When your business belongs to everyone

The participant was a family member who was not active in the day-to-day management of the successful family business. She was what some might call business-adjacent.

My answer to that question was revealed in the Tuskys Supermarkets case study that we proceeded to spend a few hours discussing.

In 1983, a man started a retail shop in a relatively obscure town in the bowels of the Rift Valley. Utilising the ubiquitous ingredients of success — hard work, grit and perseverance — the man grew the business to the point where his sons took over after his death in 2002.

A year later, the sons began a nationwide expansion that, at its peak, had about 64 branches across Kenya and Uganda, with unconfirmed reports of an annual turnover of about Sh30 billion.

Then the family swam into the shark-infested accounting principle waters called related party transactions. Family members who were actively involved in the management of the business allegedly began to supply goods to the retail chain. Others founded businesses whose initial capital was allegedly provided by the supermarket chain but were not subsequently registered as subsidiaries.

In a well-governed business, a family member supplying to the organisation would be reported as a related party transaction, while funds used to invest in another company would either be reported as a loan to a related party or an investment into a wholly or majority-owned subsidiary.

It all went pear-shaped when some business-adjacent members confronted some business-active members about all the ongoing shenanigans.

Following fisticuffs, shouting matches and all manner of disorder highlighted in public, an independent non-family member was brought in to lead the retail chain as chief executive officer.

It didn’t end well. In February 2016, third-generation family members, with a national broadcaster television crew in tow, stormed into the CEO’s office and threw him out. They followed him to his car, taunting and jeering him like a trapped leopard that has eaten all the villagers’ chickens.

But publicly humiliating the CEO was like trying to fill a pothole with salt in the rainy season — a complete exercise in futility.

Twenty-four hours into the sordid event was the point that this next generation of business-adjacent family members were slapped into the reality that Tuskys Supermarket neither belonged to them nor was it ever supposed to be managed for their exclusive benefit.

The chairman of the board, formerly an active member of management until the shenanigans began, called the same television station and issued a statement that the CEO was very much in office.

One has to ask: what changed overnight? The real owners of the business — the banks — allegedly made a few calls to the business-active members of the family. The question asked was just one: “Are you guys out of your minds?” Promptly followed by a few doses of truth paracetamol along the lines of: “We’re about to call in our loans if you don’t get your act together!”

What followed thereafter was a slow puncture. The CEO returned, but the family fissures in the background kept widening. A few months later, one side of the family ensured that the police charged two family member directors in criminal court with accusations of criminal fraud.

By 2020, creditors of the business sought relief in court for their debts, and the retail chain subsequently went into receivership with over Sh20 billion in liabilities compared with only about Sh6 billion in assets.

How does this relate to the participant’s question above? The minute your business starts to employ individuals, starts to borrow to finance its operations, starts to rent premises, starts to procure goods and services from suppliers — all in the name of generating taxable revenues — it no longer belongs to you exclusively.

It belongs to a whole slew of stakeholders who may not necessarily appear on the shareholders list at the Companies Registry, including banks, employees, suppliers, and the ultimate owner: the Kenya Revenue Authority.

And this is how I answered the question to the participant: It is imperative for the business-active family members to impress upon the business-adjacent family members that a business is managed for value. That value is not exclusively shareholder value; rather, it is for a wider stakeholder universe of which family is but a very small part.

Your business must be managed for the benefit of all of these stakeholders. And this is both a moral and legal obligation.

The writer is a corporate governance specialist and a former banker.