What family businesses in East Africa need to survive
The level of governance within family-owned businesses (FBs) in East African countries like Kenya still falls below global standards, explaining the source of huge challenges that have crippled some of these firms.
A survey by audit firm PwC indicates that 77 per cent of East African FBs have some form of governance policy in place within the business versus 81 per cent globally. Due to inadequate governance, it implies businesses are struggling to put in place and implement key policy directions.
Top concerns around governance relate to the lack of formulation of shareholders agreements often required to outline how the company should be operated, shareholders’ rights, and how to deal with certain issues.
The report, which surveyed 95 family business owners to gauge key issues to build trust, indicates only 36 per cent of FBs have shareholders agreement compared to 41 per cent on the global level.
“As much as these policies and mechanisms can facilitate family dynamics, they also link back to the core issues involved in building trust with other stakeholders like customers, employees and the general public,” PwC states in the report.
These policies also support clearer communication channels and reduce conflict and friction in the family business, which can erode trust inside the business and within the family.
The survey involved family businesses with a turnover of $9 billion (Sh1.37 trillion), with 37 per cent being second-generation businesses. Of the 95 businesses, only 29 of the surveyed businesses have a dividend policy, a determinant in the distribution of returns among owners.
Sharing of profits
In Kenya, family feuds over ownership and sharing of profits, especially in the retail and real-estate sector, have seen some of the once-giant businesses collapse, with some resorting to legal actions as a resolution. Nakumatt and Tuskys supermarkets, for instance, endured a rough patch after years of gross mismanagement and poor decisions and gross mismanagement that finally led to their closures. PwC notes that it is only in conflict resolution that family businesses have excelled, with 24 per cent of them in East Africa compared to 19 per cent globally putting mechanisms to address feuds. This is despite the East Africa FBs doing poorly in establishing family constitutions or protocols.
“East African family businesses are less likely to think that they are very advanced in a number of areas, including adapting or making decisions quickly, offering staff incentives, and having leadership that encourages a culture of accountability,” says Michael Mugasa, a PwC Partner. The research findings show that 56 per cent and 47 per cent of the family businesses believe they are fully trusted by their customers and employees, respectively.
However, being trusted by suppliers is seen as more essential than being trusted by family members, while 77 per cent are fully trusted by family members.
The survey results show that the key priorities for Kenyan family businesses over the next two years are territory expansion and increasing customer loyalty, while their immediate focus is customers, shareholders and investors.
This could be supplemented by mergers and acquisitions and/or strategic partnerships in the region.