Generally we see that private business owners are more concerned with the day to day operations of their companies. In cases where they have thought about it, many private business owners don’t see how corporate governance best practices apply to their business. Those that have thought about it frequently seem to see a conflict between corporate governance practices and how they want to operate their private business.
What is Corporate Governance?
Corporate governance is typically associated with public companies and speaks to the rules, processes, or laws by which these companies are managed, monitored, and controlled. A well-defined and enforced corporate governance structure benefits all of a company’s stakeholders by ensuring that management adheres to accepted ethical standards and best practices.
The reason corporate governance is most often associated with public companies is that the protection of the company’s shareholders is viewed as fundamentally key in public company operations. However, corporate governance practices can also be very helpful in providing guidance to private company CEOs (Click here to download our CEO Evaluation Form for a handy checklist of things you should be focused on as the owner/operator of a private business).
What are the Basic Elements of Corporate Governance?
There are seven basic elements of corporate governance best practices.
1. Independence of directors
Independent judgement ensures that multiple perspectives are considered with respect to corporate direction, management and monitoring.
2. Separation of strategic planner role from operator role
Running a business and planning its long term success are two separate activities. Each requires sufficient time and different skills sets. Ensuring that long term planning isn’t overshadowed and sidetracked by day to day firefighting is fundamental to long term success.
3. An exit strategy for shareholders
Monetizing their investment is a key goal of any shareholder. Being able to do so in an orderly and beneficial fashion is a fundamental goal of corporate governance policy.
4. Reliable systems and procedures
Reliable processes ensure smooth, on-going day-to-day operations of the business and ensure that in the case of a sale, the company can be operated by new owners.
5. Credible accounts
Credible accounts protect the company from undue risk and instill confidence in lenders.
6. Key performance indicators
Monitoring and measuring company performance versus its goals and plans ensures that actions can be taken to keep the company on its desired path.
7. Remuneration and HR policies
Transparency in matters such as remuneration, incentives, discipline and dismissal are essential for attracting good employees.
How Private Business Owners Struggle with Corporate Governance
In our experience, private companies struggle with two fundamental elements of corporate governance.
The first is independence. Many of the private business owners that we work with have trouble separating their roles as owners from their roles as operators. In many cases, they started the business and are responsible for its success. They see themselves as having both the strategic foresight to identify the opportunity(ies) that lead to their success and the operating smarts to get there. In many cases, they doubt that anyone else could possibly have their capabilities in either the strategic or the operating areas of their business. Further complicating matters, many can’t see what they would do if they weren’t ‘going to work’ every day in (not on) their business.
This inability to simply be the owner and/or heed the advice of others is a well-documented drag on the success of many private businesses.
The second is lack of an exit strategy. Few of the owners we know have given much, if any thought to what will happen to their business as they age. Some are lucky to have competent children who are interested in learning and carrying on with the business. Transition and exit are somewhat clearer and simpler for these lucky owners.
However, that is not the case for the majority of the owners we know. Instead, they find themselves rapidly approaching a point of no return – having built a business that fundamentally relies on them with little or no thought on what it will take to monetize their years of fiscal and physical investment. Without any planning on building a business that can be sold or interest in finding a buyer, it seems that many of these owners will end up settling for simply riding their successful businesses into the ground over the next five to ten years.
Our Recommendation – The Two Best Corporate Governance Practices for Private Business to Focus on.
Each of the above corporate governance best practices is good for private companies, just as they are for public companies. However, the two we would most like to see private company owners think much more seriously about are:
- Finding some independent directors to help them with the long term direction of their businesses, and
- Developing solid exit strategies.
In fact, without outside help, we see that many private businesses will fail to make successful transitions beyond current ownership. However, the need for outside perspective is bigger than just exiting the business. It’s ensuring that current owner/operators get their heads up to see the business they are in not just from their perspective of their ‘baby’ and their work, but from the perspective of ensuring a long term, valuable and sustainable enterprise.