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Family-owned businesses: Here today gone tomorrow

By Sam Hlabati

OUR economic history is full of names of entrepreneurs who once ran successful family-owned businesses (Fob) who either died in abject poverty in typical rags-to-riches-to-rags fashion or are currently singing for their supper. Witches, wizards and goblins get all the blame for bringing the once-thriving indigenous businesses down to nothing.

In this column, we will not discuss how to prevent the perceived attacks on business by witches or bad luck cast by those who hate you. We will not challenge traditional or religious beliefs; rather we will challenge Fob management practices.

The Mhofus are my maternal uncles, so any reference that I would make to that family name is not meant to spite anyone, but I am just exercising my cultural right to jest with my uncles without any repercussions.

Typically, a single or a few family members with an entrepreneurial spirit start the Fobs. The founder or founders assume charge of the business, making all decisions from finance, human capital through to where the business should be located. The other people working in the organisation tend to fit into two categories: close family members occupying “management” roles and non-family members mostly in operational roles. Control of the business rests with the founders, with varying levels of power delegated to close family members.

The demise of these enterprises that we bemoan is usually brought about by the death of the founder, resulting in the business assets being split up among the heirs.

As I write, there are a number of Fob empires in the usual areas of bus companies, supermarkets, etc, that are crumbling because of the death of the original entrepreneurs. Such circumstances are common in many family-owned businesses in our midst.

Nowadays, indigenous Fobs are getting into big business ventures. However, the business management model used in these ventures is still the same as that of the enterprises that disappeared down some black hole.

Among other issues that cause the collapse of Fobs are leadership systemic issues that we will briefly discuss. The chief systemic issue is lack of talent to effectively and efficiently run the business. It is important to know that the founders of these Fobs had an entrepreneurial spirit whereas their successors might not.

At the beginning of the business venture, the founders are naturally responsible for all leadership tasks due to the size of the operations. However, as the business grows, the founders continue to take charge of leadership issues. They do not realise that the complexities of running a much bigger operation may require special skills to deal with complexity. In one of our previous instalments, we spoke about the need to change the players when the game changes.

As if the hanging onto leadership reins by the founders is not enough damage to the business; new leaders are brought in from the family. The spouses and children of the founders are given key decision-making posts. The obvious arrogance of being the owners and managers that is carried by the spouses and children does not help in giving direction to the business. The dictatorship of the founders and their families makes them feel virtually infallible, with their decisions standing like a gospel even in instances when they are wrong.

There are business sustainability issues that are not taken care of or are totally ignored in Fobs. Businesses owned by different shareholders are concerned with key issues such as talent management, policies, procedures and performance management. Talent management in Fobs generally does not exist as the leadership reins are passed down the family line, with the older family members normally getting first preference. The organisational rules and policies are usually meant for the low-level workers who are not part of the family. As for performance management, it is not always implemented; or if it is, it would certainly not be directed at family members.

One of the major systemic failure issues is that the inner circle of the family would have the perception that they have control over all of the business funds. This is because there is usually no separation between business and personal expenditure. The lines may be so blurred that the owners do not draw a salary, rather they take funds from the business as their needs require.

Fob owners should be alert enough to draw the line between ownership and management, realising that family birthrights do not necessarily correlate with leadership talent in individuals. Though according to some schools of thought, leaders are not born, those in Fob leadership should be exposed to proper development and counsel. It is much better to give family members roles according to their competences, with preference being given to non-family professionals where the family talent bench is weak.

In joint stock companies, shareholders own organisations that they do not necessarily manage; they hire professionals to run their businesses and reward them appropriately. Are Fob owners willing to run their enterprises sustainably, thereby creating wealth, by hiring the services of professionals?

Fobs should consider attracting and retaining talent from both family and non-family members. The blurred lines between ownership and leadership can lead to reward management problems when there is a mix between family and non-family leaders in the business.

It is important to ensure that a family member’s right to share in the family wealth should not overlap with their remuneration as a business leader in the Fob. For leading the business, a family member should be paid an equitable salary. Exorbitant packages for family members in the name of reward would lead to non-family members getting the perception that their own packages could be inappropriate, leading to demotivation.

Owners of Fobs should take heed to business management advice. Management literature is not meant for the big listed corporations only; it is for all who dare venture into entrepreneurial activities.

Sam Hlabati specialises in systems thinking and reward management. You can contact him on samhlabati@gmail.com

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