It’s often said that the typical family business goes from rags to riches and back to rags in three generations. Better governance of a family business can help improve business performance and satisfy the expectations of all family members.

A family constitution can strengthen the “family glue” (emotional cohesion) and helps to build the relationship between the family and the company (emotional ownership).

The advantage of a family constitution is that it ensures clarity and transparency and families know what to do when disagreements arise. In addition, it strengthens the family’s emotional cohesion because the shareholders work together to formulate the family constitution.

In Malta , many advisory bodies can help serve as the go between to help establish a bridge between the emotional cohesion and ownership while keeping the core values of the family business at the very forefront. The likes of the Family Business Office Malta would be , in principal , the starting point should one wish consider this aspect of governance of their family business.

Family business firms with a constitution do report that they will eventually come to a consensus even when they have differing opinions. This is only the case in 71 percent of families without a constitution. Regarding emotional ownership, 93 percent with a constitution say that the family business is an important part of their life, in relation to 85 percent without a constitution. These results confirm that intensive discussions in an environment viewed as safe, leads to a high degree of trust, openness, and attachment. This is even confirmed by those shareholders who were at first skeptical of developing a family constitution. Thus, the family constitution ultimately acts as an indispensable link between the family and the business. Businesses without a family constitution are therefore more likely to be susceptible to crisis.

Furthermore, a family constitution also has an effect on the economic success of the family business. Half of entrepreneurial families with at least three shareholders and a constitution, report having an annual return of more than five percent. For those without a family constitution, most (48 percent) reported an annual return below five percent. The reason is that the constitution also regulates many areas of the management structure within the company, like the advisory board, management succession, profit distribution, and the process of selling shares.

The absence of core and commonly accepted and followed (family) values may cause the company to falter. For this reason, it may be useful to establish a family council and/or a family manager in addition to the family constitution who is responsible for joint events, trainings and social engagement – and if needed for conflict management.

At the Family Business Office we can offer you assistance in dealing with family business succession planning issues through incentives supporting advisory and mediation services. Contact us today on familybusinessact@gov.mt.

(All factual and statistical information presented in this blog has been obtained from an extract of an article from the kpmg.com) Follow us on our Facebook page and Family Business Office website at www.familybusiness.org.mt