Succession Planning in Family-Owned Businesses

Family-owned businesses constitute a dynamic and resilient component of the economic landscape in Africa. In Kenya, for example, family businesses generate nearly 60% of the country’s employment and are responsible for 78% of all new job creations.  According to the Small Enterprise Development Agency, fifty percent of South Africa’s economic growth is generated by family businesses. Yet, despite the important role they play in a country’s economy, only a few of these businesses have managed to remain in operation or survive to the 3rd generation of the family. For many, succession planning remains the proverbial elephant in the room, often ignored or delayed, despite its obvious importance in the long-term.

To a great extent, the survival of businesses across several generations is dependent on how transitions are handled. Poorly planned successions not only undermine a company’s performance but create leadership voids that have the potential to destroy a business. This is especially true for businesses whose founders remain actively engaged in the leadership team and thus exert considerable influence on strategy, company values and management. Charismatic founders with formidable capabilities often cast significant shadows over younger generations – shadows these less experienced managers find difficult to emerge from under. As such, for a majority of African family businesses, the likelihood of surviving beyond the founder’s generation is extremely low.

A recent survey done by the Boston Consulting Group found that more than 40% of family businesses  have not adequately prepared for succession in the last decade. Incumbent leaders tend to stay in their positions longer and identify successors later in their tenure or not at all. Some handle it as a personal issue between two individuals rather than a process that requires the same rigour in planning and objectivity as would be seen in CEO successions in public or corporate businesses. Communication gaps between those who expect or are expected to run the business in future and those currently running the business further complicate the challenge of succession planning.

Shining the spotlight on Kenya

Transition (including, importantly, the years leading up to the moment of transition) can make or break a family business. While 80 – 90% of all business enterprises in Kenya comprise of family businesses, very few survive into the 3rd and 4th generation. In a survey conducted on private companies in Kenya, PricewaterhouseCoopers notes that only 23% of Kenyan family owned businesses have a robust and well documented succession plan. Less than 50% of these businesses plan to pass on management of the business to the next generation which could infer concern about the next generation’s skills and competencies and their ability to successfully manage the business. For business that do intend to pass on the management of the business, it remains crucial for the business to have an objective perspective on which members of the younger generation have the greatest leadership potential which can be ascertained through talent evaluations. They also need to have detailed career-development processes for the family that mirror best-in-class talent management and capacity building processes.

Families that do not intend to pass on management to the next generation have a much stronger preference for exiting the business entirely, rather than retaining ownership and bringing in professional management from outside the family. Only 13% of the businesses surveyed consider the latter as a viable option for their businesses, in contrast to 37% who would prefer to sell or float the company. This preference reinforces the growing attractiveness of private equity in Africa, with close to 25% of families that plan to transition ownership their businesses citing selling to PE investors as their exit strategy.

FB Kenya

PwC Kenya Private Business Survey 2014

Managing family dynamics in succession planning

Succession planning sits at the intersection between family and business considerations. In order to effectively manage the family dynamics while planning for succession, family businesses need to clearly articulate the values, principles and aspirations that will guide their succession process. Three main sets of questions can help to align the key decision-makers involved in the succession process:

  1. What are your core values? Which of the principles that have guided the business so far would you like to preserve? What new principles have emerged that you would like to integrate into the business going forward?
  2. What are your aspirations with regards to maintaining family ownership and operational control versus relinquishing operational responsibility in the coming years? What objectives will you aim to accomplish through either directly staying involved in the business or exiting?
  3. What leadership capabilities are required in the business? How will you evaluate the pipeline of leadership talent within the family? How will you address the aspirations of family members who do not have the capabilities required for key leadership roles?

Independently assessing what is right for the business, autonomous from family preferences,  can help to balance the needs of the business and family aspirations when developing the succession plan. Maintaining the existing culture, for some, beyond the transition may not necessarily be the right strategic move for the business. Such businesses would be in need of a shift from a family-oriented style of management to a more professional approach. Regardless of whether successors are chosen from within or outside of the family, the succession model should provide the emerging leaders with sufficient opportunity to prepare for the key roles and build credibility with senior executives and family members.

Business Profile: Nakumatt Holdings Ltd

With a $600 million turnover and plans to achieve a $1 billion turnover by 2018 through increased regional expansion, Nakumatt Holdings is a 2nd generation family business that is taking a long-term view at their company’s longevity, sustainability and profitability. Driven by a commitment to provide affordable, quality brands as well as excellent and superior quality service to their customers, Nakumatt Holdings has grown to become a regional brand in East Africa. Atul Shah, Nakumatt’s founding Managing Director shares his insights on Nakumatt’s succession plan:

Q: What are the values and priorities for your business that you hope will endure across generations and how do they currently impact your decision making and business operations?

Nakumatt Holdings is a business that was started many years ago on a very informal slate. As we have grown across different markets over the years, we have evolved to a contemporary corporate business with a formal corporate structure. The values and priorities that drive our business operations are defined in our quality policy. It is a commitment to providing affordable, quality brands as well as excellent and superior quality service to our customers. To this end we have attained ISO certifications to underline our commitment to quality management.

Q: Does your company currently have a leadership succession process? Can you elaborate on it if yes?

We currently have what I would describe as semi-formal succession policy. Our expansion and increased corporate awareness has created numerous opportunities for us to build on our expertise. While we do recruit from outside the business, we look within the Nakumatt family of 7500 employees to fill the positions that arise first. This means we are actively developing our talent to take up opportunities within the organisation. Currently the executive team in place is aligned with Nakumatt’s vision, mission, core values and strategic decisions. Should I decide to step down tomorrow, I have full confidence that within my leadership team, any one of them can fill my big shoes with ease.

Q: Do you have any concerns, if any, about passing ownership and management of the business on to the next generation of the family?

The reality of business growth is that it ends up spilling out of family control. This has been the case for numerous other global family businesses such as WalMart or even Coca-Cola and we are cognizant of this reality. For this reason, we have always looked forward to a day in the near future when we can open up ownership through a cross listing at the East Africa bourses. We also believe in the culture of shared prosperity and we are therefore very keen to provide an opportunity for all our staff, customers and even suppliers to share in our success by owning a share of Nakumatt.

Q: Does Nakumatt have a hierarchy for talent sourcing for leadership appointments?

Yes. We have a solid human resource and talent development policy which is non-discriminatory.  Through this policy, we have developed a HR model that celebrates and rewards excellence. We do treat all employees, not just the executives fairly and equally and regard them as members of one family. So we stand firmly behind the practice of promoting from within, recognising and rewarding performance. Everyone has the opportunity to grow within Nakumatt. Someone who joins the business as a sweeper or truck driver or till attendant has the potential to become a branch manager someday based on their performance, willingness to learn on the job and personal pursuit for growth. Our internal and external training programs are designed to develop employees to their highest potential. We are perhaps the only organisation in Sub Sahara Africa that develops its employees to a level that mirrors a formal Retail Management Diploma level.

Q: Do you have an active development strategy for family members involved in the business?

As I mentioned above, we maintain a fair HR policy that’s non-discriminatory. Family association doesn’t guarantee someone an executive position in the business. Family members have the opportunity to learn about the different facets of the business from the ground up and are expected to attend all training programs similar to the other employees. I currently have 2 sons and 2 nephews involved in business operations and they spent some of their vacations, for example, working in several departments within Nakumatt before coming on-board fulltime.

Q: There is a reluctance amongst non-family executives to join family owned businesses due to concerns on the level of independence needed to be effective at their jobs. How many non-family executives work with you currently and how did you address this concern while recruiting?

There are quite a number of non-family executives heading several functions including the operations and finance departments. Our corporate governance structure is performance oriented and ensures that family members involved in the business are held up to the same performance standards as non-family executives. This is critical because as a business with a $600 million turnover and benchmarked against leading global corporates, we have to operate as a corporate business. Our executives ensure the continuity of our corporate vision and they are well equipped to continue to generate growth and increase value for our stakeholders.

Q: What values/competencies do you consider critical for the long-term success of the CEO of a family owned business?

Having a value system and work ethic that is anchored against your corporate vision and mission. This has helped us to maintain core values geared at spearheading our commitment to be Africa’s retailer of choice. For this reason, our value system focuses on integrity, honesty, personal responsibility and innovation. Besides the value system, we strive to maintain a brand promise to our stakeholders focused on delivering Quality, Value, Service, Variety and Lifestyle enhancing products.  At Nakumatt, we strive to meet our corporate obligations as an active social development investor; spearheading community development projects on aspects such as health, entrepreneurship, sports, culture, environment, education and urban restoration. Given the role that the retail sector is currently playing in the East African economy, Nakumatt is committed to enhancing economic development by adopting excellent retail management standards. Any individual in our system unable to match up to this value system cannot thrive in our midst. At Nakumatt, we are one large family united for a common goal.

Succession planning needs to be at the forefront of any family business’s long term vision. It is incredibly valuable for a company’s capacity to grow in an exceedingly dynamic and competitive environment and non-negotiable for many investors and stakeholders. Issues around leadership transitions and succession planning need to be approached with the same degree of competency, foresight and objectivity as any other key aspect of the business. As cliché as it sounds, failure to plan is tantamount to planning to fail. A good succession plan approaches CEO succession and company transitions proactively, establishes independent oversight and maintains clear separation between family and business issues. These are the plans that can and will sustain family businesses across multiple generations.

 

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