shifts-in-private-company-governance

Perspectives

Shifts in private company governance

Governance practices among leading family-owned and other private companies

Governance practices among leading family-owned and other private companies are shifting as more business leaders recognize that better oversight can have a dramatic impact on the success of their organization. By all accounts, this theme is likely to continue playing out in 2016.

Shifts in private company governance

February 17, 2016

A blog post by Maureen Bujno, Center for Board Effectiveness, Deloitte LLP

If your private company is governing itself more like a public company these days, it may be a good thing.

Governance practices among leading family-owned and other private companies are shifting as more business leaders recognize that better oversight can have a dramatic impact on the success of their organization. By all accounts, this theme is likely to continue playing out in 2016.

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Board composition

The first area where we’re seeing change is in board composition. Private companies tend to have smaller boards, and those boards have historically been dominated by insiders or family members that are part of the ownership group or by members of the executive team. But increasingly, private companies are considering outside directors to encourage fresh perspectives and assist in making discussions around risk, strategy and succession more robust. Some are also utilizing advisory boards to give them access to objective knowledge and insights on specific business issues.

When it comes to finding the right directors to serve, some leading private companies are rightfully assessing their long-term goals and identifying gaps in their expertise. For example, those companies that know they will need to be more acquisition focused in the future are looking to add directors with experience overseeing mergers. Diversity is another key component in the director search, particularly for family-owned companies where different generations may be represented, but no other demographic traits. A recent survey of mid-market executives indicated that only 19 percent of respondents have more than 50 percent of their board made up of women and/or minorities; 36.5 percent said less than 25 percent of their boards are made up of women and/or minorities.

Succession planning

Succession planning is another governance topic we find some private companies more focused on these days. It should come as no surprise that preserving an organization’s value for the future may be just as challenging as building that value in the first place. Unfortunately, some private business leaders may fail to appreciate the full magnitude of the challenge before them.

Succession isn’t about a single discussion or decision–it’s a process. Succession requires a well-considered plan that gets ahead of any uncertainty that would be created by the departure of a chief executive officer or founder, or other key members of the executive team. Even after a plan is adopted, the board of directors should consider regularly revisiting it to ensure the plan is still effective and that the potential successor or successors still align with the requirements to see the company through to its long-term strategic goals.

Strategy and risk oversight

Finally, strategy and risk oversight is the third area where we are seeing a public company trend emerge among private companies. Strategy is often identified by companies of all types as one of their greatest challenges. Too often, companies get so caught up in executing every day that they feel they don’t have time to take a step back and think about where they’re going in some cases, they may have adopted a strategic plan that made eminent sense two years ago, but today doesn’t reflect new market realities or consider the latest innovations. Some private-company boards are emulating their public counterparts by adding regular strategy retreats and enhancing board meeting discussions with regard to the development and monitoring of strategic objectives. Acting more like public companies enables them to focus more on strategic objectives and identify metrics for success–and enhance prospects of achievement.

Those boards are also adding new layers of risk oversight to ensure that risks of (and to) the overall strategy are discussed and continually monitored. This may involve creating a separate risk committee or adding oversight of the risk program as well as policies and certain risks to the audit committee’s responsibilities. Regardless of whether a private-company board has separate committees or not, the full board is ultimately responsible for taking ownership of risk oversight and making sure strategic risks to the business are regularly discussed.

Benefits

Adopting the above leading governance practices may help private companies be better positioned to tackle the business issues of the day. This applies whether they’re finding skilled talent in a tighter labor market, examining the risks and opportunities of emerging technology solutions involving analytics and cloud computing, or setting a cybersecurity strategy to address a growing array of threats.

This publication contains general information only and Deloitte LLP and its subsidiaries ("Deloitte") are not, by means of this publication, rendering accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. Copyright © 2016 Deloitte Development LLC.

"Adopting leading governance practices may help private companies be better positioned to tackle the business issues of the day."

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