An important component of any business environment is family business. They are critical to their local and national economies, given their contributions to economic growth, wealth creation, job creation and competitiveness. Most businesses start as family businesses. Indeed, several global conglomerates, such as Tata Motors, 21st Century Fox, Walmart and Johnson & Johnson, started as family businesses, growing and innovating through distinct phases.
Despite the preponderance of family businesses, scholars have been attracted to the various challenges impacting the realisation of family business corporate objectives. Some of the areas of concern include CEO succession, access to finance, investor protection, governance systems, reputation concerns, corporate performance to mention a few.
In addition, literature examining family business across varieties of capitalism suggests that family businesses challenges are more prevalent in developing countries due to weak institutional arrangements, lack of market discipline, the ineffective market for corporate control, and illiquid capital markets. Nonetheless, a tangible number of family businesses are transcending these challenges and are going beyond the first generation of ownership to second and third generations. In view of the evolving socio-economic changes, both locally and globally, it is important to highlight key corporate governance factors which these family businesses need to navigate.
Ownership
Due to the ubiquitous nature of family businesses, which can range from small mom-and-pop firms to exceptionally large conglomerates, what qualifies as family business may vary depending on the focus, whether on the firm’s ownership structure or on the other hand, just the degree of family involvement in the business processes. This is an important factor for family businesses as they grow and expand, part of the governance consideration would include weighing the extent which the members of the family are involved in the day-to-day processes of the business, which family members should be in the firm’s management and the minimum threshold of ownership or voting rights the members of the family should retain for the purpose of control in the business. That is, there is a need to have clearly defined level of family involvement in the governance, management and share capital ownership of the business. Some family businesses have non-family members partake in the management or ownership of the business as a strategy mechanism to ensure both business continuity and objectivity in pursuit of the business’ goals.
Succession planning
It is important that family businesses consider early on in their growth process the plan for succession for both management and ownership of the business. Most times, what is seen with family businesses in Nigeria is that there is poor succession planning, poor management, lack of accountability, meritocracy and transparency across family businesses. In other instance, where there is some form of succession planning, there are socio-cultural or religious factors beliefs such as handing over businesses to female children or mandated inheritance by first sons in many families and refusal to consider non-family members of the business to lead its management. In some instances, this demotivates the establishment of sustainable governance systems. Founders at times seek to extract all potential value from the business in their lifetime without recourse to future generations. This may hamper the process and metrics of succession fail to throw up the best candidate to succeed the business resulting in the founder failing to pursue building an institution for the longer term.
In succession planning, founders of family businesses also need to ensure and not assume that their children are interested in the business and have the entrepreneurial drive, skills, network and knowledge required to continue to drive the business forward. Succession requires learning and growing through the ranks of the business, involvement in the day-to-day running of the business and active grooming of the next generation to succeed the previous generation. There are family businesses around the world that have shown that it is possible to have business successfully passed from the first to second generation and then to the third generation and more.
Strategy and Survival
In the current era of unique multi-faceted challenges facing businesses generally, there is a need for family businesses to chart the course for their survival. Survival for family businesses requires an objective approach to the historical details of the business, strategic and forward-looking planning for the future whilst at the same time ensuring the day-to-day operational processes are successfully met. With ongoing macro and micro-economic uncertainties, disruptions in technology, global concerns around energy and climate changes, human and capital flight and the changing face of the world of work bringing to the fore the pivotal role of environmental, social and governance (ESG) metrics which is impacting how businesses are conducted today, there is therefore, a need for family businesses to plan to constantly adapt to ensure survival. This would require that all governance controls for the business by ownership and management are working together to guarantee the business survival. This is important in these times regardless of the scale at which the family business is being operated.
The board of such family businesses, whether comprising wholly of family members or has non-family persons on board, is responsible for the entrepreneurial and strategic leadership of the business and risk-management of the business. This requires that family members move from being occasional participants to active actors on steering the business’ strategy in the face of waves and more waves of changes.
Corporate Governance and Decision-Making
Also key is for family businesses to be able to form strong standards around the family members to be at the helms of ownership and management of the business and those who should not. At the heart of it, whilst still being in business they are still families with the typical concerns and emotions that do play out in families, hence the need for firm governance structure defining and delineating the rules and measures for operating the business, the decision-making process and who should be responsible for the different aspects of the business. This requires a continuous and objective assessment process for both family and non-family members of the family business.
Family businesses should have boards to drive its governance and be its major decision-making part. It is important that there are family charters, board charters and where they are incorporated entities, well defined memorandum and articles of association that defines the business objectives, and how the different governance structures within it are to be guided.
There is no doubt that there are infrastructure, governmental policies and regulations which contribute to a difficult terrain for family businesses in Nigeria. To thrive, however, proper corporate governance structures of family businesses that will lead to better management of such institutions are key. Whilst there is the Nigerian Code of Corporate Governance 2018, along with sectoral corporate governance codes developed by regulators in Nigeria, there is still a wide lacuna in the regulatory provisions, regulations and understanding of family firms in Nigeria. It should be noted that the Nigerian Code of Corporate Governance 2018 is to adhere to by public interest entities and represents best practice corporate governance standards for private companies, which category though many family businesses fall into, there remains a need for strong consideration of both internal and regulatory governance structures that would cater specifically to family businesses in Nigeria.
Olayimika is a Partner in the Enterprise, Corporate Governance & Sustainability practices at Olaniwun Ajayi LP, a leading full-service law firm in Nigeria, consistently ranked Tier 1 by leading international directories, including Chambers Global, IFLR 1000 and Legal 500. The Firm turns 60 years today and has over those years become widely recognized as the go-to firm in Nigeria with a reputation for excellence, broad experience and versatility. Yimika is focused on advising both local and international clients on corporate reorganizations, finance, clean energy, general corporate governance matters including family businesses, sustainability, climate and environmental, social and governance (ESG) concerns.
