I always feel an underlying tension within family businesses. The tension is about what should come first. Is it family first or business first?

If the business were to place the family first, there could be various implications. Families may decide that the business was created to secure the future of the family itself, in which case it would be meant to be shared by all members equally. Under these circumstances, the family accepts that shareholding will continue to fragment at each generation, but also that they will share one future. A tough path to undertake. Such a philosophy also means that the future path of the business – how much it grows, how professionally it is managed – is very much dependent on making all components of the family happy. This creates various risks such as losing valuable employees who are non-family members and losing competitiveness.   

If the business were to place the business itself first, there would be other equally important implications. The most important implication would be that the main priority of the family business would be that the business be managed as a commercial enterprise. Hence,  the business is run and managed in the most effective way to maximise its performance and profitability. In this case, longevity of the business is more important than equal treatment of family members. Family members may exit the business at each generation and control is likely to be more consolidated even in a few family and non-family members. Which of these philosophies should prevail?

The concept of inheritance is perhaps as old as civilisation itself. Historically, societies have taken one of two stances towards it. At one end of the spectrum, the ancient Greeks postulated that family wealth was to be shared more or less equally among sons (daughters were generally not beneficiaries of the estate at this time). Early Chinese civilisation ascribed to another school of thought, that of primogeniture. Here, the eldest son was entitled to inherit most of the estate. Primogeniture went on to become quite widespread in medieval times (especially among monarchic societies, which are inherently primogenital), but, as centuries have passed, it has come to be seen as unfair and its popularity has reduced. While this may have had advantages in ancient monarchies, it has no place in family businesses – and nowadays even more so.

In the case of family-owned businesses, it is still sometimes the practice to install the eldest child, and the eldest son, as the successor CEO. Experience shows that this often leads to inefficiencies and mistakes that jeopardise the continued existence of these family businesses. An old saying, “shirtsleeves to shirtsleeves in three generations,” describes the fact that many family businesses that are passed down to children and then grandchildren tend not to survive through the third generation. There are a lot of reasons for this and it’s not a given. However, mistakes in leadership can cause a company to decline and perhaps to even go out of business. Instead of automatically assuming that a son, a daughter or a family member should take over the reins of the family business, a more disciplined approach might be advisable. Just because individuals are family, it certainly does not mean they are the most qualified or indeed worthy to run the business.

To determine whether it would be the best choice to have a family member to run the business and, if yes, which family member would be most suitable, the current senior owners should consider applying the following seven common-sense steps:

• Determine if any of the next generation of children are capable of and interested in working in, and more importantly, managing the business.

• If the answer is yes, decide which one of the children interested has the best skill sets to actually manage the business. This could require outside assistance from trusted business consultants to determine which child is best suited. Enlisting outside help will eliminate any biases the senior generation might have for — or against — certain offspring.

• If more than one individual is interested, and despite assessing the skill sets, a hasty decision should not be made as to a definitive successor. The planning for succession should start many years before the actual need for a successor to take over. As I keep preaching, succession is a journey and not an event. If there is more than one viable successor, all such potential successors should be given the opportunity to win the job. This is no different than the process that often happens in non-family business and companies and in many large private businesses. Each qualified, viable candidate should be allowed to fill a position at the company and to progress up the ladder of management.

• If possible, positions held within the company by the candidates should be rotated so that the candidates can gain experience in many areas of the operation of the business. Not only will this better groom the ultimate future leader but it will provide depth to the management team (assuming there is more than one candidate).

• After a reasonable period of time, the best candidate should be selected and meet with him or her to discuss expectations, compensation, contract terms (consult a lawyer to ensure that the legal relationship is fully in line with the law, including the most recent amendments to employment law in Malta) and other terms of employment and position.

• If there are multiple candidates to the position of CEO, then owners should meet with the non-selected candidate(s). . There will be more decisions to be made at this juncture. Is the candidate going to stay on with the company in some executive position? If so, that requires making sure that the individual is going to be able to work as a team (with the CEO and the other candidate[s]). If it is not in the interest of the company for multiple candidates to remain at the company, those discussions will be required and hard decisions need to be made. Do not make the mistake of keeping a candidate with the company simply because he or she is a family member. If the individual is not a fit for the company or cannot work together with the selected CEO as a team, the company is better off terminating the relationship sooner rather than later.

Current management needs to develop a well-communicated plan of the transition of power to the newly selected CEO. This might take place in a period of a few months or even over a period of years. Regardless, lines of authority, decision making, etc. need to be clearly delineated during this transition period. Also, family business should ensure that in the selection of a family-member CEO they will not alienate more worthy non-family employees who would do a better job of managing the business. Also remember that shareholding and management are not the same thing and should not be treated as such. 

If family businesses intend to act as owner-managers and keep the business intact, then they must create rules on how they select managers and how they ensure fair wealth sharing to the full family. Selecting managers from within the family, and the control that goes with it, is never easy. It requires well established processes for successor identification. For families, which are by nature emotional, making such a decision rationally will be difficult.

Family business owners also need to consider the possibility that no family member would be willing or skilled enough to take a leadership role within the family business. In such instances there are other models to be considered. The family may choose to opt out of managing the business but exercise control through the Board (where they can also decide their level of involvement). They could choose to be more passive as shareholders, or create a Family Trust that has a defined purpose and clearly articulated decision rights in relation to the business, like appointing the CEO or giving direction to the Board members on certain matters. If family businesses intend to manage collectively by their presence on the Board, again, they need to put in place clear forums and principles on how they agree on various matters and setting up a dividend policy. Running a successful democracy requires strong institutions and procedures. The family, which acts as the electorate, must define these rules. Only then can the inevitable challenge of fragmentation in ownership be overcome. But it requires careful thought from the entire family and a significant investment of time, effort and ongoing management. If not, the family business will implode and possibly die a painful death .

Irrespective of the model family businesses choose, they will need to agree on the vision, create the governance, and spend time operating it, if they seek longevity. The transition of operating control of a business can be difficult. It requires planning, discipline and communication. Once a plan is implemented, it should be adhered to strictly unless there are extenuating circumstances. Getting professional consultants with the  necessary experience and skill in these types of situations is critical, because reliance on them to assist in the process can be a very effective way to help make it a success.