Family businesses represent a large percentage of Maltese enterprises. However, there are numerous challenges which such businesses face and amongst those challenges are those relating to governance and planning for ownership succession.
Family businesses endure if they create robust governing structures and find a balance between the family’s natural attitude to closeness and the business’ strategic openness. A number of issues may develop in the course of running family businesses, such as confusion between the family wealth and the family business assets; dependence on specific family members within the business; family members’ attachment to particular positions and difficulty to relinquish control; glass ceiling for staff members who are not related; difficulty in attracting and retaining the right employees; lack of training in management and specific training in the sector in which the business operates.
A number of such issues arise due to the closeness between the family business and the family members themselves and the lack of a clear distinction between the business and the family members themselves. Another main source of the challenges which family businesses face is internal conflict and lack of alignment between family members with regard to the vision for the business. Many of the issues that family businesses face become more evident when planning for the next generation, and as a result of such issues family businesses may become fragmented when planning for generational transition.
These are matters which can be resolved over time through the implementation of the necessary governance structures and through a number measures taken. One of such measures may include the setting up of a foundation administered by external professionals to act as a holding of the family business. The foundation would enhance the required objectivity and would assist in achieving the business’ continued success and longevity. It would also assist in changing the perspective for the family business not to be seen as a family affair, but as an enterprise.
The Family Business Foundation
For the purposes of this article, the foundation used in this context shall be referred to as a family business foundation. The foundation would be set up by the founder/s who would typically be one or more of the family members within the family business and it would be an entity completely separate from the family business, acting as a holding to the enterprise. The foundation would be governed for the benefit of the beneficiaries as indicated in the beneficiary statement that may be amended from time to time by the founder/s. The beneficiaries of the family business foundation would typically be the family members. This could assist in increasing family harmony since family members who are not involved in the management of the family business structure and who are beneficiaries of the foundation, may be comforted by the fact that the legal ownership of the family business is not held by other family members, but by a foundation which is governed by impartial professionals.
The family business foundation would create a clear level of continuity and would survive the demise of one or more of the family members (previously the shareholder/s of the family business). The foundation would extend over time, the value produced by the founder/s beyond their lifetime and would assist in providing objective input from external third parties and would encourage proper governance procedures to be put in place at the level of the family business, due to the lack of closeness between the administrator/s of the foundation and the directors/managers of the family business. A considerable level of distance would need to be maintained between the administrator/s of the foundation and the directors of the family business, allowing for a healthy level of objectivity and accountability. Properly set up and documented meetings would need to be held. Documentation in relation to decisions or transactions carried out and reasons for such transactions or decisions would need to be held at the level of the family business.
As can be seen below, the foundation may allow for the involvement of family members within the foundation to a certain extent. A level of overlap may be seen in the relevant parties to the family business and the family business foundation. However, this should be limited in scope, solely to maintain a level of continuity in the vision and general aims of the family business or in relation to appointments or removals of beneficiaries to the foundation. Provided that the administrators of the foundation shall at all times exercise the necessary powers to ensure the proper functioning of the governance structure. Indeed, the administrator/s of the foundation should have the freedom to exercise their powers to their full extent on an arms’ length basis and carry out any actions them seem fit, such as seek clarifications or further information from the family business in relation to a particular decision or transaction, or replace one or more directors of the family business should they deem necessary.
The main ways in which the involvement of family members in the foundation may be achieved is through the retention of certain powers by the founder/s themselves or through the appointment of one or more protectors. The powers that may be retained by the founder/s include the exercise of supervision over the administration of the foundation; obtaining a copy of the accounts held by the administrators; obtaining a copy of the inventory or descriptive notes of property; appointing, adding or removing any administrators, protectors or beneficiaries; appointing external service providers to the foundation such as an accountant or investment advisor. The founder/s may in certain circumstances also give non-binding written guidance to the administrator/s on how to exercise certain powers vested in them.
The founder/s or another person of their choice may be appointed as protector/s within the foundation. The protector/s may have the power to exercise supervision over the acts of the administrators; to give guidance to the administrators in the exercise of certain powers, discretions or duties; to add or remove any administrators. In certain cases, the exercise of any power, action or discretion on the part of the administrators may be subject to the express consent of the protector/s. The function of the protector may be very useful to the family especially after the demise of one or more of the founder/s. The appointment of an independent professional protector can provide a genuine independent mechanism to oversee the administration of the foundation.
As can be seen above, the foundation is a versatile tool, which allows for the insertion of certain measures in order to satisfy the needs of the particular case. Therefore, while relinquishing control, the family members would be able to retain certain powers in order to ensure the continuity of the vision, values and mission of the family business. Nevertheless, before opting for the foundation, a detailed analysis would need to be carried out on a case-by-case basis to establish if the foundation would be a viable tool. Though, if opted for and if utilised in the correct manner, the family business foundation may act as the connector between the enterprise and the family, leading to a lasting intergenerational sustainability.