Challenges Of Governance And Succession In Kenya

Family-owned businesses in East Africa have been instrumental to the socio-economic development of the region and a catalyst for the growth of the private sector.

With a long multi-generational history, their focus has been on manufacturing industries, consumer goods, construction, and agriculture.

These businesses have created a lucrative environment that has attracted more African-focused global finance and corporate communities and has been a vehicle for enabling trade and employment.

This current landscape presents the need to ensure a more integrated and structured wealth transfer method, particularly with the NexGen for longevity purposes.

According to a research by Asoko, there are 645 family-owned businesses earning between US$10m and US$100m in East Africa. Nearly three-quarters of these companies are Kenyan with Uganda, Rwanda, and Tanzania accumulating 2% of the total figure each.

In Kenya, there are around 490 family-owned businesses earning revenues of more than US$10 million across a wide range of industries. Of the 490, 14.3% (70 companies) earn more than US$50 million per year, with 22 earning more than US$100 million.

These businesses are also the engines of growth in the economy and are key to realizing Kenya’s Vision 2030; the country’s blueprint for social-economic development, which, among other objectives, aims to drive the growth of industrialization.

Despite being an enabler of the country’s economy, family-owned businesses in Kenya face several structural challenges, including a lack of robust succession planning and good governance strategies, poor management, as well as challenges with the integration of the next family generation (‘the NexGen’) – all of which, if not correctly addressed at an early stage, could potentially limit their growth and reduce their lifespan.

The impact of the COVID-19 pandemic of course remains a formidable challenge across all sectors, businesses, and industries. Perhaps family businesses have felt the impact of this crisis more acutely as they have had to dip into their shareholder resources and introduce new capital, multiple times, to ensure the survival of the family business. Family businesses, however, have remained steadfast in their commitment to their stakeholders and the wider economy, by doing whatever was necessary to survive.

KPMG’s annual African family business barometer for 2020 highlights some of the trends that were apparent in family businesses across Africa, including in East Africa. Interestingly the research found that, despite COVID-19 having affected the confidence levels of family businesses (particularly the uncertainty concerning future economic prospects in the short to medium term), less than 20% of the family-owned businesses surveyed said they were significantly impacted by the pandemic, and many generally remained optimistic for the longer term.

This once-in-a-generation crisis has stress-tested the foundation, legacy, and heritage of family-owned businesses, as well as their ability and dependability while placing added pressures on them. On the whole, family businesses have come out of the crisis still standing, but importantly, with a better understanding of the operational intricacies of their businesses, ready to face the future and the opportunities that lay ahead in this post-COVID and African Continental Free Trade Area (AfCFTA) era.

Many businesses have inevitably been forced to rethink their business models to ensure sustainable business operations. Through embracing new ideas and forward-looking innovations, they have developed resilient business models with purpose and values at the core of their operations to preserve their legacy. This is a concept that has been referenced by The Edelman Trust Barometer, where society expects businesses to solve some of the societal problems in times of crisis. This being the case, most family-owned businesses have thus exercised their corporate social responsibility in line with their ESG and business strategies. Family businesses, perhaps now more than ever, are focussing on their businesses having a positive impact beyond shareholder return, but particularly on the wider community of stakeholders relevant to their businesses.

Another key trend that has emerged during this period is the accelerated integration and involvement of multiple generations of the family into the business. Driven primarily by the high mortality impact particularly of the patriarch, matriarch, and founder generation, as well as the need to preserve the legacy and founding values of the business, family businesses have used the opportunity to restructure their operations. By doing so, they can ensure that more family members are integrated into the business, for longevity and continuation of the family business and avoid the ‘Founder’s Curse’ dilemma. Where the founder is reluctant to give up day-to-day control of the business, resulting in adverse consequences to the family business and operations.

This is a challenge that is not only apparent in Kenya but across the globe. Insights from Deloitte’s family-owned business survey highlight that 70% of family businesses will have lost their wealth by the second generation, while 90% will have lost it by the third generation. Different cultures have their own version of an old proverb which sums up this challenge. The most common is “shirtsleeves to shirtsleeves in three generations.” In Japan, the expression is “rice paddies to rice paddies in three generations”; in Italy, it is “from the stable to the stars and back again”; and in Scotland, it’s more literal: “the father buys, the son builds, the grandchild sells, and his son begs.” All of which underlines the importance of succession planning for families that intend to keep their businesses within the family.

The pandemic highlighted the importance of integrating the next generation into the family business, which is critical to succession planning and ensuring business continuity. The NextGen now have the necessary skills, character, capacity, and capability to run many of these family businesses are now ready to make their mark and present the new order of business. This level of competence is acquired through their vast experience having studied in some of the world’s leading universities, as well as their digital exposure, which brings to life different beliefs and systems to the business that gives them a competitive edge in an ever-changing market landscape.

As a leading international finance center, Jersey provides a forward-thinking approach, a comprehensive legal and regulatory framework, and offers certainty, stability, and substance. With the current increase in pan-African and cross-border activity, such expertise will help family-owned businesses to scale and protect their wealth. Essentially what this does, it enables family-owned businesses to raise capital that will give them the financial support they need to expand. Taking into consideration different regional blocs and treaties, such as the East African Community trading bloc and the AfCFTA, will allow family-owned businesses to enter new markets, expand their customer base and develop new products and services.

A good example of this is the significant private equity investment made by French investment firm Amethis Finance in the Ramco Group, an East Africa head-quartered family business conglomerate, in 2014. This private equity investment was primarily used to allow an accelerated, but structured, expansion of the group into the East African print sector. As a result of this growth, the group has now grown to more than 50 companies operating within East Africa. Despite its humble beginnings in Nairobi in 1948, with foresight, careful planning, and a mixture of family and professional management, the group has since expanded into key economies in East Africa, employing more than 4,000 people with ambitious targets to grow even further and expand across Africa.

What success stories tell us, time and time again, is that careful planning and engaging experienced experts early provides the foundations for the preservation and protection of the family business, thus ensuring its continued survival and operation.

Involving multiple generations of the family and any professional management of the business in these discussions also helps to foster and create meaningful governance structures and avoid conflict in the long term. This ensures that the business is focused on growing and expanding within the agreed objectives and aspirations of the founder and his or her family. Conversely, what we also learn from colossal failures of once booming family businesses, and there are plenty of examples of this in Kenya, is that family businesses that fail to put in place robust governance and succession planning, at the death of the founder, are most likely going to end up in prolonged legal battles, bitter family disputes, and the ultimate destruction and significant downscaling of their business.