TOOL 5

Make Better Decisions with the Four-Room Model

The quality of your decisions will determine the future of your family business.
READ MORE
You can use the Four-Room model to map out who makes which decisions in
your family business (read more about the Four-Room model starting on page Family Business
Handbook
57 of the Family Business Handbook).
Chapter 4
Decide: Structure
The value of building your governance around the Four-Room model is that Governance to Make
the rules and boundaries of decision-making are clear: Everyone knows which Great Decisions
Together
rooms they participate in, and they understand how the rooms work together.
The atmosphere in each room should feel different, and this difference is by Pages 57–71
design. The right relationships and environment should be present in each
room to be effective. In its ideal form, an Owner Room is about power and influence, about making the
rules. A Board Room is about wisdom and judgment. A Management Room is about competence and
execution. A Family Room is about love, unity, and development.

Four-Room Model

Step 1: Assess Your Current Decision-Making

Before you begin shaping your Four Rooms, take stock of how you currently make decisions in your family
business. The table below can help you map out how you make decisions now—as well as the quality of
the decisions you are making.

© 2021 BanyanGlobal Family Business Advisors. All rights reserved.

Harvard Business Review Family Business Handbook Toolkit Page 1 of 10
 MAKE BETTER DECISIONS WITH THE FOUR-ROOM MODEL

Your current decision structures and processes

EXAMPLE WHO MAKES THE HOW IS THE DECISION ON A SCALE OF 1
DECISIONS DECISION NOW? MADE NOW? (LOW) TO 5 (HIGH),
(PERSON, GROUP, (UNILATERALLY, WHAT IS THE
FORUM, UNCLEAR) INFORMALLY, CLEAR QUALITY OF THE
PROCESS, VIA POLICY, DECISIONS THAT
UNCLEAR) ARE CURRENTLY
MADE?

Owner level  Decide who can be

an owner
 Make final call on
decisions that change
the meaning of
ownership
 Set owner-level goals
 Elect board members

Board level  Hire and fire CEO

 Plan management
succession
 Set executive
compensation
 Approve business
strategy and material
decisions
 Ensure compliance
 Set annual dividend

Management  Recommend
level business strategy
 Implement strategy
 Run the day-to-day
business

Family level  How to build family

unity
 How to educate
family members
 How to develop the
next generation

According to the table above, where do things stand now? Are some decisions being made well, some
poorly, some not at all? Do you have “messy” or “missing” rooms (see page 72–73)?

Based on your answers, you can identify one room to start working on to create or strengthen your Four-
Room structure. You don’t need to fix all of the shortcomings at once: Pick one “problem” room to work on.

© 2021 BanyanGlobal Family Business Advisors. All rights reserved.

Harvard Business Review Family Business Handbook Toolkit Page 2 of 10
 MAKE BETTER DECISIONS WITH THE FOUR-ROOM MODEL

Step 2: Build out governance structures

Much of the initial work in each room is to build a governance structure—how groups will make decisions
in the room. The structures can take the form of a committee, a council, or a board. Below, in general, we
will refer to such decision-making bodies as a “forum.” All Four Rooms share similar topics that shape their
forums. They require you to clarify the forum’s mandate, membership, qualifications, leadership, decision-
making, meeting protocols, communication, and transition.

DESIGN TOPIC KEY QUESTIONS TO ADDRESS

Mandate What is the purpose, scope, and responsibilities of the forum?

Membership What type and number of people will be part of this forum?

Selection Who is eligible to be part of this forum? How will members be selected from among those
who are eligible?

Leadership What leadership roles will the forum need? How will leaders be chosen?

Decision-making What is the decision-making authority of this forum? How are decisions made (for
example, majority rules, consensus, unanimity)?

Meeting protocols What should be the frequency of meetings? How will agendas, minutes, and votes be
handled?

Communication How will this forum communicate with the other rooms?

Transition How will the forum prepare for current members to rotate out and new members to join?

Just like the layout of your kitchen needs to be different from that of your living room, each of the Four
Rooms has its own specific application of these design issues. Below, we help you design the key forums
in your rooms.

OWNER ROOM
Many businesses start with an informal Owner Room—decisions are made at the kitchen table—but that
practice can become messy. Over time, it makes sense to formalize its rules, procedures, and structure.
When seeking more structure, most systems establish an owner council comprising all owners or a sub-
set if the system has many owners. Typically, in larger systems, the owner council will develop
recommendations for the full owner group to consider.

Begin by using the table below as your discussion guide to establish your owner council.

© 2021 BanyanGlobal Family Business Advisors. All rights reserved.

Harvard Business Review Family Business Handbook Toolkit Page 3 of 10
 MAKE BETTER DECISIONS WITH THE FOUR-ROOM MODEL

DESIGN TOPIC KEY QUESTIONS TO ADDRESS

Mandate  What are the decisions the owners face? Are the five core rights of family owners
addressed to your satisfaction? If not, what rights need to be clarified by your owner
council?
 What work needs to be done to ensure the owner group is an effective working body?
Improve communication skills? Group dynamics? Education?

Membership  Should all owners participate directly, or do you need a representational owner council?
 Who participates in the owner council? Current owners only? Future owners? Spouses?

Selection  Do owners need education and development to be knowledgeable and responsible

members of the owner council?
 Is there a minimum age requirement?
 If the owner council is a subset of the full owner group, what is the process for choosing
members?

Leadership  Do you need a chair of the owner council? How is the person selected?

Decision-making  Are you clear regarding who has “vote” and who has “voice” for each of the core five rights
of family owners (page 34) and other decisions the owners will face?
 What decision rights do the owners want to reserve in their owner room and not delegate?
 What standard will you use to make decisions?

Meeting protocols  What should be the frequency of meetings? How will agendas, minutes, and votes be
handled?
 What is the role of advisors? Can any advisors join the meeting?

Communication  How can you best communicate with your board, management, and family? For example,
should you develop an Owner Strategy statement (Tool 6)?
 What communication should happen with all owners, especially those who might be more
distant from the activity?

Transition  Does the owner council membership have term limits?

© 2021 BanyanGlobal Family Business Advisors. All rights reserved.

Harvard Business Review Family Business Handbook Toolkit Page 4 of 10
 MAKE BETTER DECISIONS WITH THE FOUR-ROOM MODEL

BOARD ROOM
If your Board Room is missing or messy, here’s a way to think about building it out.

DESIGN TOPIC KEY QUESTIONS TO ADDRESS

Mandate  What do you want the board to accomplish?

 How will you align the board with owner goals and strategy?
 What business assets should the board oversee?
 Do your documents—bylaws, shareholder agreements, board charter—reflect your
direction?

Membership  How many/what type of board members do you need to fulfill the needed competencies:
family owner fiduciaries, outside fiduciaries, outside advisors, nonfamily management?
 Does your board have any diversity requirements or targets?
 How will you compensate members?
 What (if any) role will the CEO’s have on the board?

Selection  What competencies (for example, industry or functional expertise) are needed on the
board to fulfill its mandate?
 What is the role of the family members on the board?
 What is the process to elect family and nonfamily directors?

Leadership  What leadership roles will you need? Chairman, lead director, committee chairs?
 How will you select them?

Decision-making  What is the decision authority of the board?

 How will the group and social dynamics be managed to drive effective decision-making?
 What type of access will the board have to the management room?

Meeting protocols  What should be the frequency of meetings? How will agendas, minutes, and votes be
handled?
 What topics will be on the board’s agenda? What is the optimal meeting cadence?
 What types of committees will you need? Who will be members on the committees?

Communication  What information will board members receive?

 How will the board communicate with the other rooms?
 How will outside board members interact with the broader family?

Transition  Are there board member have a defined term and are there term limits?
 How will the board as a whole be evaluated? How will individual members be evaluated?
 How does the board evolve from where it is today to where you want it to be?

© 2021 BanyanGlobal Family Business Advisors. All rights reserved.

Harvard Business Review Family Business Handbook Toolkit Page 5 of 10
 MAKE BETTER DECISIONS WITH THE FOUR-ROOM MODEL

DESIGN TOPIC KEY QUESTIONS TO ADDRESS

 How will the next generation be prepared to assume board roles?

FAMILY ROOM
A Family Room has two primary purposes: to enhance family unity and build family talent. In this room,
love and other emotions come into play, though they’re usually unwelcome in business decisions. A
Family Room allows all family members—including spouses and next-generation members—to build and
strengthen their bonds, to share experiences, and to stay connected with the business.

It may seem overly formal to set up a family room (often done through the creation of a family council and
family assembly), but some of the most important decisions and family bonding will happen in the Family
Room. Start by clarifying the following aspects of your family council:

DESIGN TOPIC KEY QUESTIONS TO ADDRESS

Mandate  What do you want the family council to accomplish?

 How will you foster family unity?
 How will you develop next generation family members into responsible future owners?

Membership  Does your family council need representation from different groups, such as branches,
spouses, age cohorts, or geographies?
 How many members should be on your family council?

Selection  How are family council members selected or elected?

 Is there a minimum age to be a member of the family council?

Leadership  Do you want a family council chair? What are the chair’s responsibilities?
 What other leadership roles are needed (treasurer, secretary)?

Decision-making  Does the family council work off consensus decision-making or are votes taken?
 What committees are needed, for example, family assembly, communication, or next-
generation development?

Meeting  What should be the frequency of meetings? How will agendas, minutes, and decisions be
protocols handled and communicated?

Communication  What information will the family council share with the broader family?
 Does the family need a communication platform to share family information?
 How do you reach family members who may be more distant from the center of activity?

Transition  Do family council members have a defined term and are there term limits? Is your family
council losing its momentum? How can you refresh its purpose?

© 2021 BanyanGlobal Family Business Advisors. All rights reserved.

Harvard Business Review Family Business Handbook Toolkit Page 6 of 10
 MAKE BETTER DECISIONS WITH THE FOUR-ROOM MODEL

© 2021 BanyanGlobal Family Business Advisors. All rights reserved.

Harvard Business Review Family Business Handbook Toolkit Page 7 of 10
 MAKE BETTER DECISIONS WITH THE FOUR-ROOM MODEL

MANAGEMENT ROOM
We won’t suggest a plan to build out your Management Room here since every business has some
management in place already. In our experience, the other rooms are far more likely to be
underdeveloped. But we will point out that the Four-Room approach gives management the language to
push back in its appropriate room any “helpful advice” from nonoperating owners of other family members,
thereby enforcing important boundaries.

Step 3: Integrate Across Rooms

To work effectively, the Four Rooms must function well together. To ensure this integration, good
governance includes four core elements: Family businesses should map out the key decision-making
processes across rooms, create formal connections between the rooms, establish policies to address
cross-room conflicts, and put formal agreements in place.

Map Out the Key Decision-Making Processes That Connect Across Rooms
A decision-authority matrix is a map that categorizes the different roles that groups play as part of a
healthy decision-making process. A decision-authority matrix clarifies roles for making important decisions
as they pass through various rooms. You can’t map every decision that cuts across rooms in elaborate
detail, but you can identify those that are frequent and important enough to justify the effort.

Clarify the decision authority in each room and across the rooms. Be specific. It’s useful to label the
functions with letters: (A) Approve, (D) Decide, (R) Recommend, and (I) Input. Consider who has input into
a decision (I), who makes the recommendation (R), who makes the final call (D), and who (if anyone) can
veto that decision (A) and send it back to the person recommending the change? (See Harvard Business
Review for more details.)

What group has the authority to decide? Fill out the decision-authority matrix below, recording which
decision body or position has which authority. Feel free to add complex decisions or remove items from
the “Decisions” column as needed:

DECISIONS OWNER COUNCIL BOARD MANAGEMENT FAMILY COUNCIL

(EXAMPLES)

Dividend payouts

Major acquisition
or sale

Raising major
equity or debt
capital

© 2021 BanyanGlobal Family Business Advisors. All rights reserved.

Harvard Business Review Family Business Handbook Toolkit Page 8 of 10
 MAKE BETTER DECISIONS WITH THE FOUR-ROOM MODEL

DECISIONS OWNER COUNCIL BOARD MANAGEMENT FAMILY COUNCIL

(EXAMPLES)

Selecting/
removing board
members

Hiring/firing CEO

Hiring/firing
family employees

Create Formal Connections Across the Rooms

Building connections across your Four Rooms can be a valuable way to keep decision-makers or
stakeholders from becoming too insulated. You might consider instituting two practices.

1. Overlapping memberships whenever possible. For example, having an owner sit on the board helps
create a natural flow of information from one room to the other.

Brainstorm and record several overlapping membership possibilities in the space below:

2. Distinct points of interaction. For example, some board and executive committee meetings have a
regular spot on the agenda for an owner to share the work of the owner council. You can build
deliberate opportunities into the agendas of different groups to stay connected.

Brainstorm and record several opportunities for distinct points of interaction in the space below:

© 2021 BanyanGlobal Family Business Advisors. All rights reserved.

Harvard Business Review Family Business Handbook Toolkit Page 9 of 10
 MAKE BETTER DECISIONS WITH THE FOUR-ROOM MODEL

Establish Policies to Address Cross-Room Conflict

Family businesses can reduce recurring conflict by creating policies ahead of time. If you can agree
beforehand on issues that should always be treated the same way, you’ll minimize unproductive conflict
down the line. Below are several policies that our clients find useful. There are others you might need, but
this can be a starting list.

 Dividends

 Family employment (We will return to this in Tool 11)

 Conflicts of interest

 Use of company resources

 Communication policies

 Other policies you might need

List these and other policies in the table below, noting the quality of the policies you have in place. If you
are missing or have low-quality policies, consider developing them in the appropriate forum.

TYPE OF POLICY USEFUL POLICY IN PLACE POLICY IN PLACE BUT NO POLICY IN PLACE
NEEDS REVISION

Document Your Decisions

After you define how your family business will make decisions, it’s important to document these policies
with a family constitution and/or shareholder agreement. See pages 71–74 of Family Business Handbook
to determine which document(s) you need for your family business.

© 2021 BanyanGlobal Family Business Advisors. All rights reserved.

Harvard Business Review Family Business Handbook Toolkit Page 10 of 10