The Double-Edged Sword of Family Business
Family-owned SMEs are the heartbeat of South Africa’s economy. They create jobs, preserve legacies, and often carry deep emotional roots.
Yet, what makes them strong – loyalty, shared purpose, and trust – can also become their greatest vulnerability. When relatives wear multiple hats as shareholders, directors, and employees, the lines between what’s best for the family and what’s best for the company can blur.
A casual favour, an unrecorded loan, or a decision made “because it’s family” might feel harmless in the moment until it lands the business in legal or reputational trouble. That’s where good governance steps in.
Understanding a Conflict of Interest in SMEs
A conflict of interest arises whenever personal relationships, family ties, or financial interests could influence a director’s judgment or decision-making.
In family-run SMEs, this risk is amplified because overlapping roles are almost inevitable.
Common examples include:
- A director awarding a supply contract to a family-owned company.
- A shareholder approving dividends that benefit certain relatives disproportionately.
- A sibling-run management team making employment or salary decisions without independent oversight.
None of these are automatically illegal, but they become problematic when they’re hidden, unrecorded, or handled informally.
What the Companies Act Requires
The Companies Act 71 of 2008 doesn’t discourage family involvement. It simply demands transparency.
Section 75 of the Act specifically addresses directors’ personal financial interests. It requires that any director who has a direct or indirect interest in a matter being considered by the board must:
- Disclose the nature and extent of that interest before the matter is discussed.
- Recuse themselves from the decision, meaning they may not participate or vote on it.
- Ensure the disclosure is recorded in the minutes of the meeting.
Failure to comply isn’t a minor administrative oversight; it’s a breach of fiduciary duty that can expose the director to liability, and damage the firm’s credibility.
The Cost of Overlooking Disclosure
Many SMEs underestimate the consequences of a poorly managed conflict. At best, it creates division and mistrust inside the business. At worst, it can:
- Trigger CIPC investigations or shareholder disputes.
- Lead to personal liability for directors who benefited from undisclosed interests.
- Undermine confidence with auditors, banks, or investors.
More often than not, the reputational fallout is worse than any fine. Clients and partners expect accountability, and a family-run company that appears biased or secretive can quickly lose credibility.
How to Manage Conflicts Proactively
1. Adopt a Formal Conflict-of-Interest Policy
Even small businesses benefit from written policies. A clear policy outlines:
- What constitutes a conflict.
- When and how to disclose.
- The procedure for board recusal and record-keeping.
Having the policy documented means no one can plead ignorance later.
2. Create a Conflict Register
Maintain a running log of all disclosed interests from shareholdings to outside directorships and supplier relationships.
This helps identify patterns (for example, if the same director repeatedly discloses the same supplier) and ensures transparency across management.
3. Include Declarations in Board Agendas
Before every meeting, directors should confirm whether they have any interests to declare regarding the agenda items.
A simple standing item, “Declaration of Interests” at the start of each meeting embeds compliance into routine governance.
4. Record Everything
Keep accurate minutes, noting who disclosed what, who recused themselves, and how the board resolved the issue.
5. Educate and Normalise
Directors and senior staff should view disclosure as responsible conduct, not suspicion. When it becomes normal to raise a potential conflict openly, the entire culture shifts toward transparency.
Balancing Family Values and Governance Principles
One misconception about conflicts of interest is that disclosure undermines trust. In reality, it strengthens it.
Transparency reassures everyone – employees, partners, clients, and family members – that decisions are made fairly and in line with the company’s long-term health.
The key is the separation of roles:
- When wearing your director hat, your duty is to the company and all its shareholders, not to the family unit.
- When wearing your family hat, loyalty and compassion can guide your relationships, but not your governance.
The healthiest family businesses are those that recognise when to switch between the two.
Real-World Example: The Family Contract Trap
Consider a small construction firm where two siblings serve as directors. One’s spouse owns a supplier company. When the firm begins sourcing materials from that supplier, it may seem like a simple internal arrangement until another shareholder notices that no disclosure was made.
Had the directors formally declared the relationship, recused themselves from the decision, and recorded the transaction terms transparently, it would have been legitimate.
Because they didn’t, it now looks like favouritism, or worse, self-dealing.
This is exactly the type of scenario that robust governance processes are designed to prevent.
The Emotional Side of Conflict
Let’s be honest: navigating governance within a family is emotionally taxing. Conversations about money and control can quickly feel personal.
But ignoring them doesn’t protect relationships, it endangers them.
By placing policies, disclosure forms, and independent oversight between family members and sensitive decisions, you actually preserve the relationship.
Rules don’t replace trust; they protect it.
The Rule of Thumb
If you ever find yourself asking, “Should I declare this?”, the answer is almost always yes.
Transparency may feel uncomfortable in the short term, but non-disclosure will cost far more in the long run.
Conclusion: Transparency Is the Family Advantage
When family and business collide, conflicts of interest in SMEs are not a sign of failure; they’re a natural by-product of close-knit entrepreneurship.
The difference between dysfunction and good governance lies in how you handle them.
By making disclosure part of the business culture, documenting decisions, and embracing tools that simplify compliance, family-run SMEs can preserve both their relationships and their reputations.
After all, the legacy of a family business isn’t just in its profits, it’s in the integrity with which those profits were earned.
