75% of Maltese businesses are family-owned

“Independent directors key to survival and growth of family businesses.” – Tonio Farrugia, NOUV

As the world grapples the coronavirus pandemic, countries have already commenced a long-drawn race to regenerate their economies and identify new sources of growth to secure the jobs of tomorrow.

And Malta is no exception and much has already been set about thinking outside the box to identify where these potential new opportunities to revive the fortunes of our economy are going to come from.

While there is no doubt that such lateral thinking is needed to spur on new ideas, this should not drive us in ignoring the enormous, untapped potential which exists in front of our own eyes. It is estimated that some 75% of Maltese businesses are family-owned.

While the absolute majority of entrepreneurs are willing to see their sons and daughters carry on with the family enterprise, only 30% actually survive, while third generation family businesses barely make it to double figures. This is a huge loss of potential growth and job creation. In simple terms, just one of three family businesses will survive.

Rather than pointing fingers at the reasons behind this failure, it is my intention today to discuss one possible solution to this situation. This solution revolves around the importance of appointing an independent director – someone with no direct blood or other close links to the family – on the company’s board in the absence of next-generation would-be directors.

This is imperative for many reasons. While our forefathers undoubtedly had their unique set of challenges thirty, forty years ago when setting out their operations, today’s realities are extensively different on many counts. Issues related to governance, performances, environmental concerns, sustainability, business contingency planning, data protection and corporate social governance to name a few, might have been not figured in the most remote thoughts of the business leader.

All these issues have compounded a higher degree of risk of conflicts and poor management. Compounding these with the recurring difficulty of ensuring adequate succession planning, can run a firm to the ground.

When businesses continued to be led by members of the same bloodline, family heritage and business evolution – which may require tough, unpalatable decisions – can often come to a conflict. Family members serving on boards will generally find it rather challenging to voice reservations or objections to the plans of fellow family members, especially if the person pushing for a specific action or direction is the founder or most respected driver of the business.

An independent director also brings diversity of perspective and is better positioned to identify unexpected risks from specific actions while coming up with creative solutions. At the same time, he or she might be able to prop up the voice of under-represented members of the family, including younger and / or possibly female relatives.

Despite the family members’ best efforts, the lack of a genuine, independent voice within the business can push the firm into isolation, by creating an echo chamber of ideas that fails to be challenged from the outside. Independent board members with wider boardroom experiences can help family members focus on the right priorities, and ideally keep family politics out of the company boardroom, while bringing a much-needed external perspective and a larger dose of reality.

Last, but certainly not least, independent directors are crucial in the succession process. Family members might find it hard to speak out on whether a new strategy is required, on whether the next family leader is truly capable in the role, or if this person truly holds wide respect among the board and company employees. It takes no rocket scientist to see that independent directors may well be better positioned to answer these questions than family members might be.

A common misconception in smaller businesses in the local scenario is that directors need to be entrepreneurs. Independent directors can never take over the role of the entrepreneurs in firms. That shall always be the job of the business owners or investors. Family businesses should not see the presence of an independent director as a threat but rather than the provision of value added that might be a fundamental contributor to ensuring the firm’s long-term survival.