Family values

Family businesses have been around since the beginning of time, when children would help their parents in rural activities to help provide for all the family. Fast forward to today. In our technological society we still find ourselves facing the scenario that the vast majority of businesses, even in advanced economies, are made up of family businesses. Moreover, family businesses are present in every sector of the economy.

At a time when trust in traditional corporate governance is low, many family businesses use the fact that they are family controlled to promote a positive message about their values.

In Malta, where 98 per cent of the businesses are SMEs, it is estimated that out of this figure, 70 to 80 per cent of all forms of business structures are family businesses. But what constitutes a family business and from where do they start?

Unfortunately, there is no standard definition of what constitutes a family enterprise – however, the foremost corollary of a family business is the influence that family members have on the enterprise’s ownership, governance and management.

The term ‘family enterprise’ usually brings to mind the concept of a sole trader where the enterprise is operated by a single person. Fortunately this cannot be further from the truth since family enterprises are found across the full spectrum of business structures, starting from the sole trader or employing other persons and family members, to mum and dad set-ups and to the largest corporations.

The developmental model of family businesses shows us how family enterprises go through changes in ownership, family and business. The three stages are referred to as Controlling Owner (who could be a sole owner, husband and wife), Sibling Partnership (normally during the second generation when the siblings take over the management and ownership of the business) and Cousin Consortium (the third generation, when cousins join the business).

At this point it is important to clearly define what is to be understood by the term ‘family business’. A proposition which is in the line of thinking with leading family business researchers has been put forward by the EU Expert Group on Family Business which brings together three important aspects of family business, namely family, business itself and ownership.

But how do family businesses start?

Family businesses are often overlooked in the conventional debate about entrepreneurship, but many of them achieve entrepreneurial success across generations and not just in the era of the founder.

The definition ‘entrepreneur’ seems most often to be used to describe driven individuals who overcome obstacles and challenges to create great businesses. Yet family businesses also go through this stage, when the financial and emotional commitment of the individual and in many instances by that of the spouse and subsequently that of the children, is often put on the line to support the vision of the business founder.

But then what? How is it that some families achieve entrepreneurial success, not just once but across generations?

This statement may seem odd to those who accept uncritically the cliché that family businesses are fated to go from ‘clogs to clogs’ or ‘shirtsleeves to shirtsleeves’ in three generations. Statistics are often quoted about how few family businesses survive to the third generation – if there are statistics then it must be true, mustn’t it?

For all we know the same may be true across the wider business community – until a comparison is made between family owned and other types of business, we cannot be certain if families are any better or worse when it comes to surviving three generations.

However, if we’re going to make progress in improving the fortunes of family businesses and the welfare of all those who are stakeholders in them, we need to study their successes and see what makes them different from other business forms.

In a family business, the values of the business and its vision for the future emanate from the family. It is the family’s attitudes to risk, thrift, commitment, trust, work and wealth that underpin the business and drive it forward. Having the next generation discuss the vision and values of the family business future is an educational process and serves to provide a clear perspective of the day-to-day responsibilities in the running of the family enterprise.

Such values are also used for marketing purposes. At a time when trust in traditional corporate governance is low, many family businesses use the fact that they are family controlled to promote a positive message about their values – “You can trust us, because we’re a family too.” Think of BMW, Samsung, and other family brands like Ford and Ferrari.

Also, looking after your family shareholders can often secure cheap, long-term capital for the business. A sense of being custodians of family wealth and focusing on long-term shareholder value and continuity of a family legacy, replace the demand for short-term returns. Your family may view the business as a means of remaining connected as the family owners inevitably grow apart and pursue their individual careers and lifestyles. This patient capital is a major competitive advantage for your business compared to the cost of capital that your competitors have to bear in order to grow.

The commitment that your family can bring to their business cannot easily be hired externally. This is self-evident in the early stages of many family businesses, when the family provides affordable labour as well as cheap start-up capital. Successful multi-generational family businesses do not assume that this commitment will automatically survive in future generations, so they invest in the career development of the next generation and have clear rules about entry to the business that balance the wishes of the extended family with the needs of the business. Carefully harnessed, nepotism can be a strategic advantage for the family business.

None of the above should be deliberately left out of one’s business strategy, and a lot of effort and money is often invested by companies to gain some of the advantages they perceive in creating a family culture in their businesses.

What is a family business?

According to the EU Expert Group on Family Business, an enterprise, of any size, is a family business if:

• The majority of decision-making rights are in the possession of the natural person(s) who established the firm, or in the possession of the natural person(s) who has acquired the share capital of the firm, or in the possession of their spouses, parents, child or children’s direct heirs.

• The majority of decision-making rights are direct or indirect.

• At least one representative of the family or kin is formally involved in the governance of the firm.

• Listed companies meet the definition of a family enterprise if the person who established or acquired the firm (that is share capital) or their families or descendants, possess 25 per cent of the decision-making rights mandated by their share capital.

Mario Duca is Chairman of the Malta Association of Family Enterprises. He is also Managing Director with FBS2M Family Business Solutions, a partnership with Family Business Solutions of Scotland.