Two Best Corporate Governance Practices – Updated
Note: this blog was originally written in 2013 and exists in it’s entirety below. However, we have added the following key points to ensure the blog remains current, accurate and helpful.
1 – We are seeing more interest than ever in private company governance. From talking to owners, we are hearing these reasons for their interest:
- Desire to build a valuable business and increasing recognition that strong governance practices help mitigate risk, improve strategy and aid in the recruiting and retention of strong leaders.
- Increasing desire by some owners (age related) to ‘step back’ from the business and recognition that strong governance processes can make it easier, less stressful, less risky to share leadership with others including outsiders.
- Increasing desire to broaden their exit and legacy options and recognition that a strong Board and a well governed business are more attractive to outside purchasers and other investors.
2 – Corporate governance is not effective when it’s complicated. Most Directors do not have the time or bandwidth to execute something that they don’t understand. Two years ago, we began defining a Board’s role this way. It has been very well received. Role of the Board:
- To protect stakeholders
- To drive corporate strategy.
- To ensure the organization is well lead by the CEO.
We suggest that any time a Board spends outside these three areas are unnecessary and likely takes them away from doing their job.
3 – Consistent with this simpler definition of the Board’s role, we have redefined the key elements (from the original blog post below) of strong corporate governance as:
- Board composition: people with the skills and expertise to fulfill the Board’s role (risk, strategy, leadership) in their particular organization
- Information the Board receives: to assess risk, strategy and leadership
- Board leadership: Board Chair and Committee Chairs who can effectively lead the Board
- Board processes: that the Board uses including Board meetings, decision making and follow-up to fulfill their role
- Board dynamics: how well the Board works together even when they disagree on risk, strategy and leadership
4 – The two best governance practices we recommended remain unchanged from the original blog post:
- Director Independence – Strong governance relies on a Director’s ability to provide input without concern for their own situation. Any Director who by way of ownership, compensation, personal or business relationships is potentially affected by the outcome of a governance decision is, in fact less independent as a Director of the organization.
- Definition of an exit strategy – The majority of private businesses are lifestyle businesses. Their owners generally enjoy what they do and the business provides an income that meets their lifestyle needs. As a result, many owners do not consider exiting their business until a sudden event (health, family situation) changes their perspective. At that point, exiting the business can become very frustrating. The elements that contribute to a successful exit must be built into a business years before an exit takes place. It’s why defining the exit strategy early is so important.
5 – Finally, we have significantly enhanced our support of private company governance practices. If you would like to learn more about private company governance let us know.
Original Blog Post
Understanding what the best corporate governance practices are for their private business isn’t a question we get from many private company owners.
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.
Are you the CEO of a private company? Which of the seven corporate governance practices would best help your company right now? Please let us know your thoughts in the comments box below.