Family firms will undoubtedly continue to play an important role in countries' economies, according to Peter Barrett, chairman of RCHKS Handa projects International in China, who is to address an Institute of Directors forum next week.
"Family firms constitute the majority of SME activities in most economies and SMEs are the main growth drivers in many countries. Economies that do not encourage SMEs hamper their own growth prospects. But there is a high failure rate in family firms and many do not last more than one generation.
"In order to evolve successfully such firms must address a number of issues such as professionalisation of family members, the training and selection of the next generation, maintaining enough capital for expansion and not distributing all profits in dividends and salaries, developing from a one country market to regional and international markets, retaining staff through reasonable staff benefits and prospects, allowing professionals to join the family firms and be given the freedom to operate, learning to delegate in line with growth, paying attention to customers' needs and being prepared to spend money on market research to discover what those needs are," he tells The Times Business in an interview.
Mr Barrett says is it also important for family firms to improve board processes and corporate governance, adding that he has seen such companies with great potential "ripped apart" by inadequate attention to proper board activities.
It is essential, he says, for family firms to have distinct and separate roles for the company's management and board of directors as the company grows beyond the first generation. This is desirable, he says, during the early stages.
"If the board is not sensibly led by the chairman it wastes time in confusion and disagreement, often because board's roles and people's authority is unclear.
"Family members can still engage in mundane operational tasks which they know about to the more difficult challenge of determining strategy, policy, knowing how to monitor operations without interfering with line management and engaging with key stakeholders."
These are necessary, he says,if the company is to grow and be financially sound.
"Ethics plays a large part in maintaining and communicating the family firm values. Management roles must be clearly specified to stop empire building and board members should set up proper performance and target setting systems to drive the business forward and improve staff performance," says.
He stresses that appointments should be merit based and should not favour family relationships.
Mr Barrett says that as a company grows good corporate governance becomes a fundamental part of developing the business and its leaders as well as the firm's reputation with its customers and suppliers.
"This means understanding how a board should work, training family members to become effective directors and ensuring that board processes are continually improved as the company becomes more complex. You will not gain the respect of your staff if the board makes unsound and irrational decisions, your business will suffer and better staff will leave, so you fall into a pit of incompetence and low productivity due to lack of awareness on the part of family members on how to run a company in a professional manner. This is the main reason between failure and success over the long term."
Good corporate governance, he points out, is the key to family firm sustainability and profitable growth over the long term.
"The same considerations relating to corporate governance apply to NGOs, but the latter often are deficient as some board members in NGOs have little or no experience of running large organisations and politics and power become their main preoccupation to the detriment of the mission of the NGO," he says.
Mr Barrett's talk, Corporate Governance Comparisons Between Family Firms And NGOs, takes place on Tuesday at the Chamber of Commerce, Republic Street, Valletta, between 4 p.m. and 7 p.m.
The talk is part of the Directors' Forum 2010, a joint initiative between the Institute of Directors and the Chamber of Commerce, Industry and Enterprise.