Answers To Questions on Private Company Governance
These answers to questions on private company governance are from a keynote delivered at a software industry user group in September 2019.
Let’s start with the basics. What exactly is corporate governance?
Corporate governance is the oversight approach organizations use to ensure management runs the business successfully. There are three elements of corporate governance: risk, strategy and the performance of the CEO. Typically the Board of Directors is responsible for providing corporate governance of an organization.
Why have corporate governance for a private business – what are the advantages?
By eliminating risk and implementing strategies for achieving their mission successfully, private companies enjoy the same benefits of corporate governance as public companies and other organizations: sustainable business success.
Is a private company ever too small for a Board of Directors and corporate governance?
Are some firms too small for a formal Board of Directors? Sure. A two-person firm doesn’t need a Board but if the owners take time to identify risks and plan out strategy then they are still executing corporate governance.
Is there a growing trend for private businesses to have corporate governance, and if so why is that?
Yes. The majority of private businesses in North America already have a Board of Directors. What’s changing is the role of the Board. Many private business Boards are focused on business advice (operations vs governance) and ownership decisions (share holdings, dividends, etc). However, especially as owners age, there is growing recognition that well-governed organizations are worth more.
What are the key roles/functions that make a Board of Directors effective in a private business?
Private businesses aren’t any different from other organizations when it comes to effective governance. Objectivity is vital – so having Directors from outside the business is key. Having a Board Chair who understands corporate governance and keeps the Board focused on governance (not just owner and operating issues) is also vital.
What are some best practices for private company Corporate Governance?
Getting clear on the role of the Board is first. There’s a big difference between an advisory Board and a corporate governance Board. Defining that is important as it will impact the Board’s composition and how it operates. Another critical best practice on a Governance Board is defining how the Board will work with the CEO. Separating the Board and CEO function is a governance best practice. The CEO reports to the Board and the Board is responsible for setting and monitoring how the CEO performs.
If a private company owner wants to adopt/incorporate a Board of Directors into his/her operations, how does one begin? Where does one finds directors? Who should they be?
Begin by defining why you want a Board of Directors. Many private companies simply want experienced business advice. It’s possible to get all sorts of good advice without the hassle of setting up a Board. The skills and expertise of the Directors on a governance Board should reflect the risks the organization is facing and the strategies it is/will be executing to achieve its mission. The range of expertise on a governance Board can range from corporate governance through technology, marketing, finance, etc. Defining the right Director competencies is generally tougher than finding them.
Is there a roadmap for introducing a Board of Directors into a private company?
Yes. 1) Define the Board’s role (governance vs advisory). 2) Define the Director competencies required. 3) Establish the operating processes – how many times will the Board meet? How will decisions be made? Who will lead the Board? How long will Directors serve? Etc. 4) Recruit/appoint the Board Chair 5) Recruit/appoint the Directors 6) Meet and learn.
Should the owner be the Board Chair? Or is it best to find an outside Chair?
The enemy of good governance is lack of objectivity. Typically, private company owners aren’t objective. Most are also reluctant to give up much control of their enterprise – especially to a bunch of outsiders. The way around that is to keep going back to the role of a governance Board 1) to identify and agree on strategies for mitigating risk – owners can buy off on that 2) agree on strategies for executing the mission better – owners can buy off on that 3) to make sure the CEO/organization is executing as promised – owners can buy off on that too. A governance Board is not about control – it’s about ensuring a strong, sustainable business. That’s something every private company owner wants.
What are the biggest pitfalls to be on the lookout for and avoid?
Corporate governance fails all the time. It’s most obvious in public companies because their stories are public (think Enron, Volkswagen, Wells-Fargo, Tesla). The biggest pitfalls to avoid are 1) making the CEO the Board Chair – it’s impossible to hold the CEO accountable when they run the Board (governance) and the business (operations) 2) focusing too heavily on finance and legal risks and not enough on external market and operating risks – finance and legal risks tend to follow the other two; all the companies above got in trouble for failing to identify external and operating risks – then they got into financial and legal trouble 3) failing to understand the mission of the organization – typically when we ask a group of Directors what their organization’s mission is, we get almost as many answers as there are Directors – governance is impossible when every Director is on a different page
What are the biggest struggles for private business owners with a Board of Directors?
Fear of loss of control and the belief that no one else understands the business as well as the owner does.
How does one overcome them?
Getting comfortable with the role of a governance Board is the key. Strong governance is in everyone’s best interest because it helps protect the business from risk and ensures there are good strategies for succeeding. It’s why public companies are required to have Boards of Directors.
Succession planning is a key role for a Board of Directors – what are the top 5 elements that should be considered for a successful exit/succession strategy?
There are several ways to exit a private business: go out of business; transfer to a relative; sell; go public. The last two in particular highlight the value of the business. Studies show that companies with good governance are worth more. Why? Because it’s good to understand the risks and know there’s a plan for succeeding. Shareholders whether public or private value the rigour that strong governance provides.
You’re giving the keynote address at the Advantage User Group Conference. What are the top 5 takeaways you want the audience to remember when they get back to their offices?
There are three elements of strong corporate governance: identify and mitigate risk; develop and oversee a strategy for executing the mission well/better; performance manage the CEO – any business that gets those three things right will succeed and be worth more
Failure to identify an external/market or internal/operating risk is the most common reason organizations fail. All organizations need to do a better job of identifying these risks. A competent Board of Directors can help.
The skills and expertise of the Directors on a governance Board should reflect the risks and strategies of the organization. For example, cyber risk is a key risk most organizations now face. More and more Boards are attracting technology and cyber risk experts to their Board.
Lack of objectivity is the greatest enemy of strong corporate governance. For a private business Board to succeed it must introduce outside Directors.
It’s natural for owners to fear loss of control. However, corporate governance executed properly protects owners and makes them stronger.