Generational wealth is rarely accidental. The variables involved in founding and running a business are herculean. According to the US Bureau of Labour Statistics, 20% of new businesses fail within their first year and about 50% fail within their first five years. Successful family businesses have been built on transgenerational grit, integrity, hardwork, and strategic succession planning, alongside adaption to modern trends and realities. Interestingly, some of the most profitable and valuable companies globally today are renowned family businesses, including Walmart (the Walton Family), Volkswagen (Porsche & Piech Families), Reliance Industries (Ambani Family), and Samsung (Lee Family).
However, while Nigeria boasts some of Africa’s most profitable companies, especially in the banking sector and in the cement industry, successful and thriving third-generation indigenous family businesses have become a unique specimen, in that they rarely exist. The corporate governance challenges faced by many third-generation family businesses are universal, particularly around succession planning and adaptation to new business trends. In Nigeria, however, there are some unique factors which has stifled the growth of family business into the third generation, some of which are extrinsic, including colonial history and others which are intrinsic, including family feuds and weak governance due to over-centralization in decision making. Due to the importance of the topic, it is necessary to understand the concept of the family business, why Nigerian family business has struggled to survive to the third generation, what we can learn from successful global family companies (comparative analysis with Italian family businesses) and instructive policy suggestions which can strengthen the corporate governance framework for family businesses in Nigeria.
Family Businesses & Universal Principles for Corporate Sustainability:
Distinguished scholar, Professor John A, Davis defines a family business/company as, “any kind of organization that are ownership-controlled by a single family”, typically meaning they hold majority of the voting shares. For avoidance of doubt, in this article the words, “family business” will be used interchangeably with “family company”.
So, it begs the question, why the third generation and not the second and fourth generation? There’s an old Italian Quote, “Dalle stalle, alle stalle, alle stalle”, which when translated means, “From the stables to the stars and back to the stables “, which depicts the notion that the first generation builds, the second generation expands, and the third generation struggles to sustain.
Family companies which have gone on to succeed and remain profitable have the following guiding principles in common: Proper succession planning, being flexible and accepting change and choosing competence over family ties. In short, family businesses survive because of “long termism”. Some of these companies have survived up to the 10th generation, and for context, the world’s oldest company, the Japanese company, Kongo Gumi, started as a family company in 578 AD and has existed as a family company for at least 40 generations for more than 1400 years until its acquisition in 2006 by Takamatsu Construction Group.
These businesses are built on foresight and business decisions are taken to ensure that the most profitable long-term strategy is adopted for preservation of the business and family legacy. The expansion of family businesses features due diligence considerations beyond the nominal financial and legal hurdles, as ethos and fundamental principles of the partner company is equally as important as synergy generated from collaboration.
Nevertheless, there is also some rigidity to the management of family business, some of which have become a notorious Achilles heel. These include highly centralised non-expert decision making; the unwillingness to hire an “outsider”-a non-family member who is qualified to run the company in the interim and train leadership while the company navigates succession.
Strong Start to Fluffed Finish – The story of Nigerian family companies
The Nigerian government had made strong attempts in the past, particularly in the early post-independence era to ensure that the prevailing corporate governance regulations protects indigenous ownership and management of companies, a factor facilitated by the previous exclusion of Nigerians from the management and leadership of Nigerian subsidiaries of global brands.
The Nigerian Indigenization policy was targeted as a mode to transfer control of key sectors to Nigerian personnel. In Nigeria today, most successful family-owned companies are either in the first generation or thriving in the second generation with quite a few facilitating the transfer of leadership into the third generation. A notable example of an indigenous and successful third generation Nigerian family company at the time of writing is the company, Nigeria distilleries Limited, which is a fourth generation business founded by proprietor Chief Ayotunde Rosiji. The company was incorporated in 1961 with production starting in 1979. The company manufactures and blends both alcoholic and non-acholic beverages including the famous aromatic schnapps. While there has been some success, the Nigerian family business has faced significant challenges which preceded the indigenization policy especially as European colonialism promoted merchant-styled chartered trading companies like the Royal Niger Company in Nigeria and the Dutch East India company in India, Asia-Pacific and Southern Africa. Indigenous family business struggled to keep afloat simply because the economic sovereignty and capital essential to sustain the business was heavily regulated by systems that sought to stifle local ingenuity and disruption.
The reasons third generation family business fail can be categorised into the following:
• Overcentralisation of decision-making
• Poor succession planning
• Inadequate governance structure
Lessons from Italian-owned family business:
A good number of Italian-owned and managed family business have exhibited the core principles applicable to durable family businesses especially in the luxury fashion industry amongst others. Here’s what we can learn from them:
a. Agnelli Family – Diversification of Portfolio
The Agnelli family is credited for founding the automobile giant, FIAT. However, the Agnelli family has spread its roots across different sectors in the Italian economy through its holding company Exor N.V. Some of these investments are in sports (with their controlling stake in Juventus) and in luxury fashion brands such as Christian Louboutin. Nigerian family business can learn from this and actively work towards diversifying their investment portfolio. While a family business may become a stalwart in certain industries or the production of certain goods, a horizontal investment in other sectors or brands help to spread risk and guard against unforeseen circumstances.
b. Ferrero Family – Good Succession Planning
The Ferrero SPA brand is famous for its groundbreaking chocolate spread, Nutella. The Ferrero family have developed a clear internal succession and governance structure which has been celebrated as effective. This has been done by ensuring a familial perspective to business where the family meets to discuss major business strategies alongside family matters. Nigerian family business can adapt by ensuring that founders think of the end, right from the beginning. The founders-CEO’s must shake off the social stigma and ensure to write their wills and edit regularly with legal consultation to avoid infighting for the control of the company upon the sudden demise of the founder.
c. Gucci Family – Family Feuds and What not to do
Families should encourage and promote internal family alternative dispute resolution mechanisms and early family crisis detection. The Gucci family and the tragic death of Maurizio Gucci show an unfortunate and natural progression of what could happen when there is no unity in the family. Family feuds ruin the family business.
Policy Recommendation:
Most family companies start as are privately-held entities meaning they are private companies and company members and managers are usually family members. The ownership and management team are usually skeptical about going public and listing on the stock exchange. This fear whether real or perceived is based on the perception that opening up the company to external investors would make the family lose control over the management and key decision-making power.
The primary applicable law regulating companies in Nigeria is the Companies and Allied Matters Act 2020 (CAMA 2020). There are necessary corporate governance guidelines provided by CAMA 2020. Section 281-302 provides for a composition of board of directors and their appointment and removal. Section 274, provides for an annual general meeting (AGMs) which is compulsory for public companies, while Section 256 provides for disclosure of financial records, and Section 477 for duties of directors to act on good faith.
While generally a robust framework, the act however lacks specific corporate guidelines for private companies which most family businesses fall under. Unlike public companies, private companies are not subject to stringent corporate governance codes, such as the Nigerian Code of Corporate Governance (NCCG), which applies to listed public companies. The absence of detailed governance codes for private companies often leads to inconsistent practices in areas such as board composition and also allows room for “sharp practices” without the regulatory oversight.
CAMA 2020 also invariably aids the limited scrutiny and accountability of these businesses as it states that AGMS are not compulsory for private companies. AGMs usually feature the production of financial records, ensuring they are kept, traced, and in good condition. The eventual effect of this non-compulsion of private companies to hold AGMs, is a lack of review of the company’s financials, thereby permitting these businesses to be funded through personal accounts. This is an unsustainable model which can run out in the third generation, thereby bringing us back to the third-generation dilemma.
It is submitted that for policy consistency and improved corporate governance, that there be a mandatory corporate governance code for private companies or an extension of the existing Nigerian Code of Corporate Governance (NCCG) to cover medium and large private companies. The code would provide a comprehensive framework for transparency, accountability, and responsibility. This could include provisions on board composition (e.g., introducing a certain percentage of independent directors), regular board evaluations, and clear separation of management and ownership.
Conclusion: Built to last and Rooted in Longevity.
In consideration of Nigeria’s relatively young economic sovereignty, it suffices to note that some of the challenges plaguing these family businesses have long been institutional. Inadequate access to capital, erratic power supply, policy inconsistency, national security challenges and limited government incentives for Micro, Small and Medium enterprises (MSMEs) make it considerably difficult to build any thriving trans-generational business.
Furthermore, it is essential for Nigerian family businesses to explore other avenues for business growth including Joint venture agreements and a potential family merger where two family businesses merges through joint holding and intermarriage of family businesses. A good family merger model is the Porsche and Pieche family merger, although it must be mentioned that both families share a common ancestor, Ferdinand Porsche. There is some hope as buoyant Nigerian companies with Founder/CEOs are adopting the family business models by enhancing tailored professional experiences for their offspring/heirs and ensuring a wide variety of inhouse departmental rotations before ceding decision making leverage. The future is bright for family businesses in Nigeria as a mode of economic equality and wealth transfer, while also acting as a platform, providing employment opportunities. With the right policy catalysts, family businesses in Nigeria would help grow the economy and strengthen Nigeria’s outlook as an attractive regional investment hub.
