Three Lessons for Private Companies from Public Company Governance
Closely held companies may not be able to afford to accept the mom-and-pop style governance that has long separated public and private concerns. Increasingly, private company executives are embracing the more structured governance processes used by their public counterparts.
There’s a challenge for closely held companies: strengthening governance without compromising the flexibility that many see as their primary advantage in the marketplace. While most public companies have clear rules and strict procedures to ensure everything from regulatory compliance to risk assessment, private companies may be wary of becoming too bureaucratic or beholden to process.
Based on our research with both public and private companies, Deloitte has identified three key areas in which private companies can emulate public company governance in developing their oversight.
1) Board Composition
Companies should consider the type of board they need. How many committees can address the company’s needs? Generally, management and directors overlap more in private companies than in public ones, so boards could include outside directors to encourage fresh perspectives. Having more outsiders on the board can make discussions of risk, strategy and succession more robust.
To determine the type of outside director a company needs, the existing board should assess long-term goals and identify gaps in the expertise of the current directors. Does a company need more financial experience on the board? Should it hire a director who has a background in international expansion?
Private companies also should consider evaluating diversity. Family-owned businesses may have multiple generations represented, but age isn’t the only consideration. Is there ethnic and gender diversity? In ad-dressing these issues, companies may want to consider their customer base and whether the makeup of the board reflects that base.
It’s also important for private company directors to understand their fiduciary duty to stakeholders, just as a public company board does.
2) Succession Planning
Planning for the replacement of a chief executive officer or founder can be difficult, especially for a family-run business. But companies should be prepared for the unexpected, such as the sudden passing or disability of the CEO. Both the board and the CEO should agree the successor and how that person will be selected. Succession stability benefits not just the company and its employees, but also customers, vendors, lenders and other stakeholders who could be affected by the uncertainty of a leadership vacuum.
This isn’t a single-discussion or decision. Even after a plan is adopted, boards should consider regularly revisiting the issue to ensure the plan is still effective and that the chosen successor still meets the company’s long-term strategy goals.
Recruiting and talent retention is an outgrowth of succession planning. Public companies typically identify key employees and determine who will fill their roles if they leave. Private companies should be equally prepared for key executive changes, even in family businesses where the possibility of turnover may seem remote. The board may consider creating a compensation and nominating committee to handle these processes.
3) Strategy and Risk Oversight
Boards should consider regularly addressing strategy and risk management issues. Strategy often is identified by companies, both public and private, as one of their greatest challenges. Boards and executives should consider regular strategy retreats or meetings in which they discuss strategic ob¬jective and set metrics and develop a strategy for achieving them. Once the goals are set, these sessions should focus on executing such objectives.
Risk management is a key part of corporate strategy, and the board may consider creating a separate risk committee. Depending on the industry and size of the company, the audit committee may be responsible for overseeing risk management. Generally, the committee is responsible for overseeing the risk policies and program. The full board ultimately is accounting for risk oversight and is responsible for discussing the strategic risks to the business.
As the challenges facing privately held companies grow more complex, many find that the board structures adopted by public companies can help position them for long-term growth. For companies of all sizes, more formalized boards, with greater diversity of directors, appear to becoming the standard.
While the needs of private companies vary widely based on their size and type of business, adopting the leading governance practices of public companies can help them move beyond insularity and invite fresh ideas for building the business.