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Family businesses must let go

Mar 19, 2006 Management, Sunday Nation

Family enterprises are the lifeblood of this country. From the humblest kiosk to the most expansive conglomerate: family-owned firms dominate the business landscape.

We may imagine that this is a very Kenyan phenomenon, but it is actually true the world over. One-third of the 1,000 largest companies are controlled by families; more than half of these are publicly traded. The names are so well known that we forget the family link: Henkel (chemicals); Roche (pharmaceuticals); BMW (automobiles); HP (computers); News Corporation (media, including BSkyB, Times newspapers and Fox); Tata (an Indian conglomerate); these are family-controlled firms – yet they are all huge global enterprises.

They are also successful. Studies in the US show that publicly traded stock issued by family-controlled companies often outperforms the S&P 500 index; returns tend to be higher than in widely-owned companies.

Why should this be? Family enterprises have a number of features that bestow competitive advantage: a long-term commitment; resilience in periods of crisis; and great incentives to engage in creative entrepreneurship. At the heart of the matter is the unusual motivation level found in family firms: the business is not just a career or a pastime; it is often the mainstay of the family and a proud heritage. The emotional commitment is immense and intense.

All you Kenyan family businesspeople out there may be thinking of popping the champagne corks upon reading this. But hang on just a moment. The family firms that show consistent success and persistent growth patterns all demonstrate very particular features; and the bad news is that you would be hard put to find those features in most Kenyan enterprises.

Dr. Matteo Tonello, a corporate governance expert, has suggested certain key features that are demonstrated by all family firms that have enjoyed sustained success. Firstly, the most accomplished such enterprises usually participate in a public share market. They have, at an appropriate point in their history, issued shares to the public. This not only taps into a new funding pool; it provides very real incentives to manage the company efficiently and deliver consistent results for all classes of shareholder. It is also a powerful disincentive for family members to attempt expropriation of the company’s wealth.

Second, many large and successful family ventures have taken on a major strategic partner, usually an institutional investor. When managed correctly, such a partner can act as an invaluable sounding board, and may exercise a moderating influence on the family. Free from the emotional attachments of family members, the partner can introduce a reality check in most such firms.

Thirdly, studies of successful family firms invariably show that they take corporate governance very seriously. Once they have taken on new minority shareholders, they protect their rights through a set of rules. In the absence of such rules, the enterprise will struggle to attract investment. Visionary families perceive good governance not as a costly impediment, but as a cornerstone of a multi-constituency firm. The important measures include: a good number of independent directors with professional expertise; an effective audit process; and transparency and controls at all levels.

Have you come across many Kenyan family firms that display this type of thinking? We clearly have some way to go. As things stand today, family ventures are reluctant to take on new investors (whether privately or through public issues); they do not want any outside interference in the central affairs of the company; and good governance is a concept they apply only to the government, not to themselves.

In many cases, the problem is even more severe. Many of our firms are insular and incestuous, shut away from the winds of change and progress. They are populated by people from the bloodline, no matter how incompetent or ill-equipped to manage. And they are mere vehicles for personal aggrandisement and the enrichment of key individuals. The business is a secondary consideration.

These ventures have placed a ceiling on their growth. They will get to a certain point and no further. They will not attract the future investment they will need, and will not ever be a good place for outsiders to work. Who, after all, wants to be part of an enterprise that is merely an extension of another family’s life? Certainly not the most talented managers.

Crunch time for most family firms comes when leadership is passed from one generation to the next. Once the visionary founder goes, everything is up for grabs. Often, the heir apparent has been raised in the lap of luxury. He (and it still usually is a he) has hobnobbed with the rich and famous, and never understood need and deprivation. He has had the BMW at eighteen and the Porsche at twenty-five. Will this person become a great leader himself? He might, but likelihood is not on his side.

Motivation, capability and cohesion can all be lost in a generational change. Unseemly squabbles and succession battles may ensue. When the founder of India’s giant Reliance Group passed on, it did not take long for his offspring to engage in the most public and unedifying of squabbles. The company’s shareholders, and the country at large, looked on aghast as the family linen was aired in full public view. The battle ended in a deep fracture of the group.

Family firms have great things going for them, yes. But that alone is not enough. The family setting is an excellent place to start an enterprise, but it is not always the right arena in which to grow it and take it to new levels. Visionary families learn this lesson very early. They know what to control and what to let go of. They understand the value of professional expertise and independent judgement. They seek outside counsel and adjust their own involvement as the business evolves.

The idea that one family can produce all the top managerial talent needed in a complex enterprise is, of course, laughable. A business should be more than just a shell in which a particular family makes money. Using bloodlines as the only basis for selection soon results in the family idiot taking charge. After that, all is lost.

It is a choice for every family to make. Are you interested in building a world-class business? Do you wish to build a resilient firm that spans generations and continents? Do you want to have a legacy that is greater than individual bank accounts, and affects positively the lives of many?

If the answer is yes, then a mindset shift is needed. Family leaders must understand the evolution patterns of business. They must make far-reaching changes in personnel and in policy, in ownership and in control. Family members can still make very important contributions in large corporations: they can protect and nurture the original vision, and control the direction of the firm. Paradoxically, they can reap even greater income streams by letting go.

Let go they must. Evolution is a necessity for all species, and business is no exception.

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