Family business bubbles

. . . the costly phenomenon ravaging Africa’s economies

Alois Matongo
Business bubbles (the rapid rise and sudden fall in values of business assets) have been a constant thorn in the necks of the capitalist economies since the advent of the secondary markets such as stock markets and other derivatives markets.

The latest economic bubbles to hit Western economies and indeed the whole world, to a greater or lesser extent, are those commonly referred to as the dotcom bubbles of the late 1990s.

These were quickly followed by dramatic falls of two of America’s celebrated corporate giants Enron Corporation and WorldCom in bubbles that burst in November 2001 and July 2002 respectively.

Between 2006 and 2009 the destructive rage of business bubbles went viral with the outbreak of sub-prime bubbles in the home ownership industry of the US that quickly grew into what came to be called the Global Financial Crisis.

Some analysts went on to term that crisis the Great Recession as the scale of economic devastation it caused almost reached that of the Great Depression of 1929-1932.

The biggest lesson learnt from these business bubbles is that large publicly traded companies are not always the panacea for economic success of nations and their citizens.

The Enron scandal, publicised in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American giant energy company based in Houston, Texas. The scandal also led to the de facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world.

In addition to being the largest bankruptcy reorganisation in American history at that time, Enron was cited as the biggest audit failure in the history of corporate affairs.

In mid-2000 Enron’s share on the New York Stock Exchange had achieved a high price of US$90,75 per share that plummeted to less than US$1 per share by November 2001 with the revelation that the company had been using accounting loopholes, special purpose entities, and poor financial reporting to hide billions of dollars in debt from failed deals and projects.

Enron’s Chief Financial Officer Andrew Fastow and other executives not only misled Enron’s Board of Directors and its Audit Committee on high-risk accounting practices, but also pressured Arthur Andersen Auditors to ignore the issues. These executives created off-balance-sheet vehicles, complex financing structures and deals so bewildering that few people could understand them.

Many ordinary citizens including pensioners who had just received their lifelong pension savings payouts had poured everything into Enron shares only to lose everything when the US$64 billion giant fell to bankruptcy. WorldCom, at US$107 billion worth of assets and an accumulated debt of US$41 billion, was soon to follow Enron to the bankruptcy gallows in July 2002 becoming the largest corporate ever in the history of the USA to face that fate. WorldCom had been plagued by the rapid erosion of its profits and an accounting scandal that created billions in illusory earnings,

The greatest lesson learnt from these bubble-related scandals by the Americans, the Europeans and, indeed, countries from all other continents with the apparent exception of Africa, is that the family business provides a simple answer.

In publicly listed companies, the full-time executives are in charge of company assets that don’t belong to them but to shareholders who are very far and removed from them (i.e. a principal-agent relationship).

The temptation to enrich themselves from company assets is, therefore, always there in the company executives especially when the companies grow too quickly in size and complexity as Enron and WorldCom did through mergers and acquisitions.

In typical family businesses, on the other hand, the ownership and management roles generally converge in largely the same people and the temptation to exploit the business is reduced as this would be tantamount to stealing from oneself. The other key advantage of family businesses is that important decisions are made more quickly in these businesses than in public companies.

Furthermore, risk taking when it comes to borrowing is more calculated and controlled in family businesses than in publicly traded companies.

So what have these First World countries done with this lesson of the destructive power of bubbles in economic matters? The first thing that they have done is to swallow their hubris about conglomerates and acknowledge that the humble family business will be the dominant business model of the 21st century.

On March 28, 2016, Josh Baron, a partner and a co-founder of Banyan Global Family Business Advisors, and author of “Great Power, Peace and American Primacy: The Origins and Future of a New International Order” delivered a conference paper entitled “Why the 21st Century Will Belong to the Family Businesses”.

In it he categorically declared that the big publicly traded companies have had their dominance in the 20th century when huge opportunities existed and scale mattered.

Now that the huge opportunities are no longer available due to cut-throat competition in these increasingly knowledge-based economies, the countries have gone back to the humble family entity where business originally started. It’s like a back-to-basics scenario as it were.

These countries have, accordingly, set up institutions, structures and policies for promoting success and sustainability or endurance of family businesses. These have included formation of family business chambers, family business schools, family business research institutes, family business faculties and departments at universities and colleges to spearhead initiatives for pursuance of excellence in running the new engines of economic development. These institutions also organise annual family business symposia for family enterprises to showcase research and innovation in their respective sectors.

Turning to Africa, one cannot help but feel pity for the lack of awareness and appreciation of the importance of the family business for the well being of its economies and citizens. Africa has a high birth rate of family businesses but unfortunately the same Africa has a very high rate of family business infant mortality.

Africans laugh when a prominent family business collapses whilst Indians, Japanese, Italians and other nationals mourn as they know that every citizen is a loser from the resultant loss in GDP, jobs, Government revenues and community convenience.

In Zimbabwe, there has been marked prejudice against the family business as a vehicle for economic development dating back to the days of the War of Liberation when family business owners were hunted down by both warring parties for perceived support or lack of it.

Zimbabwe has witnessed a high level of family business bubbles that have ravaged its economy. Bubbles have been most noticeable in the passenger transport industry where bus company giants such as Ruredzo Motors, Mangondoza Bus Services and most recently, Kukura Kurerwa Bus Services, to name but a few, enjoyed spectacular beginnings with large fleets of buses plying several road networks in the country only to spectacularly collapse before even reaching the second generation of owners.

Such bubbles have caused massive losses in economic benefits to various stakeholders including the owners, their families and their workers, the public and Treasury in lost tax revenues.

Many Africans look down upon family businesses as they prefer to see huge multinationals come into their countries to convince them that investment is taking place. What it all means is that Africa and Zimbabwe in particular are going backwards to the 20th century when other nations are marching forward into the 21st century with a bold conviction that it is the family business model that will rule the roost.

In next week’s edition, I will delve into the causes of family business bubbles in the sub-Saharan Africa and what needs to be done to reduce them and save the billions of dollars worth of assets that are being dissipated by this phenomenon.

 

Alois Matongo is the founder of Family Business Research Institute of Southern Africa (FABRISA) and the recently incorporated Family Business Science University of Southern Africa P/L (FABSUSA). He has had extensive experience in Higher Education including 10 years of lecturing and administration at Midlands State University (MSU). Contact him on [email protected] [email protected] or +263772236885.