Family businesses can only be seen as a force on the rise within Africa, which has developed ever-growing market potential. There are very few regions where this is more the case than in Kenya, where family businesses contribute 80% of the country’s GDP. They do, however, face constant threats to their survival and longevity, namely from poor succession planning and inadequate governance structures.
With over 70% of Kenyan businesses experiencing growth last year, according to the PWC East Africa Family Business Survey, implementing proper succession plans and governance frameworks will be key as these businesses scale upwards.
Why is poor succession planning such a threat?
One answer to this can be found in the renowned phenomenon that family wealth does not last beyond the third generation. The first generation creates and drives the business. The second maintains the business, but this does not last by the time we reach the leaders’ grandchildren. Engaging in long-term succession planning is critical to the survival of family businesses and an issue that should be considered seriously, especially in the context of changing family dynamics.
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A means to remedying the problem of poor succession planning is the institution of a family constitution. This will be a positive first step for any family business that will enable them to establish a clear vision and goal, making known not only how decisions are made in the business, but who they are to be made by and what principles and values are to be adhered to in doing so.
A family constitution mitigates against the current status quo of informal or poorly defined leadership transitions and will assist in choosing successors to the business, whether these be family or non-family members. The constitution can provide either a specific succession process or guidelines to inform decision-making, balancing the interests of family members with consideration for the key skills needed for the leader of that business. Ultimately, a constitution would provide a business with continuity and help prepare future successors coming into the leadership role.
To combat the threat of family businesses crumbling over time due to a lack of succession planning, it’s crucial to ensure that the younger generations of the family are involved in the business, gaining experience from the ground up, receiving training and obtaining qualifications that will gear them up for managerial roles. Active involvement of the younger generation is an effective long-term attempt at future-proofing the business.
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An additional and necessary next step Kenyan family business leaders should take is the preparation of a Will, and possibly even trust structures, depending on the internal rules of the specific country, setting out their own line of succession, as well as protecting and preserving their assets after passing. In doing so, one can consider who should take charge, should the leader of the business lose mental capacity.
Changing family dynamics require that Wills, trust structures and powers of attorney are regularly reviewed. Too often is long-term succession planning considered a secondary priority by business owners. A lack of regard for succession planning can leave the business in a state of disarray after the exit of its leader and pave the path towards family conflict, especially when ownership of the business becomes fragmented, which in and of itself can destabilise the family business entirely.
How does one mitigate against inadequate governance?
An imperfect approach to governance can be detrimental to the family business. Not having a governance structure in place can stunt the growth of the business and harm its potential to stand the test of time. Establishing a formal governance structure is, therefore, vital for family businesses in Kenya.
Whilst family businesses across Africa are starting to put governance structures in place, there is room for improvement. As discussed above, family constitutions are a good first step towards improving the business’ approach to governance. Setting up a family council or board of directors with both experienced individuals and those trained up within the family, will ensure that decision making strikes a healthy balance between the commercial interests of the business and the family’s values and priorities. It is essential too that shareholder agreements deal with transfers of shares within the business.
It is, however, increasingly alarming that many family businesses in Africa lack any form of dispute resolution mechanism. Only 21% of African family businesses have these in place.[1] The biggest threat to a family business comes from internal disputes that typically occur on the dèath of the leader, where poor succession planning has led to fragmented ownership of the business. Having documents in place with dispute resolution procedures will enable the family business to maintain a more adequate approach to governance.
The professional advisory community, including us at Boodle Hatfield LLP, are working with family businesses in Africa to address the threats detailed above with a hope that in the near future, businesses in the region will be better equipped to face these issues, paving the way to greater success when it comes to transitioning wealth in the family business in line with their succession plans.
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[1] PWC Africa Family Business Survey
KYRA MOTLEY, is Private Client and Tax Partner, and AAKASH MOHINDRA, Trainee, at Boodle Hatfield LLP.
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