Viewpoint: Why a code of conduct makes sense for private family businesses – the Italian example

Italy is, of course, very well known for its family businesses. But until recently there has been little guidance on best governance practices for the privately controlled ones. With the introduction of a new code of conduct for them, their governance should improve – and ensure a better outlook for their long-term prospects.

Privately controlled, mostly family owned businesses in Italy, contribute more to the country’s GDP than the same companies do in most other developed economies. This is one of the defining characteristics of the Italian economy. Many of these businesses are also managed by the family. Indeed, a recent Bank of Italy survey found that nearly two-thirds of privately controlled businesses in the country were managed by their family owners. So on the flip side of this is that two-thirds have no outside managers. Admittedly, many of these companies are small, but the findings were truly remarkable – and rather disturbing.

The code has been proposed by Bocconi University* in Milan and the AIdAF (the Italian Association of Family Firms), with support from the Italian Association of Bankers, the Italian Private Equity and Venture Capital Association, Assolombarda (Association of Entrepreneurs in Lombardy), Assonime (Association of Italian Corporations), and the Corporate Governance Committee at the Italian Stock Exchange.

Many privately controlled businesses in Italy don’t have a clear understanding of what governance means – and the dominance of family control is a big reason for this. Also, most the country’s family businesses are sceptical about improving their governance. They see it as an unnecessary level of interference from outside.

Nevertheless, there are seven obvious benefits for privately controlled businesses when it comes to adopting a code of conduct – these are: 

• Efficiency of processes, which will help businesses prosper;
• Better checks and balances on the power of the family managers;
• Attracting resources – not only financial, but management as well;
• Reducing conflict between the family owners;
• Improving the process of succession and integration of the next generation;
• Better management of risk – and the understanding of it; and
• The creation of a better divide between the family’s wealth and the wealth of the company

It is important to say that the code of conduct for Italian private businesses is voluntary. And, of course, the application of a universal code of conduct is difficult across all private family businesses given the huge variety of their sizes.

That said, we would recommend some basic principles for family businesses to follow, and the clearest of these if for them to create a board of directors if they haven’t already. Around 20% of the 10,000 companies we monitor don’t have a board of directors. They are led by just one person, which might be alright if the business is small and in the first generation of control, but isn’t good if the company is in the second generation of control.

Then there are other practices we would only recommend for bigger firms. These involve the creation of committees within the board, like for example a remuneration committee.

We also recommend for family businesses – no matter what their size or structure – should give special consideration to succession plans. Many family businesses are reluctant to do so, but by adopting the code can help them better deal with this issue.

And if we could point out one factor for all family businesses to follow then it is probably the importance of appointing at least one outside director to their board. There is a need for this person to be truly independent, and not someone who is an outsider, but rarely challenges the family. They need to bring new and fresh approaches to the family business and this can only happen if they are truly independent.

If Italy’s very important family businesses are to flourish in the future then they need to follow at least some of the key points in the code of conduct to improve their governance. Of course, there will be some pushback from these businesses, but they need to realise the consequences for their long-term survival if they don’t do so.

* The code is backed at Bocconi by Professors Alessandro Minichilli, Piergaetano Marchetti, Guido Corbetta, and Maria Lucia Passador

Alessandro Minichilli is Associate Professor at the Department of Management & Technology at Bocconi University