Family-owned businesses should prioritize governance
Family owned businesses are estimated to contribute over 70% of global GDP. According to the Family Firm Institute Inc. 85.4% of China’s private enterprises are family owned, in India its 79%, in Europe 60% and 25% in the UK. In Kenya, Asoko Insight released a report last year that identified 490 family-owned firms across various industries, of which 14.3% had annual revenues of over US$ 50 Million and 22 of those companies had revenues over US$ 100 Million per annum. These numbers show that, just as in other parts of the world, the local economy is highly dependent on family-owned businesses.
Regrettably, feuds, sibling rivalries and legal battles are also common in such structures and Kenya is no exception. We have witnessed great business empires crumble once the ‘patriarch’ or ‘matriarch’ ages, retires or passes on. Conversely, family businesses that are well structured and managed with solid core values continue to grow from strength to strength and are uniquely positioned to create long term wealth generation for the families and the nation.
The retail sector in Kenya is an exemplar of the value created and that can be lost in family owned businesses. Supermarkets add great value to consumers by offering choice and convenience whilst at the same time providing manufacturers and suppliers with outlets for their products and easy access to consumers plus creating thousands of jobs in the supply chain and their operations. When operated well, everyone is happy.
Yet the risks in the retail sector are systemic and can be equated to the banking sector in their impact. We have seen the economic debris left in the wake of a collapsed retail chain with domino effects spreading far and wide, ripping up supply chains, distorting markets, bankrupting producers and farmers, and erasing livelihoods and investments. The economy has barely recovered from the monetary and job losses caused by the collapse of East Africa’s largest retail chain, and we now see many more on shaky ground.
There is a clear link between the governance of these institutions and their performance. Insufficient oversight by independent directors and opaque financing structures have made it difficult for investors, lenders and suppliers to be able to accurately assess the creditworthiness of the institutions. It is also increasingly apparent that the high cash turn-over of the retail sector has obscured the difference between core capital, working capital and profits for the inadequately advised management leading to unfunded expansion and loss of essential operating controls. A robust corporate governance with independent and experienced directors would perhaps have mitigated such glaring missteps.
In our current difficult times, the risk posed by our tottering retail sector on the economy is significant. I say this, because delayed payments have become quite critical and a main contributor towards the collapse of small and medium businesses, risking the very existence of otherwise viable businesses and the associated jobs and livelihoods they provide. This in turn affects the creditors of those businesses creating a vicious cycle of losses and costs on the economy.
Given the importance of the sector, there is need to introduce some regulation to mitigate against the emerging risks. A Retail Trade Code of Conduct has been agreed by the players in the industry and we welcome moves to make it more enforceable in law as envisaged under the Trade Policy, 2017. Some requirement on sufficient capital levels and improved governance for retailers above a certain size would also be useful in curbing unfunded expansion in a structure that ought to be careful not to restrict growth and innovation. Further structures need to be in place to monitor prompt payment of suppliers and punish and retailers that delay payments.
Family businesses have been credited with the growth of many economies across the world as they are committed to cultivate skills and entrepreneurial talent, across generations. There is much more to learn from them than there is to fear, but they must enhance their governance and sustainability structures in order to instill confidence in their business models.
The writer is the Chairman of Kenya Association of Manufacturers and can be reached on firstname.lastname@example.org