The third generation curse : family businesses in Malta and the principal-agent theory

Abstract

Family businesses are the most widespread form of business entities worldwide and are the backbone of most economies, not least Malta. Therefore, this dissertation seeks to examine issues related to Agency Theory in the context of Maltese family firms and gauge whether these entities implement succession policies directed at safeguarding corporate value throughout generations. Particular attention is given to Agency conflicts that exist between owners, managers and creditors associated with family businesses. In this respect, ten prominent family businesses under varying generations of ownership, ranging from first to fourth-generation, were examined. Through secondary research complemented with the results of the primary data, this study seeks to provide a comprehensive insight as to how family businesses ensure intergenerational survival with reference to the Agency conflicts that disrupt corporate continuity. The primary data was collected using semi-structured interviews directed towards ten respondents who are executive members of each respective family firm they represent. Accordingly, they were asked a series of questions related to the subject matter detailed in the Literature Review section. The results exhibited many approaches through which family firms handle the interlinked issues of intergenerational survival and how to address Agency conflicts. However, in spite of the variety of methods used to confront such matters, the central mechanisms inherent in most family firms included: the existence of a diverse Board of Directors and the authority it can impose; a well-defined capital structure and dividend policy as well an expansive succession plan that successfully earmarks potential leaders. This study concludes that while all of the family firms interviewed are aware of the central issues of this research paper, not all of these organisations apply the mechanisms above consciously and more efficiently. The reasons as to why the existence and implementation of these mechanisms differ are primarily due to the differing organisational sizes inherent amongst the respondents, and secondly due to the dissimilar relationships that family firms hold with banks in fostering intergenerational survival. This dissertation evidences the need for a more augmented appreciation of Agency issues, the resultant conflicts, as well as the long-term detrimental repercussions that resultant Agency costs have on family businesses. This is particularly pertinent to the prevalence of family businesses in the Small and Medium Sized Enterprises segment of the economy’s productive backbone. In order to ensure successful growth through generations, more attention needs to be focused on succession planning while also creating a professional, defamiliarised organisation that better manages such Agency conflicts.