As experienced private company directors and executives recognize, good corporate governance is critical to any company's growth and success -- it adds real value, preparing the company for short-term challenges and long-term opportunities.
A common misconception about corporate governance is that it is only about the board of directors. In practice, however, corporate governance is about the policies, processes, and procedures throughout the organization -- from the board to the employee base -- that guide how the company sets strategy, manages risk, monitors its assets and resources, satisfies its legal and regulatory obligations, and communicates with internal and external stakeholders. Most importantly, corporate governance is about the tone and culture throughout the entire organization.
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From the perspective of an entrepreneur or investor seeking to build a successful company, what are the most critical or effective governance practices? How do these practices evolve as a business matures? Given the stakeholder demands for good corporate governance at all companies, we see lenders, insurers, and venture capital and private equity investors increasingly focusing on the governance practices of private companies -- often stressing many of the SEC and listing exchange requirements that apply primarily to public companies.
In developing and maintaining an effective governance structure, we recommend that every private company bring the right people and perspectives to the table periodically to assess the governance structure -- and ensure that the present (and future) governance structure meets the expectations of key stakeholders and serves as a foundation to achieve the company's strategic objectives. Among the areas of focus, we emphasize three:
First, identify the key elements of the company's governance structure, which will vary depending on the development stage of the business and its size and complexity (e.g., strategic planning, financial reporting and internal controls over financial reporting, external audit, risk management, ethics and compliance, internal audit, and the overall control environment). For each element, assess the current state and identify the company's short-term and long-term objectives. Are our governance processes keeping pace with the increasing size and complexity of the business?
Second, consider the need for independent directors to serve on the board. For small companies -- where directors, shareholders, and management may be essentially the same -- this may not be an issue. As a business begins to grow and mature, however, independent directors can provide a broader perspective, play an important role in management debate and strategy setting, and support and monitor the CEO. For resource-constrained smaller companies, recruiting outside directors with specialized skills can also fill management gaps in critical areas such as financing, M&A, product expertise, tapping new markets, and financial reporting.
Finally, recognize the value-add of an audit committee -- particularly as the company migrates to a more robust financial reporting and control environment. A sophisticated audit committee can play a critical role in assessing and, where appropriate, strengthening the company's financial reporting processes globally; helping build and oversee an appropriate control environment; and engaging and managing the external auditor relationship.
Given stakeholder demands as well as the complex, volatile business and risk environment today, strong governance practices are key to the success of all companies. As a private company evolves and matures, it is critical that management periodically assesses whether the company's governance structure and processes are keeping pace with changes in the business -- and importantly, whether the company is making the most of its board as a strategic asset that serves as a foundation to achieve the company's short-term and long-term objectives.