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Understanding The Principles Of Corporate Governance


Specializes in governance, strategy, finance, and M&A for private and family businesses. Experienced Corporate Director. Kona Advisors LLC.

Every private company has its own set of ownership issues, competitive dynamics and resource constraints to optimize. As you would expect, private companies vary widely on what they want their boards to accomplish. Setting these priorities starts with understanding the basics of governance.

What are the functions of a private board?

Public boards typically focus on management selection and compensation. In a private company, this need likely has a different slant. As companies grow, they benefit from outside advice on who runs the company and how they get paid. If you own 100% of the business, these issues are likely off the table.

That being understood, I’ve found there are three functions that are critical for private companies: (1) approving major strategies and financial objectives, (2) advising management and (3) risk management, controls and compliance. Focusing on these functions can pay huge dividends, and they are a measure of the board’s effectiveness.

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Most private company boards are advisory, not fiduciary boards, and for a good reason. Owners want advice regarding these three functions, but they don’t want to give up control to outsiders. While agendas vary, each meeting should include elements of these functions.

How does a private board operate?

• Board size: While public companies often have tens of directors, I’ve found private companies usually do best with five to seven people in the room.

• Independence: A primary duty of a public board is to hold management accountable, so there needs to be clear independence. For private companies, good advice is needed, which is somewhat different from accountability, but the outside directors need enough independence to maintain clear judgment.

• Committee work: Most private company boards do not have separate committees, although larger ones do. Managing audits and compensation require experience beyond general management.

• Leadership: Public companies may wrestle with whether the CEO should be chairman or if the duties need to be split. Private companies typically don’t have this problem.

• Board compensation: This is always a delicate subject, but it is not without ample data to consider.

Boards should prioritize substance over form.

Board work is intended to solve long-term issues, which is best done through active discussion. Boards should minimize listening to reports and non-productive group activities. The best advice I received was to identify just a handful of critical questions for the board to consider while looking forward three to five years.

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It is the responsibility of ownership to identify and prioritize these critical questions. It starts simply by asking, “What keeps you awake at night?” For family businesses, it may go deeper into the family dynamics that constrain high-priority business issues. If owners are unable to distill these questions alone, then facilitation may be beneficial. Sometimes talking to an unbiased outsider helps to both challenge and validate thoughts and conclusions.

Focus on the specific needs of the organization.

I find the 1997 Statement on Corporate Governance from the Business Roundtable to be highly applicable to private companies in that it informs owners on the basics of governance. The statement mentions that “Good corporate governance is not a ‘one size fits all’ proposition.”

I’ve seen this issue stump newer boards. No two boards are alike, nor should they be. Like a bespoke suit, a board is designed and made for only one client. When designing a board, each seat should serve a specific need: marketing, finance, HR, M&A, etc. “Don’t buy what you can rent” is the best mindset when selecting directors. For example, technology changes quickly, but directors don’t. You can change consultants as technology changes. It is better to use board seats for knowledge and judgment that will apply over a three- to five-year horizon.

Where do you want and need advice and counsel? When do you want it? How do you best take advice on difficult and sensitive matters? This leads to the question of fit. A successful board is a matter of chemistry and fit. The airplane test still applies: If you would not want to fly across the country sitting next to these people, don’t put them on your board.

Measure results.

If you are forming your first board, how do you know if you made the right decision? By measuring results! If you don’t know the results you want and need, it will be difficult to know if you made the right decision.

Unlike the rest of the organization, boards need to evaluate themselves since they don’t have a “boss” in the traditional sense. There are numerous methods that can be used to evaluate your board’s performance. The trick is to figure out which method is best suited to your situation. Are you evaluating the board as a body or the performance of individual directors? How will you interpret feedback given how interpersonal relationships may skew the data? More importantly, once you have results, what are you going to do with them?

The most direct method is to interview directors and address the issues that need to be discussed. This is often best done by a third party to anonymize contentious comments and facilitate discussion on delicate subjects. (Disclosure: My company can help with this.) Surveys are another popular method used to gain feedback. A combination of methods can also be used.

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If you are not sure what is best, start with a simple approach addressing the board as a group. Once you find out what is beneficial, probe further.

It comes down to adaptability.

Many people believe Darwin coined “survival of the fittest,” when in fact, his findings have been paraphrased more along the lines of “survival of the most adaptable.” Businesses and boards are no different. Markets, technology, regulation and competition are constantly changing, and your governance model needs to adapt to those changes to keep the business healthy.

Ultimately, the work of a board and its committees is more art than science. It is always useful to compare notes with colleagues and peers to get the perspective needed to strike the best balance between needs, concerns and costs.


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