The Alpha Lion Business Founder

During a game drive while on a trip to the Masai Mara, we found an old lion resting in the long grass. His face and flanks were pock marked with numerous, aged battle scars and the afternoon sun glinted against his weary brown eyes as he looked disinterestedly at our passing tour van. The tour driver informed us that he had been kicked out of the pride by the female lions who lay about three hundred metres to the west of him having killed an enormous hippo and eaten to their hearts content. There must have been six lionesses there, with numerous cubs that were playfully jumping in and out of the enormous cavity that used to be the hippos stomach, which had now been converted into a play area after the feeding frenzy. The lion, we were told, was biding his time waiting to be admitted to the high table if the lionesses were in a good mood.

That scene reminded me of a family owned business, with the old lion representing the founder of the organization. Lions are known to kill male cubs born into a pride as they represent a threat to the future leadership of the group. Over time I have come across a number of family enterprises where the male founder is so aggressive and intolerant that the children want absolutely nothing to do with the business and prefer to go and make their own mark in the world. As the founder begins to grow old and tired, he realizes that he has failed to grow employees into potential successors and his children have no desire to come and learn the ropes of the business when they are already established in their own respective careers. The founder, whose initial vision drove the success of the company, is often unable to find the magic strategy that will ensure the company continues to thrive in an increasingly competitive and technology driven world. He finds that as he is unable to transform the business in this new world, the business transforms him as it lurches from strategy to strategy just to survive against smaller, nimbler competitors.

A large number of banks I have spoken to grapple with this issue as they have provided loans to family owned enterprises and require the business to take “key man insurance” to protect their exposure in the event the founder dies during the duration of the loan. The banks do not have the time nor energy to help these businesses build the internal capacity that family owned businesses require to ensure leadership continuity in the event the founder dies. The banks can only hope that the founder does not die before the loan is paid but you must remember that hope is not a strategy, therefore requiring the business to insure the life of the “key man” or founder, where the bank is the beneficiary, becomes the default setting.

But taking life cover against the founder of the business is an extremely inward looking and short term way of addressing a bigger problem of succession planning. Look, it’s not the bank’s business to step into every single organization it lends money to and tell them how to run their operations. Educating family owned businesses is a huge investment that may or may not pay off depending on the learning capacity of the founders in the class.

Many years ago in my banking days, we hosted a workshop for family owned business clients of the bank. We brought in an excellent facilitator who helped such businesses set up legal structures for protecting family wealth through generations. In the room were many father/son pairs, with a smattering of father/son/daughter groupings. The frustration of the offspring was palpable in the questions being asked of the facilitator, children who were weary of asking for a seat at the strategy decision making table. Many of the fathers made the right sounds of agreement when the facilitator spoke of the need for expanding the leadership decision making and nodding furiously when the risk of death was raised.  But very few changes were made within those businesses once the workshop was concluded.

Is there a solution to this age old problem? Maybe not a short term one, but there is an opportunity for banks to perhaps provide financial incentives like a staggered interest rate regime that is linked to the governance structures that a family business puts in place to ensure continuity. Of course the major risk will always remain that a wily old lion of a founder will window dress his organization in order to get those incentives. After all, even if you put lipstick on a pig, it remains a pig. But there is an opportunity to use external forces to try and push that governance needle and create sustainable organizations that survive beyond the first generation.

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Twitter: @carolmusyoka

Corporatize The Family Business

I’ve had a lot of discussions recently with second generation family members who wish to “corporatize” the family business founded by their parents. Having been well educated and widely read and, in some cases, having worked for corporates themselves, they see the danger of not setting up organizational structures that will ensure the business remains sustainable for future generations. In almost all the cases the ageing parents are still active in the business and naturally wary of allowing “outsiders” into key decision making positions that may affect the trajectory of the tightly run organization.

But first things first. The verb corporatize means the process of converting a state organization into an independent commercial company. In many ways, family businesses are like state organizations. Funding comes from the government [founders] and decisions on who gets to run the organization are made by the government [founders] that can control the appointments of the executives and the flow of dividends back into their own coffers, if at all a dividend is declared. Second generation family members are like a privatization commission: Look, let’s sell this company to those who can bring in efficiencies and run this place much better than we can. Why? Because we are simply not interested in running this place anymore and are happy to sit back and receive the dividends off of someone else’s sweat  in some instances, or if we are interested, then we recognize that we don’t have all the answers and perhaps an outsider can help us find the answers [in the form of an independent board of directors] or deliver the solutions [in the form of an independent chief executive officer and senior management].

Last week I wrote about the concept of an advisory board, which is a non-binding and non-legal structure that allows a family to create the semblance of a corporate governance structure, while maintaining family independence. Advisory board members would be subject matter experts and deeply experienced in their areas of expertise, giving the family non-binding but valuable insights on issues such as strategy, risk assessment, internal controls, product and route to market innovation as well as financial performance. Since the advisory board members are not registered as statutory directors in the Companies Registry, they should not bear fiduciary nor legal responsibility for the company.

But how does one deal with a cantankerous founder who would want to remain as “chairman” even on the advisory board? Borrowing from the jurisdiction of the United States corporate governance jurisprudence, it may be useful to appoint a “Lead Director”. This position emerged following the early 21st Century corporate scandals such as Enron and Worldcom in the United States and was found to be an excellent bridge for independent directors where the fairly common role of chief executive officer and chairman were combined. The lead director acts as a liaison between the independent directors and the chair and where it works well, actually takes the lead in formulating the board agenda in collaboration with the chairperson and advises the chairperson on the amount, content and timeliness of information given to the board.

By ensuring a healthy communication flow, the lead director can help the chairperson get comfortable with the concept of receiving external insights and guide advisory board members on what their responsibilities are relating to the role. The family can ensure that the lead director’s letter of appointment clearly expresses his or her role and responsibilities to avoid blurred lines and the danger of overstepping their mandate not to mention pissing off an already wary founder chairperson! It is imperative that the lead director is not an old family friend, someone who may tread gingerly around the chairperson like a cat on a hot tin roof when critical issues need to be discussed or brought to the advisory board’s agenda. However the lead director should be a person of significant gravitas, senior enough to command the chairperson’s, as well as other family members respect as well as having the commensurate business experience as well as emotional intelligence to provide effective leadership, build consensus and facilitate discussions sagaciously.

And maybe, just maybe, the advisory board can gently begin to encourage the founder to relinquish day to day management of the business and move to a more non-executive chairperson role that allows him to have his nose in, but fingers out.

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Twitter: @carolmusyoka

Entitled and Uncouth Heirs to the throne

[vc_row][vc_column width=”2/3″][vc_column_text]Last Tuesday, a video of a nauseating scene at the Tuskys management offices went viral on social media. In case you missed it, an entitled, uncouth and mealy mouthed ragtag of young family members burst their way into the Tuskys CEO’s office and demanded that he leave the premises immediately. Having engaged some media journalists to film this Mexican soap opera in its full but cheap theatric version, the posse used choice epithets and kindergarten taunts to push the CEO out of his office, into his car and out of the premises. What they did was, to say the least, a childish but very public display of corporate ignorance. Legend has it that many years ago, the grandfather, Joram Kamau, started the business as a small provisional store called Tusker Mattresses in Rongai, Nakuru county. He grew the business slowly and eventually expanded by opening the first store in Nairobi’s Tom Mboya Street, as his some of his sons joined and helped to grow it into the successful enterprise that it has become. He passed away but ensured that the shareholding of the business, which had been formally structured into a private company, was distributed amongst his seven children. However, since early 2012, the public has been treated to sibling fistfights and courtroom battles for control of the multi billion shilling turnover business.

Let me tell you young rabble-rousers what no one else will tell you: the business may have been started by your grandfather, but now has multiple stakeholders who are deeply invested in its success. The first of these stakeholders are the employees who wake up at the crack of dawn every morning, while you turn on your mattress in blissful slumber, to walk or ride to work in the supermarket branches and at the head office. Their daily labor output helps to serve customers who purchase the goods that produce the revenue that eventually filters into dividends that line your mealy mouthed pockets. The second key stakeholders are the suppliers of the stocks on the shelves of the supermarkets. If no products are delivered, no sales will be generated. The third key stakeholders are the banks that lend the working capital to the business. They monitor the cash flow with beady eyes, ensuring that money generated from goods sold is not diverted to other non commercial uses, as that will spell disaster in the form of non-repayment of loans. The business is no longer a small, rural kiosk. It’s a corporate entity.
A typical family business goes from rags to riches and back to rags in three generations. Research has shown that only about 10% of family businesses make it to the fourth generation. Once you rabble-rousers have deposited your juvenile theatrics at the left luggage counter at the Tom Mboya Street branch, you urgently need to put together a family constitution that is an instrument often used by wealthy families to avoid future disputes. According to a KPMG Canada advisory paper titled “Constructing a Family Constitution” a family constitution serves three purposes. Firstly, it documents the values and principles that will underpin the conduct of the family business. Secondly, it defines the strategic objectives of the business. Finally it sets out the way in which the family will make the decisions affecting the ownership and management of the business.

The fact is that many family businesses don’t fail because the business has become unsound; rather they fail because the family member disputes derail the business from the successful track laid out by the original founder. The KPMG paper finds that from their own research there are five common issues for family businesses namely balancing family concerns and business interests, compensating family members involved in the business, maintaining family control of the business, preparing and training a successor and finally, selecting a successor. What we witnessed on television last week, was clearly a dispute over the last point, that is, some family members clearly have not accepted the current external successor that was appointed primarily to dilute the dispute about an internal successor running the business as was previously the case. That this fight was going to happen was inevitable. The KPMG research paper finds that as any family business grows into the second generation, the demands of the business and the demands of the family members working in it begin to diverge. The family dynamic may be that while not all the children or grandchildren are interested in running the business, all are highly interested in receiving the benefits in the form of dividends therefrom. The family constitution therefore helps to address these issues for current and future generations. A good constitution thus takes into consideration a number of issues such as the strategic business objectives that should reflect agreed family values and aspirations for the business. It should also include the process for hiring, assessing and remunerating family members employed in the business together with the rules for nominating and appointing management successors and the process for nominating and assessing individuals for appointments to the company’s board of directors or family council. Further, it should cover the composition and rules of conduct for a family council, communication and disclosure policies between the company and family, the process for resolving conflicts about the business between members of the family, rights and obligations of shareholders as well as the recommended or compulsory retirement age for family directors and managers. Finally, the constitution should also include the process for buying out family shareholders in the business, and clearly articulate policies concerning external, non-family ownership and management of the business as well as procedures for amendments to the constitution.

It’s never too late to write a family constitution but it is best done during the lifetime of the founder to ensure that his or her values are distinctively captured for posterity. It then helps to avoid the despicable television drama that the Tusky’s grandchildren have sullied their grandfather’s name and memory with.

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Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]