Strong governance, compliance and ethics are not merely obligations to fulfill fiduciary duties. They are essential, strategic drivers of private company success and long-term growth. Even though private companies operate outside of the intense spotlight faced by public companies, effective governance remains the foundation of all well-run enterprises. The interplay between governance and compliance forms the backbone of corporate integrity, working together to build sustainable organizations. Creating and maintaining a robust compliance and ethics program — coupled with a sound governance framework — must be a priority.
When these elements are properly aligned, companies gain more efficient and effective operations, heightened resilience, proactive risk management, stronger strategic decision-making and improved business oversight. While these principles may seem basic, experience shows successful organizations excel by mastering fundamentals and applying them consistently. Successful leaders understand doing the basics often — and well — is a strategic imperative. Governance, compliance and ethics are no exception.
Private company governance
Governance frameworks within private companies vary significantly. Ownership is typically concentrated among small groups of investors, private equity firms or individuals. Structures can range from a formal board to an advisory board or even rely primarily on management teams in some cases. Regardless of whether governance is formal or informal, the framework’s effectiveness is vital to a company’s long-term sustainability.
Family-owned businesses often have additional layers of complexity. Generational relationships bring both strengths and challenges. A reluctance to bring in outside expertise can slow progress and hinder decision-making in the company’s best interests. Over time, family members alone may not provide the necessary talent pool to sustain the enterprise. Achieving a successful generational wealth transfer and preserving the company’s legacy depends on building a resilient, enduring organization. Recognizing obstacles, such as resistance to change or limited access to talent, allows leaders to make strategic decisions, including the integration of external expertise to complement family strengths.
Another common governance challenge is the desire for unanimous decision-making. Whether written into bylaws or stated in informal governance protocols, the requirement for unanimity can delay actions and stall progress. Consider the impact when even one person disagrees. Legislative bodies, for example, generally require only a simple majority for most decisions, reserving supermajorities of two-thirds or three-quarters for exceptional cases. They rarely require 100% agreement, if at all. While unanimity may appear to foster harmony, in practice, it can lead to paralysis and missed business opportunities.
Succession planning, particularly for top leadership and other key roles, is another sensitive yet critical element of sound governance. Discussing the potential departure or incapacity of leadership is uncomfortable. But avoiding the conversation creates unnecessary risks that threaten business continuity and stability.
While public companies face more stringent regulatory requirements and public disclosures to protect investors and others, private companies should not interpret the lack of such mandates as permission to neglect good governance or compliance. It’s essential — and not an option — to have these for sustainable and ethical operations, trusted relationships, enhanced reputation, investor attraction and overall resilience.
Risks created by weak governance and compliance
Failing to establish strong governance and compliance structures exposes private companies to significant risks. These include loss of business licenses, reputational damage, vulnerability to opportunistic mergers and acquisitions as well as costly regulatory penalties. The strategic choice is to be proactive. It is far more efficient to invest up front in building a positive reputation and preventing negative regulatory action than to divert growth capital toward paying fines or resolving government investigations.
Laws and regulations set the minimum acceptable standard for conduct. However, corporate behavior shapes reputation and sustainability far beyond those minimums. While “box-checking” to meet compliance requirements may prevent fines, forward-thinking companies embed ethics as a competitive differentiator. Less encumbered by bureaucracy than public firms, private companies are well-positioned to leverage governance and compliance programs as strategic advantages. Unfortunately, these foundational pillars are often overlooked, increasing exposure to avoidable risks.
Historical context
The first government guidance specifically addressing compliance and ethics programs surfaced at the U.S. Sentencing Commission. The U.S. Federal Sentencing Guidelines were amended in the early 2000s to establish seven basic elements for programs:
- Written codes of conduct, policies and procedures
- Designation of a compliance professional
- Training and education
- Auditing and monitoring mechanisms
- Conduct reporting mechanisms
- Disciplinary systems
- Prevention, response, and remediation actions
Although rooted in criminal conduct, these principles rapidly evolved into standards for all compliance programs.
Additionally, government enforcement considers aggravating and mitigating factors to establish culpability. It weighs conduct like involvement of upper-level employees in wrongdoing, repeated violations, obstruction of investigations or tolerance of bad behavior. Conversely, companies fare better if they maintain effective programs, report misconduct promptly, cooperate with authorities and accept responsibility.
Evolving DOJ guidance
The U.S. Department of Justice (DOJ) Criminal Division’s “Evaluation of Corporate Compliance Programs,” updated most recently in 2024, serves as a thorough reference for compliance and ethics programs. The DOJ acknowledges that each company faces unique risks, requiring its own risk profile and solutions to reduce those risks. It’s not as simple as a one-size-fits-all approach. Evaluation factors include company “size, industry, geographic footprint, regulatory landscape and other factors.” Fundamentally, the DOJ assesses whether programs are well-designed, adequately resourced and empowered as well as effective in practice.
Regulators increasingly focus not only on whether compliance programs exist, but also on how they are designed, implemented and improved over time. To demonstrate effective risk management, for example, companies proactively identify risks, apply deliberate methods to address them, analyze lessons learned from internal and industry-wide incidents, and integrate improvements into policies and procedures. Further, involving business units in policy development enhances credibility and effectiveness. Essentially, government agencies want to understand what actions you are taking, why you are taking them, and how they fit into your overall compliance and ethics program. While not all questions in the DOJ’s guidance apply to every business, the document offers hundreds of prompts that can be used by enforcement officials on all levels.
Compliance monitors and oversight
Compliance monitors are external firms appointed by the government and paid for by the company. Monitors are typically imposed in cases of serious misconduct, where a company appears unable to implement an effective program on its own. Monitorships can be costly and are generally reserved for extreme situations. However, as government resources are increasingly strained, alternative and less formal oversight arrangements may become more common during settlements to provide assurance of compliance.
It bears repeating: The absence of a formal board does not excuse private companies from establishing strong governance structures and compliance programs. The duty of oversight extends well beyond boards and encompasses anyone with authority over business operations.
Legal consequences
The landmark 1996 Caremark case established that boards of Delaware corporations have a fiduciary duty to oversee implementation and monitoring of effective compliance programs, and failure to do so may result in personal liability for directors. More recently, In re McDonald’s Corporation Stockholder Derivative concluded oversight obligations can extend to officers as well. In corporate law, it is common for other judicial jurisdictions to reference well-established Delaware law and opinions for guidance, further reinforcing these compliance standards as best practices.
For private companies, any individual with governing authority, whether a formal board member or not, may bear Caremark-like duties. In family-run businesses, managing family members could be deemed responsible for ensuring that governance structures and compliance programs are both in place and effective. The key question remains: Who holds fiduciary responsibility for business oversight? Private company leaders must ensure governance and compliance are robust. They must also be able to demonstrate effectiveness through detailed records.
Beyond legal liability, Caremark-related duties have practical implications for private companies. Stakeholders, such as regulators, investors and strategic partners, increasingly view strong oversight as an indicator of operational maturity. Demonstrating robust governance and compliance structures can strengthen a company’s credibility in financing rounds, merger negotiations and other situations where accountability matters. Conversely, inadequate oversight can erode stakeholder trust, damage valuation and invite scrutiny from government agencies. By embedding Caremark principles into operations, private companies not only mitigate legal risks, but also enhance strategic agility, making governance a driver of both compliance and competitive positioning.
The necessity of compliance and ethics
An effective compliance and ethics program should not be viewed simply as insurance against misconduct. Rather, it is integral to strong governance and serves as a powerful strategic lever. When well-aligned and functioning effectively, governance and compliance enable private companies to operate more efficiently, manage risk proactively and position themselves for growth. Strong governance and effective compliance do more than protect against regulatory risk. Together, they build reputational capital, enhance investor confidence, and provide a solid foundation for competitiveness, strategic advantage and long-term success. Now is the time for private companies to thoroughly assess and strengthen their governance structures and compliance and ethics programs.