Corporate Governance Principles for Unlisted Family-Controlled Companies: Code of Corporate Governance

Family-controlled businesses need a well-functioning governance system, which must encourage the dynamic achievement of two objectives, namely: i. the ability of the family owning the corporation to express clear views related to the future of the company/group; ii. the ability of management (no matter if family-related or not) to reach the corporate aim using the best resources available on the market, in full accordance with the principles of accountability and appropriate checks-and-balances. In family businesses, respecting these principles requires, firstly, a firm adherence to the values of disclosure and accountability towards all stakeholders, and, secondly, a specific regulation applicable to family members (who also act as managers, directors and shareholders) that is tailored to the particular decision-making context in which they are involved; thirdly, the utmost care in the composition and functioning of the Board of Directors.

As the annually published results of the AUB project (an observatory which monitors the performance and structure of all non-minor Italian family businesses) confirm, well designed governance structures for family businesses can add significant value.

First of all, family businesses with at least one non-family director tend to grow significantly and register more relevant profits than businesses with a Board of Directors consisting of family members only.  Moreover, a Board of Directors that is open to non-family members also increases the likelihood of companies acquiring or investing abroad.  This last element is even more relevant if we consider that, given international competition, Italian family businesses will be involved in an increasing number of operations at both a national and international level in the next few years.

On the basis of this evidence, Università Bocconi and Associazione Italiana delle Aziende Familiari (AIdAF) decided to promote a series of corporate governance principles, specifically drafted to meet the needs of unlisted family businesses.

The document – hereinafter the ‘Code’ – does not, of course, aim to represent an unnecessary burden for the companies that comply with it, but rather a virtuous constraint, the starting point for the definition of crystal-clear business criteria that favor the best international competitiveness of Italian family businesses.

The Code aims to facilitate the achievement of certain goals, namely: i. to assist entrepreneurial families to grow their subsidiaries while reducing the level of risk; ii. to help entrepreneurial families to draw a clearer distinction between the assets owned by the family and the ones owned by the company; iii. to permit banks, customers, suppliers and more generally international markets to be informed (and eventually certify) about the corporate governance quality of the companies; iv. to appoint the most skilled managers that, even if not family members, would increase the international competitiveness of the family business; v. to steer generational transition processes; and vi. to guide companies that are (even potentially) interested in opening up to equity or bond markets to an upgraded governance system.

To achieve these goals, the Code proposes principles that listed companies and the most competitive family businesses already adhere to.  These principles concern the functioning of the shareholders’ meeting, the size, composition and operation of the Board of Directors, as well as the roles of the Chairman and independent directors, the rules regarding related-party transactions and succession plans for top management positions, and statutory and independent auditors.

Furthermore, the Code recommends that larger corporations should apply some principles regarding the separation of the roles of Chairman and Chief Executive Officer (CEO duality), the opportunity to remunerate the Chief Executive Officer and top managers through a fixed and variable form, the adoption of some best practices, as induction sessions and board development sessions; the organization of Board committees; the selection of both family and non-family-related candidates for the positions of Chief Executive Officer and top managers.

Ultimately, on the basis of the evidence and of similar previous European experiences, the Code proposes to go beyond a single individual as the key leader of the corporations, and also to go beyond the idea of appointing a family member as a key figure for any role, regardless her abilities, which has made very difficult to create internationally-renowned Italian family businesses that can be considered highly and truly competitive in their field at an international level.

Piergaetano Marchetti is an Emeritus Professor in the Department of Law at Bocconi University.

Guido Corbetta is a Professor in the Department of Management and Technology at Bocconi University.

Alessandro Minichilli is an Associate Professor in the Department of Management and Technology at Bocconi University.

Maria Lucia Passador is a PhD Candidate in Law at Bocconi University.