The Bethlehem Businessman

In this Easter period of reflection, it struck me for how long human beings have been running governments and doing business. Take for example the Biblical story of Jesus’ birth. His parents lived in the village of Nazareth and as luck would have it the Roman government of the day, led by Caesar Augustus, demanded for a census to be held over all Roman occupied territory.

This was not about resource distribution to counties, constituencies and wards. It was quite likely a Roman government move to establish the scope of taxable revenues from colonized domains. Joseph, being the head of the home and a descendant of the house of King David, had to travel south with his very expectant wife to their native home in Bethlehem, “shags” as we would call it here. Bethlehem, according to Google maps, is a good 150.9 kilometres away via the Yitzhak Rabin Highway or Route 6 taking an expected one hour and 58 minutes in 2023. Well it took weeks in those days.

Arriving hot, dusty and exhausted beyond belief, Joseph looked for shelter. Now this is what I found interesting. There were inns in those days, as in places for travelers to sleep overnight. Which means that people used to crisscross the country for various reasons back in the day, be it trade, census or perhaps leisure? After all, Bethlehem is about 30 kilometres from the Dead Sea, a place that could likely have been a great tourist attraction.

But I digress. Even though Bethlehem was Joseph’s native home, it would appear that there were no relatives that could give him a place to sleep. Or maybe the relatives had relocated over the years to brighter lights and bigger cities. Whatever the case, the inn was full and the only shelter that the innkeeper had that could be safe for an expectant mother and deeply worried father was the animal pen next door. The innkeeper was all about finding simple solutions to complex problems. But the long term thinking he should have been having by this time was the need for expansion.

I give this story as last week someone asked me on Twitter when does a micro business start to think about governance structures. The answer to this question is the classic non-answer: it depends. Governance structures are usually put in place to ensure that stakeholder interests are equally monitored and protected. Stakeholders are many in a business and don’t necessarily rank equally in the need for monitoring and protection. They include shareholders, employees, suppliers, customers, the taxman and regulators. All these stakeholders have different demands on the organization and, commensurately, different levers that they can pull to get their demands met.

For a microbusiness, survival is the primary objective of the founder. The Bethlehem innkeeper, for instance, just needs to ensure he gets enough business to keep his doors open and feed his family. Revenues don’t feed families, profits (revenue minus costs) do. As business grows, he needs employees to clean the rooms, cook the food if he has a dining room and serve the guests. He has to pay suppliers of the food, the cleaning materials and whatever else is needed to keep the inn running smoothly. Caesar Augustus has his Kanjo representatives probably hounding the innkeeper for a business licence, a music license, a parking license for guest’s donkeys and then the Roman Revenue Authority officer also comes around every now and then to get income tax.

If he has borrowed from the local shylock to build more rooms, then the shylock is added to the growing list of stakeholders whose needs are to be monitored and protected. The innkeeper can manage all of this by himself, until he cannot. Eventually he will have to hire a manager and, as his business expands, managers.

As he gets older he has to take a step back from the business and appoint a general manager to run the business while he provides oversight. By this time, if the business is still surviving, it cannot be regarded as a microbusiness anymore. Growth and expansion should have taken it into a small or medium sized business. That is how a governance structures begin to set in as all the stakeholders, including the founder and his family want to ensure the business continues to survive beyond the founder. A board, whether advisory or statutory, would help provide the necessary governance oversight beyond the aging innkeeper’s capacity.

Have a restful Easter break.

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Twitter: @carolmusyoka

Founderitis

When is it time to corporatize your family business

At one of my recent corporate governance classes, a participant wondered out loud why large retailers that were family owned were not regulated by the government. His question arose after we had undertaken a case study on what is now becoming an unfortunately familiar situation of mammoth retailers collapsing with significant supplier payments outstanding. The knock on effect of such a collapse is always fraught with dire economic effects on the supply chain of both processed and unprocessed goods, the manufacturers and growers of the same, their cash flows and overall financial stability thereafter especially where such a mammoth retailer has turnover in the billions of Kenya shillings.

Truth is, you can’t expect the government to register your company, give you the license to operate a business and then regulate the management of the millions of companies and sole proprietorships that fuel Kenya’s economy. It would require hundreds of thousands of civil servants to do that. Where the government does step in is when a business decides to seek capital from the public in the form of equity or debt, at which point approval of such an issue will be required from the Capital Markets Authority whose role is to ensure that the public is well informed about the issuer not only at the point of issuing the equity or debt instrument, but for the years following such issue by requiring publication of the financials of the issuer and tracking of their financial performance.

A recent report issued by the Retail Trade Association of Kenya (RETRAK), titled Kenya Retail Industry Outlook Survey 2020, was quite illuminating. RETRAK boasts of a membership of up to 600 businesses made up of supermarkets, restaurants and specialty stores such as mobile phone shops, clothes and furniture shops amongst others. The report provides the outcomes of a survey undertaken by members in June 2020 where 28% of the respondents said that the greatest barrier to trade was weak corporate governance structures especially in family owned businesses.

You know the drill: an entrepreneur starts a business with one branch, the business grows based on customer popularity, more branches are opened and family members are recruited (or forced) into the business primarily out of trust rather than professional qualifications and before you can say Bob’s your uncle, the business has multiple branches and the family owners are stretched to capacity and, in some cases, to their level of incompetence. Spouses and adult children are now running an enterprise with hundreds of employees, multiple suppliers, complex supply chains and even more complex financing structures. More often than not, the founder is unwilling to bring in outside professionals to run the business as that would entail letting out “family secrets”. The result is that family tensions spill over into the business and the rest is history.

A good start would be to design job descriptions for the various roles in the business. From the chief executive officer, chief finance officer, supply chain manager etc, which would then help the founder and the role holder to have clarity on what their specific functions are and, perhaps, allow them to see where there are individual skills gaps that need to be addressed. Doing this in tandem with a well designed organization chart allows role holders to see their reporting structure which helps avoid tensions that accrue when one family member feels undermined where decisions are made without their input. Setting up regular business meetings outside of the family’s dining table and in a more formal office set up, with an agenda and a performance dashboard on the various work functions is also a good way to infuse some professionalism into the business as well as awareness and accountability on what the various role holders are doing.

And for the love of God and country, it would be advisable to avoid the jua kali route of writing the job description yourself and bringing in a human resource professional (of which there are several available) to do this task as it allows independence and the right amount of challenge in ensuring the job description is one that is benchmarked with what is out in the market. While this is not a panacea to weak governance it is a good start to helping the business prepare for the professionalization of key organizational roles critical to the organization as it begins to scale and make an impact on the wider (and often unsuspecting) economy.

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Twitter: @carolmusyoka


Corona Times are Tough

Last week I attended an excellent webinar on personal finance management in the time of corona, hosted by one of the local banks. I was surprised to find a large attendance, with at least 1,200 attendees at its peak, which spoke to the relevance of the topic in the current environment. The key message that came through from many of the speakers was slow down your expenditure and measure your personal runway to ensure you don’t run out of space to keep yourself afloat. One speaker was very specific: if something doesn’t generate cash for you, and is not related to food or shelter, this is not the time to be thinking of buying it. Most late afternoons, I have now taken to walking for exercise down the beautiful paved footpaths of the recently expanded Ngong road. In the approximately three kilometer stretch between the Junction and Prestige Malls, there are tens of used car yards packed with luxury and mainstream cars awaiting new owners but what I often see are solitary security guards and, in a few cases, the odd hopeful salesman waiting to catch that elusive lucky break. At the risk of using a pathetically small statistical sample, my uneducated conclusion is that folks are already making decisions around unnecessary expenditure in the form of vehicular purchases.

The same Webinar speaker warned attendees against starting and investing their savings in businesses based on a whim without having done the requisite research and feasibility studies on the product or service so desired to be sold. Which led me to ponder over what the hundreds of thousands of Kenyans who have lost their jobs in the last three months must be doing, some trapped in the major cities of Nairobi and Mombasa without the chance to go to their upcountry homes to lay low and take economic cover. I have opined about the resilience of the Kenyan entrepreneur since we were first hit with the Covid-19 scare in March this year. On May 18th 2020, I noted information from the Kenyan Companies Registry that from an average of about 700 private company registrations of per week prior to Covid-19, registrations dipped to about 480 when the government announced the partial lockdown in March and were now ticking up to about 550 per week. Business names, which represent sole proprietorships, moved from an average of about 1,400 per week to a low of about 800 and is now ticking up to about 1,000 sole proprietorship registrations per week.

Progressively, in the week ending June 19th 2020, business names registered were 2,206, a slight increase from the 1,953 registered in the previous week. In that same period, there were 1,141 private companies registered, also a slight increase from the 1,027 registered in the previous week. As you can see, this is a notable increase from the May 2020 numbers I had reported In the same period in June 2019, there were 1,039 business names and 818 private companies registered with no Covid-19 in sight. Without interviewing the owners of the capital behind these registrations, one can only take an uneducated guess as to what is driving the significantly increased number of business registrations per week especially since we haven’t seen any external interventions in the form of angel investors suddenly floating into the Kenyan entrepreneurial space. There is clearly an upsurge of interest in opening businesses and, noting the absence of concrete evidence, it is likely that these are previously employed persons who are moving into the entrepreneurial space.

Other anecdotal evidence is found in the number of private car owners now selling fruits and vegetables from the boot of their cars on various roads in Nairobi’s suburbs. Either your traditional mama mboga got a vehicular upgrade in the last three months, or car owning citizens, who are working from home, have found a better way to spend their unsupervised office hours making an extra shilling or two. Whatever the case, the resilience of the Kenyan spirit has never been so evident. The challenge is now to ensure the continued commitment to the ease of doing business that our government has demonstrated, not only in the registration of businesses but in finding ways in which these fledgling entrepreneurs can create a marketplace devoid of baffling tax encumbrances and byzantine county administrative licences.

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Twitter: @carolmusyoka

Black Economic Empowerment in the Kenyan Context

“Each of us is as intimately attached to thesoil of this beautiful country as are the famous jacaranda trees of Pretoria and the mimosa trees of the bushveld – a rainbow nation at peace with itself and the world” Nelson Mandela 1994

With a 2017 estimated population of 56 million who call the place home, it is not hard to see why Mandela referred to his country as the “Rainbow Nation”. The 2011 South African national census found that 79.2% of the population was of African extraction, 8.9% were categorized as White, 8.9% were Coloured and Asian were at 2.5% of the population. A category called “Other/Unspecified” was found to occupy 0.5%.

In the decades before South Africa achieved democracy in 1994, the apartheid government systematically excluded African, Indian and Colored people from meaningful participation in the country’s economy. The Broad Based Black Economic Empowerment Act of 2003 (B-BBEE) was created to “situate black economic empowerment within the context of a broader national empowerment strategy, focused on historically disadvantaged people and particularly black people, women, youth, the disabled and rural communities.”

Institutional mechanisms were later set up for the monitoring and evaluation of B-BBEE in the entire economy including independent verification agencies that would issue certificates of compliance. In 2007 new Codes of Good Practice were gazzetted by the South African government to definitively establish ownership, management and control, employment equity, skills development, preferential procurement, enterprise development as well as socioeconomic development.

The unintended consequence of the B-BBEE program has been to create “black privilege”. As much as “black” was anathema in the apartheid regime, not having enough“black” in the current regime presents an economic disadvantage to companies looking to do business with government agencies or get licenses in regulated sectors like mining, banking and telecoms. The beauty of the B-BBEE program is that it is far reaching beyond just the companies that do business directly with the government. It looks at the wider planet, capturing not only the owners but also the employees, suppliers and service providers of those companies to ensure that the economic benefit envisaged cascades beyond just the boardroom to other stakeholders that would ordinarily not have the opportunity to be employed or to participate in the procurement process.

To be considered black, one has to be a black African, Indian or Colored and have been a citizen of South Africa before 1994. Consequently, non South African African professionals working in South Africa, whether male or female, are given the same ranking as white male South Africans due to the provisions of the Employment Equity Act of 1998. This act requires firms that employ more than 50 people to annually report on their progress towards having “blacks” as identified by the B-BBEEframework at every level of the organization and face financial penalties for not meeting set targets.
The result of that black privilege has been a brain drain of skilled South African white professionals who now face undisguised glass ceilings in the work place as the legislative regime rewards a decision to hire or promote a black person, where black means black African, Colored or Indian, than a white person, where white means South African white or non South African professional.
In Kenya, the recent calls for secession of some counties who have not enjoyed the economic benefits of past political regimes needs some sober rumination. Beyond the rabble rousing antics of politicians lies a significant group of Kenyans who do feel excluded from basic employment and procurement opportunities, notwithstanding the programs to push for youth, women and persons with disabilities. The question is: Can legislation on the manner in which corporate Kenya hires workers and procures from its suppliers and service providers jumpstart the equilibrium that is being sought? The definition of corporate Kenya could be extended to any entity within the public and private sector that employs more than 50 people. The challenge to applying such a legislative regimehowever, would be twofold: first we would have to ensure a strong, independent verification and certification mechanism. Secondly we would haveto take into account existing demographics around actual tribal numbers that will set a basis for determining what our workforce should reflect from a representation perspective, and then permit a phased approach to achieving those goals in the medium to long term. The last thing such a legislative regime should do is to create a “minority privilege” that eventually shuts out the “majorities” from employment and doing business in Kenya.
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Twitter: @carolmusyoka