Abstract

The concept of family business is universal as many businesses big, medium, or small are run by families and certainly, this concept is not alien to the Nigerian commercial or corporate landscape.

Family businesses are very important to the economy of Nigeria. Recognising this fact, KPMG in May 2017 released its first publication themed 'Nigerian Family Business Barometer' where research on the subject matter was shared for the benefit of those interested in establishing corporate governance frameworks for their family businesses. The research revealed strong resilience and optimism about the future notwithstanding the serious challenges and setbacks faced by family businesses.

In the 1990s, Nigeria boasted of several large, popular, and flourishing indigenous companies and businesses across various sectors such as banking, merchandise trading, media and publishing, airlines and even shipping. Sadly, most of these businesses failed shortly after the demise of the founders. A variety of reasons which include lack of proper governance structures, inadequate infrastructures, mismanagement of business fund, limited access to finance, fluctuation in exchange rate, misunderstanding amongst family members, family tension, disregard for structures of corporate governance, political uncertainty, competition, recruitment of unskilled Staff and declining profitability have been advanced for this trend.

To deal with some of these identified factors, there is need to rethink the extent to which the principles of corporate governance are applied when considering succession planning as it affects family-owned businesses. This paper will consider the "what" and "why" of family businesses and the relationship between corporate governance and succession planning. It will further analyse provisions of relevant corporate governance codes and how adherence to such guides will boost the growth, sustainability, transparency, profitability, and survival rates of family-owned enterprises.

The Concept of Family-Owned Enterprises

Often, family businesses started off as trades established to cater for the immediate needs of the family, both nuclear and extended. Sometimes, the visioner envisages the impact of his business on the immediate society and he or she does not necessarily have the plan to extend the business beyond the shores of the country. What had happened over time was, family businesses began to metamorphose into big businesses as the demand for services or goods arose. However, robust structures were not put in place to sustain and accentuate the growth attained.

Arguably one of the oldest business organizations in the world, 75% to 90% of all world businesses are carried on by familiesi. Family-owned enterprises are businesses in which two or more family members and the majority of ownership or control lies within a family. The existence of family-controlled businesses imply that ownership and management are concentrated in one family. Often starting out as a one-man business, family businesses possess the potential to grow through the stages of small and medium enterprises to become large companies and conglomerates sometimes spanning multiple sectors, industries, and generations.1

A common feature of family-owned enterprises in Nigeria is the inability to transcend the first generation or outlive its founder. Where properly planned and managed however, family-owned enterprises have the potential to become multinationals, transcending tens of generations, expanding across several continents, and positively impacting the lives and livelihoods of millions of people. Examples of successful and internationally renowned family-owned businesses include the Volkswagen company which makes the Volkswagen, Porsche, Audi, and Bentley cars; Electronics giant, Samsung; Ford and American retail corporation giant, Walmart. In the local space, the Ibru family organization, the Eleganza group, First City Monument Bank are a few of the family businesses that have transcended the 1st generation or at least engaged the next generation in the operations of the business. The unquantifiable role that family businesses play in an economy is reflected in jurisdictions like the UK where there is an institute for family businesses involved in helping families gain support and relevant connections while championing the course of family businesses and the role they play in the economy.

Proper Governance Structure

Corporate Governance is a system of rules and practices by which a company is directed and controlled.2 The board is responsible for overseeing the management of the company. Therefore, the board of directors must be accountable and transparent as it carries out its fiduciary duty to all stakeholders such as shareholders, employees, creditors, the community where the business is situated etc., in a manner that aids the growth of the business and protects the business' sanctity.3 Thus, the Board working with the management and the company secretary drives the company's corporate governance compliance.

Meaning of Succession Planning, need and its importance

Succession Panning in Family business is the process of transitioning the management and the ownership of the business to the next generation of family members for the purpose of continuity, profitability and longevity.4 It is about positioning the business in such a manner that it becomes an institution with the right internal and strategic frameworks, capable of outlasting itself. The 2021 family business survey by PwC shows that 55% have a documented vision and written purpose statement, 30% have succession plans, and 29% say there is a resistance to change.5 Succession planning has been identified by most writers as the greatest challenge and strategic issue in the determination of the continuity of family businesses. It is often viewed as a complex process and practice restricted to large organizations with the most sophisticated organisational structure. On the contrary, succession planning can be of great value to organizations like family businesses which generally have fewer resources available for knowledge acquisition programs and formal, structured development of employees.

Succession planning is further defined as the process of identifying and developing new leaders who can replace old leaders when they leave, retire, or die. Succession planning increases the availability of experienced and capable employees that are prepared to assume major roles as they become available.6 It is a strategy for passing leadership or management roles to other persons so that the business can continue to effectively function after the exit of the founder or current leaders. As it relates to family business, focus should be on the process, planning, the influence of the family business and ensuring leadership is strategically passed to the next set of leaders.7

For this to be achieved, adherence to the Nigerian Code of Corporate Governance arguably the apex regulations on corporate governance practices, the Companies and Allied Matter Act 2020, or the relevant sectorial code is imperative. Also, the roles of the MD/CEO particularly, the Chairman, the Board of Directors and the Company Secretary are critical to bringing the above three elements together. Under the Companies and Allied Matters Act 2020, if the business is not small, clear guidelines are given as to how the company should be managed by the board and their role vis a vis that of the shareholders. Part A of the Nigerian Code of Corporate Governance sets out the need to have the person of the Chairman and CEO separated, a diversified board and recommends the setup of different committees of the board. Principle 1 of the NCCG provides that the establishment and implementation of a succession planning is one very critical role required of the board because having one steers the board in the right direction in terms of preparing for the company's future. Family-owned businesses need to adopt this principle to be able to reap its benefits.8

The COVID-19 pandemic and its attendant impact highlights the increasing urgency with which family-owned enterprises are expected to make adequate provisions for succession planning as part of its effective corporate governance strategies. The challenge of many family-owned enterprises is where the founder finds it difficult to give up what he had created yet in retrospect desires to have his children run the business later without establishing corporate governance structures, policies, plans including training to prepare them for the responsibility of taking over the business. Some, when they are about to retire, and without instituting the governance structures already mentioned, just place their children as MD/CEO or Chairman on the board of the company with no training or preparation. This is a recipe for disaster. Successful businesses having the one-man risk may be deeply hurt and unable to recover if the founder or critical staff of the business exits. This may have a negative impact on customer relations, business goodwill or cause reputational damage to the business name. It may also lead to the exit of key staff resulting in possible operational inefficiency or human resource deficiency.  Flowing from the effects of the pandemic, Family-owned enterprises in Africa moved from an average 57% annual growth rate to 25% growth rate and this resulted in 47% reduction in sales. Regarding priorities for the next 2 years, 88% of Nigerian family businesses indicated that they would focus on expansion and or diversification, with 69% signifying focus on digital, innovation and technology. 72% plan to evolve with new thinking while 41% will work on sustainability. Additionally, the survey found that most family businesses are still behind the digital curve with only 38% possessing strong digital capacities, a poor assessment in a post COVID-19 world where technology has become a critical requirement for corporate and individual survival. One may wonder if this may be because the next generation who are digitally inclined have not been adequately involved in the family businesses. Thus, focus on succession planning which is the bane of most family businesses is very key.9

Preparation of a Successor

Certain formidable governance structures need to be established, some of which include, setting up a family constitution or charter, shareholders agreement, the code of conduct, remuneration structure for the board and senior management of the company for both family and non-family members, a formal board of Directors in the first instance, formal advisory board, family council, process of inducting, welcoming  and educating  family members into the business  and estate plans for family members who have a stake in the business. We must keep in mind three elements required to achieve this i.e.  process, planning and influence. The bedrock structures which need to be taken into consideration include but not limited to the following:

Setting up a family constitution

A family constitution is a written statement that serves as a record of the family's heritage, hope, culture, and aspirations for future success.10

The family constitution will serve as the grand norm of the family in terms of managing the family business and a tool to bind the acts (actions and inactions) of family members towards the leadership of the business. While it is important to set up a family constitution, it is crucial to ensure that the constitution is set up with the family members. KPMG was of the view that it is important to develop a family constitution with the members of the family through a workshop and appointment of a consultant. The family gets to go through the process of envisioning the plans, goals and mission of the business with a concentrated effort to proffer solutions to the business' challenges and potential obstacles. These workshops and exercises would not only help family members to bond, but it will also help them have a panoramic view of how successful the business can become, and the necessary frameworks needed to be set up to achieve the visions and goals they may have crafted for the business. The workshops must be set up in such a way that the members of the family analyse the state of the business by looking first at the history of the business, then the present condition of the business, and the competitive edge of the business.

When the family constitution or charter is established, there is clarity as to who is in charge or controls of what or those that work in a particular area of the family business to avoid conflicts and protect the wealth of the family business. The constitution may include guidelines and clauses on the right time to inform heirs about the business, hiring and firing family members,  determination of  how key leadership roles in the family will be handled, members of the board of directors, establishment of governance policies integral to the smooth running of the business, decision on whether ownership shares will be given to non-family executives, statement on resolution of conflict and periods for amendment of the family constitution, amongst other clauses.11

While having a family constitution may not necessarily alleviate conflict or prevent future family dispute, it sure mitigates against severe breakdown of the business as disputes are dealt with as they arise. To further entrench the tenets of the family constitution, it is crucial to establish a code of conduct which will direct the actions of family and non-family members who play certain roles in the business. This code will also direct employees and third parties and set out the rules and consequences for breach.

Establish a Board of Directors and Committees

The corporate governance framework is anchored on an effective board of directors who are appointed to ensure the proper guidance and strategic management of the company.

A functional board of directors makes decisions and performs oversight functions. These individuals are saddled with the responsibility of setting the tone for the business and ensuring necessary corporate governance principles are adhered to. Some of these rules include, having meetings from time to time, presentation of statements of account at each meeting, ensuring the office of the MD/CEO is separate from that of the Chairman of the board to avoid abuse of power and engaging in strategic thinking for the purpose of enhancing the business, amongst others.

It is also important to have board committees where concentrated effort is channelled into monitoring and developing crucial areas of the business. Having an audit committee is critical as this committee would review the financials and establish internal controls for the business. It is also important to have a finance and investment committee where attention is given to business expansion, investment and general financing of the business. An important committee to also have is the nominations and remuneration committee. This committee would be given the responsibility to draft adequate policies for the proper governance of the business as well set up adequate remuneration packages for the directors and employees. This committee can also set out adequate exit package for incumbent family members to encourage exit at the appropriate time. Ensuring continuous education of the directors and managers is another function of the committee.

The power of continuous education for managers of family-owned businesses cannot be overemphasised. Attending trainings on business development, succession planning, strategy, accounting and finance, marketing and leadership trainings amongst other trainings would help widen the horizon of directors and managers. Adequate process must also be put in place in terms of inducting, welcoming and educating family members who are about to enter the business based on the family constitution.

Process of Planning for Successor

There are different schools of thought on how best to have proper process put into planning to groom a successor for the family business. Two issues are quite important: the competence (the operational know-how) and legitimacy (relational skills) of the successor.

One school of thought believes that the best plan is to have a successor who would work closely with the current founder or CEO as early as possible. This successor will be next in line to the founder or CEO learning the ropes and being with him/her in the day to day running of the business. Thus, the founder or current CEO positively influences the successor to understand how the family company runs. It is believed that this method helps the successor to understand and buy into the business strategy, be known by strategic partners or customers and thus give him or her the competence and legitimacy required when he/she takes over the business.

Another method would be to employ a CEO who is not a family member but has the competence needed to effectively run the business.  A study shows that usually this person is not emotionally attached to the business and can objectively add value to the business.

Another school of thought believes that proper education and experiences acquired by the family member externally should suffice in preparing a successor family member for the business.

Furthermore, another opinion is that a combination of good educational training for a successor and ensuring the successor grows into the business early from the lower levels while working up to the top and amassing necessary in-depth knowledge of the business may be a better process of preparing a competent and legitimate successor.

It is also important to have open conversations and involvement with the relevant family members (key stakeholders) and possibly prepare a clear, documented plan/policy on the best method to use. In so doing, the decision on who the successor will be is not limited to that of the founder or incumbent CEO or the chairman. 

Please note however that whichever method is used, entrenchment of a viable succession planning strategy which will be in line with corporate governance principles must be clearly established to facilitate business growth and continuity. 

Linked to the analysis on different methods of succession planning is the need for proper estate planning by the founder or incumbent CEO or Chairman to separate his/her personal assets from that of the business. When this is done properly, it becomes easier for founders of family business to let go, adhere to the succession plan put in place, while aligning with other corporate governance measures to ensure business continuity.

Remuneration structure for both the Board and senior management of the Company--family and non-family members.

A written remuneration structure is a vital corporate governance tool for accountability and transparency as we have highlighted above. Unavailability of a clear structure on how family members in family companies deal with remuneration may promote lack of good corporate governance. Absence of this structure may cause family members to tamper with the monies of the company for personal benefits. This unethical behaviour has destroyed a lot of family businesses as well as other businesses.

Conclusion and Recommendation

The success of family-owned enterprises is paramount to the growth of the Nigerian economy and must therefore not be taken lightly. Corporate Governance is a solid panacea in ensuring that succession planning is not only enshrined in family business but that proper and competent person or persons are in line to effectively run the business and ensure continuity.    It is also recommended that in addition, a 360-degree approach is employed to safeguarding the family business. This approach entails onboarding competent accountant, auditor, compliance office, legal officer, lawyers, portfolio manager and other crucial professional individuals with the requisite skills to build the family business into the vision and plans codified in the family constitution.

BIBLIOGRAPHY

  1. DK Sinha, 'Meaning of Family Business: Types and Characteristics' available at https://www.yourarticlelibrary.com/business/meaning-of-family-business-types-and-characteristics/41130 Accessed on 20 February 2021
  2. Institute for Family Business, 'Succession Planning in Family Business' available at https://www.ifb.org.uk/resources/succession-planning-in-family-business/z Accessed on 20 February 2021
  3. Engaging in Succession Planning (Shrm.org, 2021) available at https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/engaginginsuccessionplanning.aspx accessed on 21/02/2021
  4. Will Kenton, 'Succession Planning' (Investopedia, Dec 6, 2020) https://www.investopedia.com/terms/s/succession-planning.asp accessed 19 February 2021
  5. PWC 10th Global Family Business Survey (2021), From Trust to Impact: Why family businesses need to act now to ensure their legacy tomorrow https://www.pwc.com/gx/en/services/family-business/family-business-survey.html?icid=fbs-2018 accessed 14 February 2021
  6. Shila R, What is Corporate Governance? (Your Article Library) https://www.yourarticlelibrary.com/corporate-governance/what-is-corporate-governance/99690 Accessed 18 February 2021
  7. Shafi Mohamad, The Importance of Effective Corporate Governance (2020) https://www.researchgate.net/publication/228237979_The_Importance_of_Effective_Corporate_Governance Accessed on 17 February 2021
  8. Nigerian Code of Corporate Governance (2018)
  9. DK Sinha, 'Meaning of Family Business: Types and Characteristics' available at https://www.yourarticlelibrary.com/business/meaning-of-family-business-types-and-characteristics/41130
  10. Institute for Family Business, 'Succession Planning in Family Business' available at https://www.ifb.org.uk/resources/succession-planning-in-family-business/Accessed on 20/02/2021
  11. Engaging in Succession Planning (Shrm.org, 2021) available at https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/engaginginsuccessionplanning.aspx accessed on 21/02/2021
  12. Will Kenton, 'Succession Planning' (Investopedia, Dec 6, 2020) https://www.investopedia.com/terms/s/succession-planning.asp accessed 19 February 2021
  13. PWC 10th Global Family Business Survey (2021), From Trust to Impact: Why family businesses need to act now to ensure their legacy tomorrow https://www.pwc.com/gx/en/services/family-business/family-business-survey.html?icid=fbs-2018 accessed 14 February 2021

Footnotes

1 DK Sinha, 'Meaning of Family Business: Types and Characteristics' available at https://www.yourarticlelibrary.com/business/meaning-of-family-business-types-and-characteristics/41130

Accessed on 20/02/2021

2 Shila R, What is Corporate Governance? (Your Article Library) https://www.yourarticlelibrary.com/corporate-governance/what-is-corporate-governance/99690 Accessed 18 February 2021

3 Shafi Mohamad, The Importance of Effective Corporate Governance (2020) https://www.researchgate.net/publication/228237979_The_Importance_of_Effective_Corporate_Governance Accessed on 17 February 2021

4 Will Kenton, 'Succession Planning' (Investopedia, Dec 6, 2020) https://www.investopedia.com/terms/s/succession-planning.asp accessed 19 February 2021

5 Engaging in Succession Planning (Shrm.org, 2021) available at https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/engaginginsuccessionplanning.aspx accessed on 21/02/2021

6 Institute for Family Business, 'Succession Planning in Family Business' available at https://www.ifb.org.uk/resources/succession-planning-in-family-business/

Accessed on 20/02/2021

6

7 Ibid

8 Part A, Nigerian Code of Corporate Governance, 2018

9 PWC 10th Global Family Business Survey (2021), From Trust to Impact: Why family businesses need to act now to ensure their legacy tomorrow https://www.pwc.com/gx/en/services/family-business/family-business-survey.html?icid=fbs-2018 accessed 14 February 2021

10 Davis Wright Tremaine LLP, 'The Family Business Constitution' (2017) https://www.dwt.com/blogs/family-business-resource-center/2017/10/the-family-business-constitution#:~:text=A%20family%20business%20constitution%20is%20a%20written%20agreement%20between%20family,to%20proactively%20resolve%20family%20disputes accessed on 2 March 2021

11 Ibid

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