Corporate Governance For Private Business – Two Best Practices (Updated)
Start with why – if you’re thinking about introducing a private company board, define its role first.
There are three reasons that private businesses have Boards:
make owner decisions
How to think about each.
There are many ways to get advice that don’t require having a Board. Advisory Boards are not accountable for oversight governance.
Oversight pays off because it brings accountability to the business. Oversight Boards are best for providing effective corporate governance. Implementing effective oversight puts a premium on Director independence and Board leadership.
Making owner decisions is the most common reason private businesses have Boards. Generally, these Boards only provide limited governance oversight.
2. To make your Board more effective, look outside your private business for independent Directors
Outside Directors aren’t constrained by their dependence on the business. So, it’s frequently easier for them to spot risks and identify opportunities that the business is facing. Including outside Directors in a private business requires some adjustment. However, the benefits – including long term sustainability of the business – can be significant.
Blog on Private Business Governance (Updated from 2013)
Note: this blog was originally written in 2013 and exists in its entirety below. However, we have added the following key points to ensure the blog remains current, accurate and helpful.We are seeing more interest than ever in private company governance.
There is significant interest in private business corporate 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. Simplify the Governance Board’s role.
Corporate governance isn’t effective when it’s complicated. Most owners and Directors don’t have the time or bandwidth to execute something that’s not clear. We define a governance Board’s role this way. It is very simple and effective.
Role of the Board of Directors
to identify and mitigate risk
to validate and oversee execution of corporate strategy
to hire and performance manage 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. Align Board processes with the Governance role.
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 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 support private business owners through our governance and strategy consulting practice. More information here.
Are you interested in understanding the effectiveness of your private company Board?
Using surveys, interviews and audits, we assess how well Boards are fulfilling their governance role and identify opportunities to improve Board structure, composition, nominating, leadership, operating processes, information and dynamics. You can find more information on the Boardroom Metrics governance assessment here, or get in touch by writing [email protected] / calling 416-994-6552.
This is the original blog written in 2013:
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 not-for-profit organizations. It speaks to the rules, processes, or by-laws by which these organizations are planned, managed and monitored. A well-defined and accountable corporate governance structure benefits all of a company’s stakeholders by ensuring the business is sustainable in three ways: by identifying and mitigating risks; by developing strategies and implementing strategies for achieving the mission better; and, by performance-managing the CEO who is responsible for carrying out the strategic plan approved by the Board.
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 planning from operations 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. Accounting and Controls
Financial controls 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 shares their capabilities in either the strategic or the operating areas of their business.
This tension between owner and operator is a well documented drag on what’s best for both. Objectivity depends on independence and when an owner/operator isn’t objective, then the well-being of the business can be at risk.
The second is lack of an exit strategy. We know many owners who don’t have a plan for 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, the future is less certain for those without this option. Many find themselves rapidly approaching a point of no return – having built a business that fundamentally relies on them without a plan for turning it over to someone else and monetizing their investment. Without a plan, some end up settling for the cash flow option – riding out the cash flow their business generates until they can no longer continue to operate it.
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 independence and objectivity goes beyond exit strategy. It’s ensuring that current ownership ‘get their heads up’ to ensure a long term, valuable and sustainable enterprise – which is exactly the role of strong governance in every enterprise including public, private and even not-for-profit.
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Use this evaluation to objectively measure CEO performance versus the goals and expectations of the Board.
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Jim Crocker is the founder and Chair of Boardroom Metrics. He is an experienced Director, CEO and Consultant to public, private and not-for-profit organizations. Jim facilitates and works with Boards, CEO’s and Leadership teams on governance effectiveness.