Management Issues in the 3rd World

Editorial

This topic deals with business succession with special reference to the third world. Business, when talking about the third world includes acquired artisan skills, professions such as farming, and trade in the informal sector, which accounts for a substantial portion of a third world Countries' Gross Domestic Product (GDP).

A reference to the word "founder" also applies to current managers or owners of a family business.

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Family Businesses:
Coping With Sussesion Issues.

Contents
Introduction
Why do we have succession problems in private businesses?
  1. Failure to Make a Succession Plan
    1. Lack of Interest By Immediate Family Members
    2. A Desire to Remain Active in Old Age
    3. Nostalgia
    4. Fear of Mismangement and Failure
    5. Sycophancy
  2. Failure to Update a Succession Plan
  3. Failure to Respond to a Changing Environment
  4. Government Policy Sommersaults
  5. Conflicts, Natural Disasters & Forced Relocation
How can we avoid succession problems?
  1. Founders' Family or Estate
  2. Employee Perspective
  3. Creditors, Suppliers, and Customers
  4. Government/Authorities
  5. Host Community
Conclusion

Introduction

Most, if not nearly all the big businesses of today started as small businesses, following a modest idea, started by a person, or some people in partnership/joint venture. For many, they were family concerns that went through several generations.
To have become a big corporation or multinational, they must have gone through several transformations during which might have witnessed an Initial Public Offering (IPO), Mergers and acquisitions, restructurings etc.

One inevitable stage for those which have existed beyond a generation is the succession stage. The founders would have grown old or retired and have passed on management to another generation.

For those which have become publicly owned (that is quoted on the bourses or stock exchanges of the country in which they do business), this may not be a serious problem. However, small and family businesses units account for a substantial proportion of business activities globally, and in the world's largest economy. Business succession therefore could be a big issue.

When family is mentioned in a third world country like Nigeria, the term has a wider meaning.
The nuclear family, which in itself may involve many siblings in a polygamous setting, which is still accepted under “ native law and customs”.
You can then imagine the extended family in such settings and then the relations (a massive web of cousins, uncles and aunties, nephews and nieces, in laws and “grand uncles” etc).
Brother (or sister), in a typical African setting, may include people from the same, or nearby compound in the same village.

For many in this type of setting therefore, when a business grows and expands beyond what can be managed by an individual, the first consideration goes to these “family” members, who may be a source of loyal, trustworthy and reliable manpower, a very important consideration in Nigerian business today, as their family references seem impeccable.
You have a large pool of people whose interest in a business goes beyond that of their current source of livelihood, while the employer does not see them as just current employees.

If that should that be the case, a business in the third world should have little or no problems as far as human resources is concerned. This, in reality however, may not hold for these reasons:-


The extended family becomes unwieldy, with polarization of loyalty among different groups.
Even if there was a will, such may become the subject of a bitter legal contest.
“Family Members” usually meddle in matters that should ordinarily be handled by the founder/owner.

Many other entrepreneurs as a result of the problems outlined earlier go the other extreme and disregard the prestige associated with their success among village and extended family members and would never involve them.
Typically they take every decision and fail to delegate functions in an effort to secure and safeguard the business assets from fraud by employees of unknown pedigree.

In this case also, succession becomes a problem, as an extensive reorganization will have to take place after the demise to ensure proper delegation of managerial functions and internal control in the activities of the business practically managed by only one person.

Nigeria's rural landscape is dotted by massive complexes of abandoned factories.
The premises are very easy to recognize as unkempt and overgrown giant weeds with abandoned and rusty vehicles occupying the parking spaces.
These cannot go unnoticed in a third world environment, where viable employment and production capabilities are in short supply.

Where the children are able to agree, the business is stripped to pieces and sold off, leaving only the carcasses in the premises that once accommodated the thriving enterprise. The situation is worsened when the late founder fails to leave a will, or in a polygamous Nigerian setting, even a will is contested, and the litigation process goes on for a long time.

While some other causes may be disputes among partners, and an expectation of a court decision, the overwhelming cause is death or a tragedy in the ownership of the business.

Why do we have succession problems in private businesses?
  1. Failure of a founding entrepreneur to make a plan. This in turn may be for the following reasons:-

    1. A lack of interest by immediate family members.
      1. For businesses which have their operating bases in a third world rural setting, a desire to work and live in the city by the founder’s offspring may be overwhelming. This is more so as development efforts rarely trickle down to those areas, where ordinary rural folk always seek to migrate to the urban centers in search of a better life.

      2. Some small businesses might have sustained rural families in a third world environment, but not their more educated and sophisticated offspring.

      3. For all, the attitude of the founder goes a long way in attracting the offspring.
        1. A founder who spends considerable time reminding the children how his/her hard work has brought success usually alienates them. By the time he/she now desperately needs a successor, they would have been established their own careers

          .
        2. Some others are so distant from their children and hardly know them. They demand respect from them just because they provide what they need or ask for.
    2. A desire to remain active in old age.
      It is desirable for senior citizens to engage themselves with something in old age. They then carry on their businesses where they meet customers, employees and associates on a regular basis. This keeps them active.
      However, when their health begins to fail and it becomes apparent they can no longer cope, it becomes too late to make the necessary changes.

    3. Nostalgic feelings
      Some have grown to cherish some habits acquired while managing a business at a much younger age. They relish the attention they attract as a local champion.
      A graphic example was a founder, who, until his early eighties, walked a cobbled pathway to his office from his house in an expansive estate twice a week. It took him about twenty minutes to walk the ten meter well landscaped route, during which he would lecture the gardener on how he should have clipped the hedges and fed the roses with compost and then demand an explanation on why some of the shrubs were late to flower.
      He would then get into the office to be briefed on the correspondences by the secretary/personal assistant who would receive a five minute lecture or admonition for every lapse observed. He would then call for the financial statements and query every item of income and approve every item proposed for expenditure, with lectures and stories on why incomes must increase and expenditures reduce.
      He would then attend to appointments by those who would like to make business proposals.
      A five minute presentation may attract an hour long response, which would include stories on life experiences, lectures, and admonitions on virtues of diligence in business.
      It is very obvious that this founder would find it very difficult to adapt to life without being the chief executive.

    4. Fear of Mismanagement and Failure.
      Many founding entrepreneurs find it very difficult to believe that someone else can manage the business they found better. The technical details aside, they are not able to verify their managers’ honesty and integrity.
      They then carry on the management themselves to prevent someone else destroying their labor and investment of many years.

    5. Deception of an interest group (Sycophancy)
      There would be employees, creditors, and customers who would benefit from the declining mental alertness of the founder. They pump up the founder’s ego and encourage him/her to carry on the business by drumming up fears and anxiety over handing over to someone else, who in the course of restructuring, might end their fraud.

  2. Failure to update a succession plan
    A visionary founder might have envisaged a succession problem and might have come up with a plan quite early enough.
    By the time the issue comes up, circumstances and reality of a current situation might render such plan unworkable. An alternative may be hastily worked out, which may eventually fail, thus making the failure of the business inevitable.

  3. Failure to respond to a changing environment.
    Many of the older generation may not be able to cope with today’s breathtaking changes. The effect of the computer revolution and the internet are rendering the way businesses were conducted in their active years obsolete. Keeping abreast of these changes even by younger managers require a lot of hard work.
    Competing therefore with businesses managed by younger executives may become difficult, thereby taking its toll on the fortunes of the company. By the time the succession issue comes up, the effort needed to bring up the business may be so enormous that closing down may be the best option.

  4. Government Policy Somersaults
    It is not unusual for third world governments to change a policy which had made a line of industry very profitable. Examples are protective tariffs.
    Governments usually change such policies under pressure from foreign trade partners in the name of “bilateral or trade agreements”, often in exchange for some favors

  5. Conflicts, Natural Disasters and forced relocation
    Displaced people or refugees experience disruption in their businesses or occupations. The challenges faced in continuing the business in a new political or operating environment, without the abandoned land, customers, and possibly the supply chain, often eclipse the succession issue.

How then can we avoid succession problems?
The effects of business failure resulting from succession, goes beyond the estate of the deceased founder:

One can therefore identify at least five stakeholders in this avoidable problem from whose perspectives the question will be answered.
  1. The founder’s family or estate
  2. Family or non family employees of the business
  3. Creditors or suppliers and customers
  4. Government/Authorities
  5. The host community
  1. The founder’s family or estate. Every founder must start planning for succession the moment a business takes off, just the same way a Will or testament should be written the moment a person acquires assets. He/she must decide if the succession will be by immediate family members, employees or an outsider. If family, then it is never too early to start, as it requires considerable investment in time and mentoring.
    There are usually four stages in this process: the discovery, the development, the trial and the mentoring stages.
    The process must start at the children’s early life, if possible, just before adolescence.

    1. Founders must spend quality time and get familiar with the children, and their ways of thinking. This will make counseling easier.

    2. The founder must also know the friends of the offspring, the cause and reason for their friendship. If they are for the wrong reasons, such association should be discouraged.
    3. Founders must observe and check any tendency towards extravagance or wasteful spending very early in an offspring’s life and must encourage resourcefulness.
      This may have serious implications in an ability to manage business growth in the future.

    4. Founders’ children, who would be expected to be successors in a business, must understand what the parents do to earn income at a very young age. Who knows? An early interest in the business and a passing knowledge of some of the processes may influence the decision of the course of study in a tertiary institution or higer education.
    5. The founder should occasionally seek suggestions on some interesting matters relating to the business among the children. Those inclined towards the business would be discovered quite early.

    6. They must not grudge or persecute those who do not show any interest in the business.
    7. This development stage will only be completed when the offspring gets an opportunity to see the internal workings of the parents’ company when on, say a vacation job.
      The offspring should only spend some years in another firm if that other firm is much bigger and more profitable, otherwise the offspring should commence the trial stage at the parent’s business.

      The founder must make guarded allowances from time to time for some business decisions the offspring would like to make even if they seem rather adventurous.
      Time and patience is needed for the offspring to learn some lessons if such decisions turn out to be mistakes. However, if the mistakes persist, without any remorse, then the founder may have to start grooming another successor.
      When one is found, the founder may gradually disengage from the business while offering as much support as possible to the successor.
      1. If more than one offspring show interest, then the parent founder must explore the possibility of carving out more associated companies from the existing one,where the other sibling(s) may operate independently. The structure must be such that failure of one will not necessarily bring down the others.

      2. If no offspring shows interest, or if the company is a professional firm to which none of the offspring belongs, the founder has a number of options. Part of the founder’s interest can be sold for cash which is invested immediately, and the rest left in the business as a source of regular income or as a fixed income debenture,
        If the business meets the conditions, it may altogether go for an Initial Public Offering (IPO) after it becomes publicly owned, and the founder’s interest in the company can now be traded on the Stock Exchange.
  2. Employee’s perspective
    As a stakeholder in a family business, an employee should endeavor to have a disengagement clause included in a contract of employment which should guarantee adequate compensation when a succession issue abruptly ends the business. In practical terms, this may be an insurance policy where the premium is added to the employee’s compensation.
    This should apply whether or not the employee is a member of the family.

  3. Creditors, suppliers and customers.
    Proper documentation should be made for all business transacted with a family business. An evidence of supply, for example and receipt of goods and payments must be indisputable. Such must carry the family business’ logo and duly signed by the appropriate staff/employee.
    This is of particular importance in a third world economy where a very large proportion of the gross domestic product is transacted in the informal sector of the economy.
  4. Government/Authorities
    We may then wonder why such succession problems are not as widespread in publicly quoted companies.

    1. The laws give a mandatory retirement age for executive and non executive Board members unlike what happens in a private company.
    2. Investors are always trading their shareholding. The election and replacement of new and retiring Directors is not held up by the absence of a major shareholder at an Annual General Meeting (AGM).
    3. The financial reports are always made public by law and everyone can have a quick estimate of the value of the business.
      Even when a buyer wants to pay for a private business with a succession problem, he/she may not even know who to pay.
    4. A succession problem may therefore be significantly reduced in a private company if succession plans are perpetually in place. The Government can ensure this by mandating the inclusion of a temporary succession plan in the Articles and Memorandum of Association, or included in the company’s annual returns to the Registrar of Companies.
      This plan takes effect, if the management of the company will be affected by the demise of any major officer of the company. This may be implemented by serving employees, or appointees who will report periodically to a new Government department set up for this purpose until a permanent ownership structure is implemented, probably after the execution of a will, or the issuance of a letter of administration.

      This should safeguard revenue received from employee, corporate, and value added taxes.
  5. The Host Community
    This will experience reduced economic activity with its toll on social activities such resident corporate bodies usually provide. They should therefore, even with the local business’ support, organize regular seminars and workshops on succession planning.

Conclusion.
Failure to pass down skills to succeeding generations may impede development as one gets curious as to why once flourishing ancient civilizations occupied locations within the political boundaries of many present day developing countries.
These were centers of ancient learning, craft, commerce, and even technology.
Not all were buried in natural disasters, as they now serve as tourist attractions.
The present day occupiers, in many instances rarely display such skills, and in more instances, import such, when it has to do with their living standards.

It is therefore, not out of place, to theorize that failure to have passed down such skills might have been due to succession problems.
Small family businesses may be the most convenient vehicle to transfer such skills, through succeeding generations.

A British survey suggests that 30% of business failures have to do with succession issues. The rate should be higher in developing countries. We must not discount the importance of family businesses in a third world economy, and the repercussions a failure by succession issues will cause, as the economy will suffer from this is avoidable situation.

The steps outlined in this paper may go a long way in reducing this, if implemented by the various stakeholders.


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