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Looking long-term through succession planning
19 Sep 2018

Family businesses are the heart of the Maltese economy and their success relies heavily on their ability to plan for the future, according to Albert Frendo, Chief Business Development Officer Credit at Bank of Valletta plc. Here, he speaks to Rebecca Anastasi about how succession planning can ensure these businesses live long and prosper.

Since post-independence, the Maltese economy has relied on the strength and sustainability of family businesses, which have become the bedrock of the islands’ prosperity. The recent spate of legislation – the Family Business Act, enacted at the beginning of last year – has highlighted the centrality of these small and medium companies to the country’s future, cementing into law initiatives and commitments aimed at guaranteeing continuity.

“Family businesses tend to think ahead,” Bank of Valletta’s Chief Business Development Officer Credit, Albert Frendo explains. “The philosophy behind a family business is to move beyond the short-term, with an emphasis on building an asset base for the founder’s children and their children’s children.” He contrasts this with larger businesses that are more likely to think in terms of dividends, results and growth in the short-term, stating that the smaller enterprises build their “focus on future generations”.

Indeed, these businesses are defined by two key elements, Mr Frendo states: values and resilience. “This was evident in the financial crisis when family businesses, especially in Europe, were considered the most resilient to the crisis. They absorbed losses, they sought to maintain their workforce and they soldiered on, knowing their objectives were not short-term. They knew the need to ensure a better future, to ensure a future for the next generation,” he asserts.

He aligns this commitment with that of the bank to support their customers. “We have an effective business model of relationship management” he says. “We are very close to the family businesses and we can share practical experience on how to conduct it. At BOV, we’ve always give weight to the extent of succession planning of our customers and its importance in safeguarding the future.” He points to the changes which have occurred over the years, stating that, today, there is much more demand on organisations to ensure they abide by legislation. “The way we’re looking at businesses now has shifted dramatically. It’s costlier to run a business

since you need to have proper governance and a proper set up,” he states. With reference to studies conducted on the sustainability of family businesses internationally, Mr Frendo notes that “there is a tendency for one to have a romantic view of a family business distant from office politics, strife or disjointed goals,” but the reality shows that only one third make it to the second generation and even less to the third. “Whether such statistics apply to Malta is a moot point – what one needs to question is whether the challenges that typically apply to family business internationally apply to Malta as well,” he explains. Mr Frendo seems to think they do and he names poor succession planning as “an obvious challenge” which the bank is trying to mitigate by helping family businesses plan their survival and continuity. “In Malta, businesses, unfortunately, tend to look at succession planning as solely a way to save tax, but if you look at it in these limited terms, succession planning will not work, and your business will find itself in difficulty.”

This issue is compounded by another weakness of family businesses – the tendency for all decision-making to be vested in the hands of the founder of the business. “Rudy Giuliani, the ex-mayor of New York, is quoted as saying that a good leader is surrounded by good people. This sounds obvious but, in reality, there are a number of ‘leaders’ who prefer not to be challenged, and who prefer to be surrounded by loyalists.” These businessmen or women usually tend to take all decisions, and this has serious consequences on the future viability of their company, according to the bank’s Chief Business Development Officer Credit.

These concerns have resulted in the bank attempting to mitigate any risks to the viability of businesses and the economy. “Ultimately our business is one of risk management, and one of the obvious worries is business continuity. If we’re lending to a successful family business, but there’s the prospect of complications, the moment the person leading the company becomes ineffective, this could challenge business continuity, and that’s a big problem for the bank,” he asserts.

Another concern highlighted by Mr Frendo was the resistance some family companies have to the idea of diversifying their businesses, especially as their families start to grow. “A huge challenge for a family enterprise is when the number of family members begins to increase, resulting in smaller units within family structures.”

Indeed, he sees diversification as key to counteracting the issue. “While in the short term the business will be weakened as it loses resilience, in the longer term such a route may effectively be the best one to ensure business continuity,” he insists.

Hence the need for good succession planning, which is heavily reliant on good governance, Mr Frendo explains, and “a good planner of succession planning is to ensure the business can continue beyond the person involved, while the person is still leading the company.” This goes “beyond identifying a successor”, Mr Frendo continues, “but ensuring the right notes are there for the business to be safe in its journey in this competitive and global world.”

He points to some success stories, stating that there are plenty of examples of lucrative, global Maltese family businesses, in diverse sectors, which have managed to make inroads around the world and, as a result, are trusted by international banks. “They have a well-thought out structure and are a safer bet which the bank can support, so they have more negotiating power,” he claims.

A proper family charter, delineating the difference between family and business needs, is essential to achieve this, in his view. “There’s a lot of emotion involved and if there is a proper family charter specifying how to recruit, when to retire, how family members are promoted, whether on consanguinity or meritocracy, this will have a huge bearing on the survival of the family business.”

This article featured in the 79th Issue of The Commercial Courier published in September 2018

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Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap.370. of the Laws of Malta).