Lack of good corporate governance places long-term future of family businesses ‘at risk’

Family businesses which do not have good corporate governance are placing their long-term futures at risk, EMCS Director – Advisory Services Silvan Mifsud has stated.

His comments came as he presented the findings from the Family Business Survey, conducted in February 2024 by EMCS Advisory in collaboration with The Malta Chamber of Commerce, Enterprise and Industry on Thursday (today). The study was based on a sample of 160 local family businesses, selected through a number of criteria, including size, the economic sector they are involved in, as well as maturity – in what family generation they are in – to have a balanced sample. The results were compared to the findings of a previous edition of the study, conducted between November and December 2022, which had a relatively smaller sample size (115).

While family businesses form a crucial part of Malta’s economy, accounting for around 70 per cent of all businesses in the country, they have repeatedly been urged to up their game when it comes to corporate governance and strategic planning.

In fact, just 67 per cent (107 out of 160) of respondents said that their family business has a functioning Board of Directors that regularly meets to discuss the present performance and future direction of the firm. This is significantly lower than the 83 per cent that said yes in the 2022 survey.

Interestingly, 69 per cent of the 107 family businesses which said yes to having a Board of Directors, remarked that they do not have non-family members as independent Non-Executive Directors.

The importance of having Non-Executive Directors has been highlighted in the past, with business advisors stating that such additions can give a different perspective and challenge the day-to-day running of the business.

The study also noted that 32 per cent of family businesses have a written strategic plan, while 53 per cent said that they do not, but have recognised the need to develop one. The remaining 16 per cent stated that they do not need it. The findings from this survey are relatively in line with those of the 2022 one.

Furthermore, just 57 respondents (36 per cent of total) said that they have a written succession plan. Out of those 57, 11 said that the succession plan is not being implemented and the next generation is not being exposed to and trained on matters linked to the family business, with some postponing the task and others saying that the coming generation is not interested in the running of the business.

Those without a written succession plan said that they are too busy and need to find the time to do so, constantly putting it off. Some stated that the plan is known but not written, while others strikingly affirmed that the Directors are primarily focused on generating sales and dealing with day-to-day operations.

Mr Mifsud, who is also Chairperson of The Malta Chamber’s Family Business Committee, remarked that governance is “ultimately the basis for everything” within a business.

“If family businesses don’t have good corporate governance, they are putting their long-term future at risk,” he added.

At one point in the survey, respondents were asked to rank the priorities for their family business, with the need to improve financial performance coming on top. This represents a stark change from the 2022 survey, when financial improvement was ranked third. In 2024, this was followed by the need to retain the present labour force, together with investment in new technologies to automate processes and increase efficiency, which came in second and third, respectively. The need to be more environmentally friendly in operations dropped from seventh to ninth, signifying how when things get challenging for family businesses, environmental goals tend to go further down the pecking order.

Unfortunately, the need to improve corporate governance and have independent Non-Executive Directors was very low in the list, coming in at 14th.

Additionally, the study also analysed the difference in results of those family businesses which have Non-Executive Directors with those which do not. It was noted that those which do have Non-Executive Directors were more likely to have a written strategic plan and succession plan, while decisions were more often taken based on research and data analysis.