Family-owned businesses come in all shapes and sizes and cover various industries. In the local context, they are mainly micro businesses that often employ less than 50 employees and operate in wholesale, retail, catering, and local domestic services sectors. They are the most numerous economic operators that provide tens of thousands of jobs. So, the quality of their governance is crucial for the success of the economy.

A study by the Malta Chamber has revealed some worrying trends in the governance of family businesses. A third of family businesses in Malta do not have a functioning board of directors, and most of those that do say that only family members sit on the board. Just over a third of family businesses have a succession plan in place. Unsurprisingly, most business owners spend most of their time on day-to-day operations and little time on strategic planning.

These findings are not unique to Malta. Various international studies confirm that only 30 per cent of family businesses survive the second generation. This means that in 70 per cent of family businesses, the family loses control of assets, and relationships are potentially destroyed.

Over the years, local banks have devised special loan schemes to help family enterprises re-engineer their business models by strengthening their governance to give them a better chance of survival after the founding family members retire. Anecdotal evidence indicates these schemes had limited success because they did not address small family businesses’ real challenges.

So, what other issues need to be addressed by small family businesses to continue to create wealth for the owners and good employment opportunities for their workers?

Small family businesses share the same concerns as non-family businesses, including profitability, responses to competition, adoption and adaptation of new technologies, relationships between management and employees, and generation of returns to stakeholders.

However, family-owned businesses also have unique challenges.  Perhaps the most arduous is managing emotions unique within families. Few family enterprises promote internal professional business relationships free from emotional positive components like trust, love, and affection or negative components like resentment, jealousy, and rivalry. This is arguably the main cause of serious problems that often lead to the decline of a family business.

The most influential family leaders must identify these emotional components and take them into account when making business decisions.

Another daunting challenge for family-run businesses is the excessive sense of entitlement that some family members may have when a family business ownership is passed by inheritance.

There are often heirs actively involved in leading the business, heirs who are employed in non-leadership positions, and other heirs who are passive owners.

The expectations of these various categories are often out of sync. Some family members may expect to be provided jobs, irrespective of their qualifications, and they might even expect to be paid a salary without providing any useful service to the business.

It is crucial that while the original owners are still active in the business, they work to diminish the culture of entitlement in favour of operating the family enterprise as an arms-length business.

Family-run enterprises can sometimes suffer from what business experts call ‘cordial hypocrisy’. This happens when family members too often avoid tough issues by avoiding meaningful conversations, especially about succession planning. Left unaddressed, these tensions increase distrust in families and obstruct performance in family-owned small businesses.

Stakeholders in a family-run business must make every effort to align their shared purpose, mutual trust, and collective decision-making to bolster business performance, family relationships, and sound employer-employee relationships.