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Family businesses firm up governance policies to survive Covid pandemic

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Summary

  • Unlike public and private companies that enjoy support from wealthy investors and governments, family companies rely on customers’ goodwill and trust for survival.
  • The current Covid-19 measures such as a dawn-to-dusk curfew and movement restrictions that have consequently throttled their growth have tested their resilience.

Unlike public and private companies that enjoy support from wealthy investors and governments, family companies rely on customers’ goodwill and trust for survival.

The current Covid-19 measures such as a dawn-to-dusk curfew and movement restrictions that have consequently throttled their growth have tested their resilience.

To be fair, even before Kenya recorded its first case of the coronavirus in March last year, the enterprises were already struggling as growth and sales dipped. For instance, in 2019, family-owned firms reported a 22 per cent drop in growth from 74 per cent in the preceding year. This was largly attributed to a 28 per cent sales drop from 13 per cent in 2018.

The outlook appears worse as the government’s restrictions pile more pressure on the family businesses. Their sales are projected to drop further by 48 per cent.

Yet, these corporations are showing resilience as they did numerous times before and after wars, pandemics and other natural and man-made disasters.

"The lessons drawn from the past are passed onto the next generations as part of the business’ heritage, providing them with tools and recipes for successfully overcoming emergencies," PricewaterhouseCoopers (PwC) says in its 2021 Africa Family Business Survey.

Also, the close-knit relationships within these businesses shore up good governance.

For instance, 75 percent of family businesses have some form of governance policy or procedure in place.

“At the other extreme, disagreements are a regular occurrence for five per cent. Dealing with disagreement is very much a private affair — 80 per cent of respondents who report having disagreements deal with them internally — but just 12 per cent have an established conflict resolution system, while 14 per cent have used an external third-party resolution service.”

That is why optimism for the future remains high.

Turnaround

While two-thirds expect to see growth this year, 96 per cent believe 2022 will be their turnaround year.

This target could, however, fall short because about a half (46 per cent) do not see digital or e-commerce platforms as important. This is despite the important role that e-commerce has played in keeping businesses afloat amid pandemic driven economic disruptions.

“Third or later generation African family businesses are also more likely than first and second generation businesses to prioritise aspects relating to innovation or digitalisation. Only 26 per cent of all African respondents say that their digital journey is complete and 57 per cent believe they have a long way to go.”

The survey, which involved 231 online surveys in 13 African territories such as Kenya, South Africa and Botswana, was conducted between October and December 2020.

It sampled owners and executives representing family-owned businesses with turnover ranging from under Sh539.2 million ($5m) to Sh107.1 billion ($1bn).

The report recommends that if Kenya is to address its high unemployment rate, then it should support family businesses to overcome low financial power, low sales, high cost of doing businesses and unreliable value chains.

Already, the country is reeling from the effects of business closures as millions of youth are out of work.

Data from the Kenya National Bureau of Statistics (KNBS) showed that the number of people in employment fell to 15.87 million between April and the end of June last year compared to 17.59 million the previous quarter.

This came after the Central Bank of Kenya (CBK) warned that about 75 per cent of Kenya’s SMEs could collapse if they fail to get fresh funds from banks or equity partners by the end of June.

Similarly, a study that was conducted by the World Bank Group on the Socioeconomic Impacts of Covid-19 on Kenyan firms showed that only 50 per cent of small firms (5–19 employees) and medium-sized businesses (20–99 employees) are still operating.

“Micro-sized firms (0–4 employees) are more often forced to permanently close or temporarily cease operations by their own choice, indicating that they are less able to deal with the aftermath of the pandemic on their own,” the report argues.

As a result, nearly nine in 10 (88 per cent) of businesses have prioritised to protect their companies for more than five years to come.

Priorities

Other priorities are creating a legacy (81 per cent), creating dividend for family members (71 per cent), ensuring businesses stay in the family (68 per cent) and creating employment for other family members (42 per cent).

This is achievable through expansions into new markets/client segments, diversification and digitisation in the next two-years to achieve this.

Also, since these businesses are trusted, their trusts in mitigating climate change by measuring sustainability and societal impact of investments on communities is crucial.

“Although issues related to sustainability and the local community are a lower priority for Kenyan family businesses, 60 per cent acknowledge that they have a responsibility to fight climate change and its related consequences," the report notes.

"Their future intentions are more encouraging though, with 64 per cent of Kenyan family businesses saying there is an opportunity for family businesses like theirs to lead the way in sustainable business practices (Africa: 63 per cent)."

Since business succession is both crucial and a sensitive area, people are now open to choose their heirs amid an uncertainty brought by the pandemic.

“About half of first-generation African family businesses surveyed expect that the next generation will become the majority shareholders in five years’ time” the report said.

Nonetheless, 76 per cent of African family businesses don’t have a succession plan as only 19 per cent of them have a family constitution or charter.