1. Governance Structures of a Family Business
Silvan Mifsud, Chairperson Family Business Committee
THE MALTA CHAMBER
OF COMMERCE, ENTERPRISE
AND INDUSTRY

2. Why Governance?
Good governance helps owners balance the need to maintain
control over what matters most with the need to delegate
responsibility to others. It allows for better and faster decision-
making :-
Putting yourhomeinorder- Helpingfamilybusinessesreachnewheights:
If your business is small or has functioned well with an informal decision making process, you may
consider formal governance unnecessary. But with a company’s success and growth, the number and
difficulty of decisions soon become too great for any one person (or one group of persons) to make all
the decisions and do them well.
Time and again, family businesses underperform and slide into chaos when they have failed to learn
how to make good decisions together.

3. A four room model
Imagine your family business system as a home with four rooms:
an Owner Room, a Board Room, a Management Room, and a
Family Room. Each room has clear rules about who is allowed
inside, what decisions are made there and how those decisions are
made.
Putting your home in order - Helping family businesses reach new heights:
Many family businesses are not large or
complex enough to warrant a full Four-
Room build-out. Nonetheless, you can put
into practice many of the ideas in a more
informal approach. You could, for example,
have discussions in all the appropriate
rooms in a single meeting. You just need to
set a clear agenda and make sure that the
right people are in the right discussion, and
enforce the boundaries you have set up. The
fundamental decisions are the same for

4. Two main focus areas
To improve governance in your family business, you will need to
focus on two areas:
1. Structures: Which rooms will you create, and which decisions
should be made in each room?
2. Processes: How will the rooms be integrated? This is the flow of
your house—how the rooms are connected and communicate
with each other.
Putting your home in order - Helping family businesses reach new heights: The Need to Survive – Setting the scene

5. Structureof Rooms – Owner Room
Putting your home in order - Helping family businesses reach new heights:
No matter what the specifics of your family business are, you should set up an Owner Room in
which to make the decisions that will shape your business for years (and indeed for generations).
What decisions should happen in the Owner
Room?
•Defining how ownership interests can be bought, sold,
and transferred, including to the next generation
•Making the final call on actions that change the nature
of what it means to be an owner, such as going public,
taking on significant debt, or selling the company
•Setting goals that define success
•Electing family or non-family board members to
represent the owners’ interests
To be an effective owner, you need to decide which few
decisions are so important that only owners should
make them. Everything else can and should be
delegated.
Who should be in the Owner Room?
• The current owners of the business are the
core members of the Owner Room.
• Future owners may also be invited into the
room when the current generation sees
them as fit to be part of owner discussions.
• Since they have great influence on both the
current and the next generation of owners,
spouses of present and future owners can
sometimes be invited to participate in the
Owner Room.

6. How does the Owner Room work?
Putting your home in order - Helping family businesses reach new heights:
Decisions in this room are affected both by vote (where voter weight matches the
percentage of shares) and by voice (where nonvoting input can play an important role in
decision-making).
Even in a Concentrated ownership structure, a controlling owner risks conflict if they fail to
seek input from minority and next-generation owners. Well-run Owner Rooms ensure that
all owners have a voice in the major decisions, even if they don’t have a vote. Even if you
have the votes, I advise trying to work toward consensus first in order to maintain as much
unity as possible.
Meetings in the family owner room is to serve as a forum for family shareholders to
receive updates on the business and to express their views, as a a working group to make
recommendations about key ownership issues (e.g. dividend policies) and as a liaison from
the family shareholders to other decision making groups like the board of directors or top
management. Meetings for the family room should be convened at least quarterly –
especially if there are ten or fewer owners.

7. Structureof Rooms – Board Room
Putting your home in order - Helping family businesses reach new heights:
The role of the Board Room reflects its position between the Owner Room and the Management Room.
A board should ensure that managers are operating the company in a way that accomplishes the
objectives set by owners. The board should oversee the business, not run it.
What decisions should happen in the Board
Room?
• Hiring or firing the CEO, which many board members
consider to be their single most important decision
• Planning management succession, whether within
the family or with-nonfamily employees
• Setting appropriate executive compensation,
including that for the CEO and the CEO’s team
• Approving business strategy recommended by the
CEO and “material” decisions such as acquisitions
and loans
• Ensuring proper regulatory and legal compliance
• Setting annual dividends in light of the policy set in
Who should be in the Board Room?
• You may be tempted to limit your board to family
members in an effort to keep the details of your
business private. I understand that bringing on an
outsider is a big step for family businesses, but I
urge you to consider adding at least some
independent voices to your board.
• When your business is sufficiently large and
complex, adding independent directors or
advisers is one of the few universal best practices
that will very likely benefit any family business.
Make sure your board is composed of people
who understand the interests of owners and who
can wisely guide and oversee the business in the
board level decisions.
• Remember, as owners, you’ll always have the
right to fire any independent director if they fail
to serve your interests. You’re still in control.

8. Structureof Rooms – Management Room
Putting your home in order - Helping family businesses reach new heights:
Every business has a long list of management decisions—recommending strategy, operating the
business, hiring the management team, to name a few. The owners who are not explicitly managing the
business on a daily basis should step away from management decisions.
Who should be in the Management
Room?
• In the early stages of a family business, you
may only have family members acting as
managers. As the business grows, you’ll
probably need to add non-family
professionals to help run it.
• Some family businesses require their
business to be run by family members;
other firms prohibit family members from
working in the company. Most businesses
are somewhere in between, and successful
family businesses exist across the entire
spectrum.
• You don’t have to choose between being
family run and being professionally

9. Structureof Rooms – Family Room
Putting your home in order - Helping family businesses reach new heights:
The primary purpose of the Family Room is to enhance family unity and build family talent. A Family
Room allows all family members—including spouses and next-generation members—to build and
strengthen their bonds, to share experiences, and to stay connected with the business. Family Businesses
that may have dozens or even hundreds of family members, clearly need strong Family Rooms, than
those with a small amount of family members.
What decisions should happen in the Family
Room?
Family rooms do not normally have executive powers,
but usually work to overcome the following challenges:
• What unites us as a family? How do we organize our
family to stay together?
• How do we develop healthy communication within
the family and between the family and the business?
• How do we develop the next generation?
• What family policies should we put in place to clarify
expectations and manage conflict?
Who should be in the Family Room?
• All family members above a certain age
can be part of the Family Room. But who
exactly constitutes your business family?
• Some families include all descendants and
spouses of their founder. That seems
obvious, right? But if a branch sells its
ownership in the family business, is that
branch still part of the business family?
What about divorced/seperated spouses
whose children will someday be owners?
Family businesses have different definitions
of family—and there are many common
permutations—but the most successful

10. Processes – IntegratingtheRooms
Putting your home in order - Helping family businesses reach new heights:
A family business is a system—what happens in one area affects other areas, often in unintended ways.
Because major decisions are likely to affect the family, the business, and owner groups, the rooms
require coordination and cooperation. Not only do you have to have well-defined forums to make
decisions, but you also need to figure out how those forums interact with each other. Without good
integrating processes, even thoughtfully created structures lose their impact. To work effectively, the
Four Rooms must function well together
1. Key decision processes that connect across rooms
One helpful tool is a decision-authority matrix, a map that
categorizes the different roles that groups play as part of a
healthy decision-making process.
A decision-authority matrix can lay out a clear process for
how important decisions pass through various rooms. For
example, the CEO may recommend acquiring a small
company to meet the company’s strategic goals. That
recommendation starts with management and then moves
on to the board. The board members have the authority to
decide on the recommendation, basing their decision on the
investment required. But the owner council can veto such a
major decision. And finally, the family council should be
informed of the acquisition, perhaps in its annual meeting
or through a special communication.

11. Processes – Integratingthe Rooms
Putting your home in order - Helping family businesses reach new heights:
2. Create connections across the rooms
Building connections across the rooms can be a valuable
way to keep decision-makers or stakeholders from
becoming too insulated.
• Overlapping memberships whenever possible:
Having an owner sit on the board, for example,
helps create a natural flow of information from
board room to the owner room.
• Distinct points of interaction: Some board and
executive committee meetings have a regular
agenda items that allows for an owner
representative to share the work of the owner
council, for example, and to raise any questions
or concerns about the business.
3. Establish policies to address conflicts between
rooms
Family businesses can avoid recurring conflict by
creating policies ahead of time. If you can agree
beforehand on issues that should always be treated
the same way, you’ll minimize conflict down the
line. For example, rather than treating each next
generation coming into the business as a one-off
decision, develop a policy that sets standards for
entry into the business. Setting policies this way
helps increase the communication and transparency
among rooms
Once you have done all the work to define how
your family business will make decisions, you need
to document these policies (e,.g. Family constitution).
Many family businesses operate through informal
understandings and handshakes, which tend to

12. Most Common Problems in Governance
Putting your home in order - Helping family businesses reach new heights:

13. Most Common Problems in Governance
Putting your home in order - Helping family businesses reach new heights:

14. Whenyour Home is not in Order…..
Putting your home in order - Helping family businesses reach new heights:
Sometimes, family businesses don’t realise that their
governance structure is lacking until they encounter
significant problems with decision-making.
For example, someone’s “cowboy” approach—investing
in new businesses without consulting other family
members, is a typical problem. When decision-making is
not working in a family business, it is usually the case that
the rooms are
not setup or functioning correctly.