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Founderitis Syndrome

According to Wikipedia, Founder’s Syndrome (also founderitis) is the difficulty faced by organizations, and in particular young companies such as start-ups, where one or more founders maintain disproportionate power and influence following the effective initial establishment of the organization, leading to a wide range of problems.

In this region, we have hundreds of thousands of businesses that have been started by individuals who then go on to include spouses and grown children into the organizations. But the challenge is often a successful transition of business to the second generation, particularly where the founder doesn’t believe that the entity can succeed without their presence and institutional knowledge. There are many businesses that are buried in the cemetery of dead ventures that failed to implement basic governance structures that would ensure sustainability beyond the founder’s death or incapacitation. A quick and dirty route that is often used is to give shareholding to the spouse and children so that ownership in the business is established, but the structures for ensuring continuity such as job descriptions for role holders in the business as well as reporting structures are not put in place. In some cases, having spouses and multiple children in the business can lead to fudged reporting lines for employees with demands and counter-demands ordered that lead to angst and loyalty “fault lines” emerging as some employees interpret the pecking order of the children differently.

A founder, who envisages a legacy beyond just founderitis, can set a clean path to an organization that outlives them. Giving family members job titles, with clear job descriptions and reporting lines would be a good start, accompanied by an organogram that allows internal stakeholders to know on what side their performance bread is buttered on. Setting up an “executive committee” (Exco) of management members, who report to the founder CEO, allows for a corporatized environment if meeting times are set in a calendar with a standard agenda for operational performance reporting duly designed and followed. The Exco meetings should take place in the business premises and not at family dinners to clearly demarcate the informal home environment from the more professional organizational environment and also avoids the tag of a “kitchen cabinet” emerging from other senior non-family employees. The founder should then set up a board of directors which may or may not include family members, bringing in critical external insights on how the business is performing within the general economic environment as well as establishing controls and a solid risk assessment over the business.

If the business reporting at Exco level is robust, then information flowing up to the statutory board of directors should be easier to replicate and getting experienced directors who have exposure to other boards would be an excellent way to professionalize how the board processes are structured. A key risk that many family business owners are constantly wary of is exposing their institutional secrets to outsiders who may reveal the information or, in the worst case, set up competing businesses.

A way to mitigate against this risk is to ensure careful selection of external directors who do have a track record of sitting on other boards or who are not known to be serial entrepreneurs that jump at the opportunity of starting a new business time and again. Inserting a non-compete clause in the board appointment letter as well as non-disclosure confidentiality clause could also ensure that board appointees understand their duty of loyalty to the company. While the founder may chair the board, it would be prudent if an independent chairperson is groomed to take over to ensure that the board sets its own agenda rather than that solely of the founder, particularly in the area of oversight and risk management. A good board process should also be continuity of the board itself and here the role of a nominations committee would be useful in setting board director terms, recruitment and succession planning for independent directors.

In setting up a board made up largely of independent directors, the founder ensures that the longevity of the organization is maintained as good directors should ensure that the business has the right caliber of employees who can run the venture professionally as support to existing family members as well as ensure that succession planning for critical roles is put in place. Good directors will also ensure the establishment of a credible external audit process, and a viable internal audit resource if the size of the business permits so that control of the business is maintained and identified operational risks are continually mitigated. As treasonous as it may be to imagine the death of a founder, in light of all the big retail businesses that we have seen collapse in the Kenyan boulevard of broken dreams lately, it might be useful to start having these discussions at the next family lunch.

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Twitter: @carolmusyoka

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When is it time to corporatize your family business

At one of my recent corporate governance classes, a participant wondered out loud why large retailers that were family owned were not regulated by the government. His question arose after we had undertaken a case study on what is now becoming an unfortunately familiar situation of mammoth retailers collapsing with significant supplier payments outstanding. The knock on effect of such a collapse is always fraught with dire economic effects on the supply chain of both processed and unprocessed goods, the manufacturers and growers of the same, their cash flows and overall financial stability thereafter especially where such a mammoth retailer has turnover in the billions of Kenya shillings.

Truth is, you can’t expect the government to register your company, give you the license to operate a business and then regulate the management of the millions of companies and sole proprietorships that fuel Kenya’s economy. It would require hundreds of thousands of civil servants to do that. Where the government does step in is when a business decides to seek capital from the public in the form of equity or debt, at which point approval of such an issue will be required from the Capital Markets Authority whose role is to ensure that the public is well informed about the issuer not only at the point of issuing the equity or debt instrument, but for the years following such issue by requiring publication of the financials of the issuer and tracking of their financial performance.

A recent report issued by the Retail Trade Association of Kenya (RETRAK), titled Kenya Retail Industry Outlook Survey 2020, was quite illuminating. RETRAK boasts of a membership of up to 600 businesses made up of supermarkets, restaurants and specialty stores such as mobile phone shops, clothes and furniture shops amongst others. The report provides the outcomes of a survey undertaken by members in June 2020 where 28% of the respondents said that the greatest barrier to trade was weak corporate governance structures especially in family owned businesses.

You know the drill: an entrepreneur starts a business with one branch, the business grows based on customer popularity, more branches are opened and family members are recruited (or forced) into the business primarily out of trust rather than professional qualifications and before you can say Bob’s your uncle, the business has multiple branches and the family owners are stretched to capacity and, in some cases, to their level of incompetence. Spouses and adult children are now running an enterprise with hundreds of employees, multiple suppliers, complex supply chains and even more complex financing structures. More often than not, the founder is unwilling to bring in outside professionals to run the business as that would entail letting out “family secrets”. The result is that family tensions spill over into the business and the rest is history.

A good start would be to design job descriptions for the various roles in the business. From the chief executive officer, chief finance officer, supply chain manager etc, which would then help the founder and the role holder to have clarity on what their specific functions are and, perhaps, allow them to see where there are individual skills gaps that need to be addressed. Doing this in tandem with a well designed organization chart allows role holders to see their reporting structure which helps avoid tensions that accrue when one family member feels undermined where decisions are made without their input. Setting up regular business meetings outside of the family’s dining table and in a more formal office set up, with an agenda and a performance dashboard on the various work functions is also a good way to infuse some professionalism into the business as well as awareness and accountability on what the various role holders are doing.

And for the love of God and country, it would be advisable to avoid the jua kali route of writing the job description yourself and bringing in a human resource professional (of which there are several available) to do this task as it allows independence and the right amount of challenge in ensuring the job description is one that is benchmarked with what is out in the market. While this is not a panacea to weak governance it is a good start to helping the business prepare for the professionalization of key organizational roles critical to the organization as it begins to scale and make an impact on the wider (and often unsuspecting) economy.

[email protected]
Twitter: @carolmusyoka