Many wealthy Kenyans are unprepared to hand over business empires and fear children will fritter their inheritance away.
The late James Njenga Karume’s estate has run into a number of problems, chief among them that it is running out of cash.
Several other wealthy families are struggling to maintain and grow massive fortunes left by their patriarchs or matriarchs.
He was one of Kenya’s wealthiest businessmen at the time of his death, a man whose fortune was estimated to be in the range of hundreds of billions of shillings.
And while his sudden death one early morning on February 24 seven years ago shocked the nation, his exit was devoid of the succession battles that have rocked families of Kenyan billionaires after their final bows.
The calm did not last long.
The late James Njenga Karume’s estate has run into a number of problems, chief among them being that it is running out of cash.
In one of the most heartbreaking stories touching on claims and counter-claims of betrayal, greed, and mismanagement, details of how the late Karume’s business empire has been crumbling, and fast, have come to the public limelight.
At one point, the late Karume’s beneficiaries who previously enjoyed lavish lifestyles were reeling from acute financial challenges only too familiar with ordinary Kenyans like lack of fees.
Yet the late Karume sat on a business empire ranging from investments in agriculture to banking, conservatively estimated at Sh120 billion.
Keeping it in the family
Several other wealthy families are struggling to maintain and grow massive fortunes left by their patriarchs or matriarchs.
So how can they ensure that their descendants keep their fortunes intact over generations?
Experts say they indeed can but only if they adhere to certain wealth management practices. Families with serious long-term wealth strategies have to do something different, they say.
According to Wanja Michuki, a family business team coach and private wealth management consultant, founding owners - also referred as generation 1 or G1 - can successfully ensure their children (Generation 2 or G2) remain wealthy by teaching them about money and how to work together.
“Succession planning from Generation 1 to Generation 2 or beyond is about the transfer of both ownership and leadership,” says Ms Wanja, who is also the daughter of late Cabinet Minister John Michuki. The long-serving top State official was also a wealthy businessman with interests spread across various sectors like real estate and hospitality.
Plan for succession
Ms Wanja, a Columbia University-trained financial analyst and proprietor of Be Bold Consulting and Advisory, says the most complex elements in succession planning are governance, professionalism, interpersonal dynamics, and financial knowledge.
“In planning for succession, ensure that the right people are in the right positions to take the business to the next level, that the right processes and procedures are in place to do so, and that those in the business work as functional (as opposed to dysfunctional) teams,” the wealth management consultant says.
It is often assumed that children will understand how wealth is generated, having grown in it.
“This is not necessarily the case. Educate and induct the children into the businesses through teaching and work experience,” says Ms Wanja, adding that the Kolb’s Learning Cycle approach works well as it reinforces through experience, experimentation, study, and reflection.
Work experience should be obtained outside as well as inside the family business from early on so as to create solid structures for succession.
“This may look like internships during the holidays and then informal jobs after graduation for a few years to identify areas of strength and gain certain skills, including working with teams, before they join the family business,” she says. Tailoring children’s education towards the skillset that would be required to grow the business is also a useful approach. However, pick the children with interest.
Squander wealth
Some critics argue that children should not be left with lots of wealth because they would squander it or wouldn’t know how to grow it.
But Ms Wanja dismisses this argument as unfounded.
“Those that argue that probably don’t have much experience with wealth,” she notes.
“They will squander inherited wealth when they do not understand wealth. It is imperative to educate them about wealth; how it is has been generated and preserved and grown.”
She observes that if the second generation appreciates what they have been left, they will work towards preserving and growing the gift.
“Too much wealth is only harmful when they do not appreciate what they have been bequeathed and do not make the time and effort to grow that wealth,” says Ms Wanja.
The problem is when the children see their inheritance as a cash reserve for personal needs and not as a base for legacy-building and succession beyond their generation.
But at what stage or age should a patriarch or a matriarch hire a financial advisor for his or her children?
‘‘In their teens, once the children start earning money during the holidays. Financial education is just as important as any other type of education, if not more. I think financial literacy should be taught in schools or provided through private study,” she argues.
The patriarchs or matriarchs also need financial advisors and when they are planning for succession, they should hold sessions with their children. The older generation should also demonstrate a healthy relationship to wealth and set an example for their children or grandchildren.
“Having a work-life balance that generates conversation away from business through being involved in public service or philanthropy or travel is a great way to do this,” says Ms Wanja, adding that she supports families to get clarity about the purpose of their wealth beyond themselves.
Are the wealthy families building the economy and generating jobs? Are they building a legacy business that will span generations and provide for the lifestyle needs of beneficiaries?
In her training, she also focuses on fulfilment.
“Accumulation of wealth at the expense of fulfilment is a pointless task,” she says.
No rivalry
According to 33-year-old Ross Evans, the group operations director of Hemingways Collection and the Express Travel Group, parents should not hire their children straight from school.
‘‘That’s a big mistake since many children lack work ethics and end up plundering the business to ruin,” says Mr Evans, who helps run his father’s business. His father has remained in his role as the executive chairman in the firm that owns three luxury hotels Hemingways Nairobi, Ole Seki Mara and Watamu Hemingways and Resorts.
“My father’s role is clear as he concentrates on expansions and seeking opportunities together with other board members while I run the facilities on a day-to-day basis. My sisters who now live in UK, visit us once in a while and are successful in their own right,’’ he says.
“Each of us attended the best schools in the world and enjoyed equal treatment from our parents which gives us an opportunity to discuss as equals. This has eased sibling rivalry,” he adds.
Mr Evans who studied business economics at Cardiff University, UK says children must never join the family empire if they have nothing to offer in terms of growth strategy for higher profits, efficient management and product improvement.
Mr Evans says allowing children to play roles in a business when the founders are alive helps build trust and nurturing them for succession.
The Ndegwas
According to the outgoing head of Deloitte East Africa Sammy Onyango, it is important for family patriarchs and matriarchs to provide a business challenge for their children to ensure they grow the fortunes further.
Mr Onyango cites the family of former Central Bank of Kenya governor Philip Ndegwa as a shining light in the management of family wealth.
They hold a string of investments in the city running into billions of shillings including in the banking and real estate sector several years later after the death of the senior wealthy Ndegwa.
“I am sure by the time Philip Ndegwa was making his investments, he did not envision that his children would grow the companies to this level,” Mr Onyango says.
“The children have taken the investments to the next level.”
Passing wealth to the next generation is a major concern for wealthy individuals, according the latest The Wealth Report Attitudes Survey. Most super-rich fear that their children will fritter their inheritance away, they worry that passing on too much, too soon will dampen their offspring’s entrepreneurial spirit. It also cites concerns about how to treat siblings fairly.
Prateek Pant, head of products and solutions, at India-based Sanctum Wealth Management notes in the above survey that traditional family set-ups, with multiple generations living and working together, under the watchful eye of the patriarch, are being replaced by nuclear families, with the often Ivy League-educated younger generation keen to carve out their own paths.
“This has only served to increase complexity in the lives of many high net worth individuals, who now find themselves having to consider how to integrate professionals into the boards of family-run businesses, find roles for family members and manage inter-generational inheritance,” says Mr Pant.
“An iconic founder may refuse to entertain new ways of doing business, while heirs may shudder at the prospect of succeeding incredibly successful parents,” he adds.
