The first part of this article delved into succession issues in family businesses and the importance of early succession planning.
This article will be considering into the value of having governance structures on place and how such structures are critical to ensure the continuity of such businesses.
According to a survey conducted by the Malta Chamber of Commerce, Enterprise and Industry between November and December 2022, it was estimated that family businesses constitute approximately 75% of businesses in Malta.
This same survey also showed that around 65% do not have a written strategic plan. The numbers indicate that while family businesses are clearly one of the pillars of Malta’s economy, governance within these businesses is clearly lacking. When one considers the underlying dynamics that exists when family and business mix, it clearly emerges that there is a need to have proper governance structures in place.
Family businesses should strive to create a proper governance structure which goes beyond the ‘family head’ role which in any event will not succeed if there is no proper succession planning. However, apart from a good governance structure, family businesses need to bifurcate family matters from business affairs and all businesses should have distinct policies and procedures to achieve this aim. Failure to do so creates risks in terms of conflicts of interests and will result in poorly managed relationships and a process which is not partial. In addition to having these policies and procedures, the process in which decisions are needs to be transparent, fair, and sufficiently thought out to manage the emotional factors and familial relationships which are naturally going to be present when such decisions are being made. This may involve the creation of a board of directors with independent members who can provide an objective perspective. In some cases, it would also be advisable that such non independent director acts as chairperson to manage balanced boards and ensure that deadlock situations are resolved.
In addition to ensuring that there is a decision-making process which is clear, recognising that conflicts are inevitable and implementing effective conflict resolution mechanisms is key. This will allow disputes to be addressed in a constructive and fair manner and achieving this can be either through the establishment of family councils, or by appointing independent arbiters/advisors (trusted by both parties) to help navigate and resolve conflicts without harming the business’s operations, family relationships and the business’s reputation.
Family businesses also need to recognise and embrace the strong ties they have to the local community and industry. This is even more so where regulation is increasing, consumers are becoming more discerning and environmentally conscious, family businesses need to recognise that good governance also includes setting ethical standards and actively engaging in ESG responsibility initiatives. Demonstrating a commitment to ethical business practices and social responsibility not only benefits the community but also enhances the company’s reputation and long-term success.
This article was first published on Business Today on 01/10/2023.
Authors: Simon Schembri (Partner, Ganado Advocates) and Philip Mifsud (Senior Associate, Ganado Advocates)
