Older employees may prefer to discuss business questions with the recently retired president and founder of the company than with the new president, the founder’s son.
Although it would be impossible and undesirable to prohibit informal conversation among family members about their work, every company needs to design and disseminate an organization chart. When responsibilities must be delegated, lines of authority still need to be respected and followed on a regular basis. For both family and nonfamily employees, an understanding of the organizational structure helps to minimize friction, miscommunication, uncertainty, and inefficiency.
An organization chart has a particularly useful role to play in a family company. Yet, if it is not drawn correctly—and taken too literally—it can sometimes conceal the true lines of authority and responsibility and contribute to friction and obfuscation. Before explaining why it is better to have such a chart than not, let me describe some of the pitfalls.
Business consultants employ a common tactic to dramatize the lack of understanding that many families have of how their company functions. At their first sessions with the family, the consultant asks each family member to draw his or her conception of the company’s organization chart. As the group gets down to work, there is a certain amount of nervousness, uncertainty, and indecision. Everyone does a lot of scribbling and makes scratchouts and erasures. Inevitably, someone asks, “May I have another sheet of paper?”
The business owner and members of his management team may come up with one version of the organization chart while other family members may draw an entirely different version. The interpretations of lower-level family members may be “politically correct”—that is, calculated not to alienate the senior leaders. Or, if they are honest, they may strongly imply criticism of the leaders and cynicism toward the system.
A number of different patterns commonly emerge from this exercise. In companies with a very strong president who has voting control, people tend to draw the “Roman model” (above). In this model, everyone reports to the president and there is no delegation of authority. Of course, the president—also the majority owner—often doesn’t see it this way. His or her drawing may have additional boxes and lines suggesting that others have real responsibility and authority. The employees’ versions, however, may be honest and straightforward, showing all roads leading to the boss.
One variation of this diagram is the “royal model” (above). This shows up typically after a company has worked with a competent organizational consultant. The model depicts a neat hierarchy of boxes, suggesting a certain amount of delegation of authority in top management. The odd lines running from the president’s box to various departments tell another story, however.
Those connecting lines emphasize the leader’s right to intervene whenever it suits his or her whim. Of course, the lines may not appear on the drawing of the leader, who has been taught that delegating is important in any well-run organization. But they will often show up in charts drawn by underlings, who are accustomed to the boss’s second-guessing and intervention in their work.
The royal model demonstrates the president’s direct involvement in almost all things, at almost all levels. Uncertainty, confusion, and even chaos are virtually certain to reign under such a system. But who can say no to the King or Queen?
Another popular organization chart is an excellent starting point for a company that encourages teamwork. The “group” or “team” model (above) is usually an honest and sincere effort to describe a cooperative organization. However, it may conceal more than it reveals.
The group model seeks to avoid the resentments and status wars in a company that has too many layers of authority and stresses competition for top jobs. This often leads to oversimplification: The chart usually masks a lack of clear job descriptions and accountability.
By lumping managers together under general headings such as “Factory Management Group” and “Office Management Group,” the group model deftly avoids sensitive issues of status and seniority among key managers. But it also makes it difficult to identify specific lines of authority within each category and between categories. Likewise, employees in each function are simply classified as “Workers,” even though some may have more authority and responsibility than others.
The basic, traditional organization chart (above) may vary widely in form, depending on the size and complexity of the organization. Although useful to every type of company, this model has one fundamental flaw when interpreted too literally in a family enterprise.
The traditional chart headed by a single president may be necessary for outsiders such as suppliers and customers, who are accustomed to working with and “looking into the eyeballs” of one and only one leader. Variations of this chart, headed by a president, can work fine for most family companies—with one important qualification. The president may be the most visible leader in these firms, but, especially in later-generation companies, he or she is oftentimes not the only one with power or influence. Siblings or cousins who own large numbers of shares may well be just as important, even if they don’t participate in management.
An organization chart dominated by a president downplays the significant roles that may be played by other worthy and talented family members. In a sibling or cousin company, this model may well exacerbate rivalries between individuals and among branches of the family.
Family members tend to forget that the president is usually a mere employee who reports to a board of directors (if there is one) and serves at the board’s pleasure. In fact, the most accurate picture of a family business organization follows an oft-quoted corollary of the Golden Rule: “Those who own the gold, rule.” The “Golden Rule model” (above) places the shareholders at the apex of the organization chart, thereby representing the president’s role as less important symbolically and perhaps discouraging the in cumbent from indulg ing in self-glorification.
Clear paths of communication
If your company doesn’t have an organization chart, put one together with the aid of your key managers. Don’t map how the company is supposed to be organized, but how it is organized in reality. The process itself will help everyone clarify how the company actually works and uncover weaknesses in reporting relationships that need to be remedied. Avoid the temptation to purposely blur lines of authority in order to protect the feelings of family members and prevent rivalries from erupting. When conflicts and jealousies do exist in the family, they should be dealt with by other means, not by drawing an organization chart that conceals and misleads.
If you can create a chart that is a true picture of your organization, it will be helpful in achieving your company’s goals and objectives in several ways. It:
• Develops clear paths of communication among employees. The organization chart reminds people to bring problems and concerns to their immediate supervisor as opposed to skipping around the chart. This is particularly important for young family members who may not yet understand that clear lines of authority and accountability are essential in an organization.• Paints a clear picture of relationships in the company for family members not active in the business. Family members not employed by the company also tend to disregard lines of authority when communicating with employees. A dreaded phone call to an employee may begin: “Will you do me a favor and...?” Of course, this places the employee in an uncomfortable position. Likewise, family members criticizing actions taken by the company may blame the wrong individuals.
• Directs vendors, suppliers, customers, and other outsiders to the appropriate person to contact for their business. Nothing impresses an outside businessperson or customer more than being able to identify quickly the right person to talk with in a company. The organization chart helps outsiders avoid multiple calls when trying to reach the right person. It also guides employees in making referrals.
• Helps to educate young family members considering careers in the company. Inevitably, teenagers and young adults develop misconceptions about the company. It is easy for them to get the impression that all family members enjoy a special status regardless of education, talents, and work ethic. A careful review of the organization chart, along with job descriptions, can bring them back to reality.
• Provides a valuable map for restructuring jobs in the event of the loss of a key manager. The death of the president or another important officer can create a crisis that requires a reshuffling of functions and responsibilities. The organization chart is an essential tool in planning the needed changes.
• Provides an essential tool in developing and implementing a strategic plan. The exercise of constructing a chart with clear job descriptions helps management think about strategy. When the plan is formulated, it identifies personnel needs for achieving the goals and objectives of the plan and helps to ensure that the right people and departments will be assigned specific responsibilities for implementing the plan.
• Is often useful in clarifying the company’s succession plan and establishing the authority of the next-generation leaders. This can be the greatest value of an organization chart in a family company. The chart can identify the young family members who will be candidates for top leadership, and thereby give family shareholders and outsiders confidence in the future continuity of the business. However, this positioning carries with it all of the pitfalls described above. If it gives too much prominence to a single president in what is destined to be a system of shared ownership and leadership, the chart can be an obstacle rather than an aid to a smooth transition.
Joe Goodman is an attorney in the firm of Holton Howard and Goodman in Nashville, TN, and one of the founders of Attorneys for Family-Held Enterprises (AFE). This article expands on material in a book Goodman wrote with Dirk R. Dreux IV for the American Bar Association, “Business Succession Planning and Beyond.”