PwC survey finds that private companies see business benefits in formal corporate governance

PwC's Private Company Trendsetter Barometer tracks the business issues and best practices of privately held US growth businesses. It incorporates the views of 221 CEOs/CFOs: 116 from companies in the product sector and 105 in the service sector, averaging $307 million in enterprise revenue/sales and including large, $500 million-plus private companies.

NEW YORK, October 3, 2012 A large majority of private companies (80%) are adopting specific corporate governance practices to help them successfully navigate an increasingly complex and volatile business landscape, according to PwC USs latest Private Company Trendsetter Barometer survey. Corporate governance at those companies takes the form of official policies promoting oversight and accountability in a variety of areas, including financial reporting, corporate strategy, and risk management. Nearly all (89%) of private companies that embrace corporate governance appear to do so voluntarily.

While formal corporate governance is mandatory for public companies, it isn't a regulatory requirement for most private businesses, says Ken Esch, a partner in PwCs Private Company Services practice. Rather, private companies are embracing corporate governance primarily because it makes good business sense as they look to increase value for their stakeholders and keep pace with new business realities. Another key distinction is that, unlike their public counterparts, private companies have the freedom and flexibility to incorporate corporate governance as they see fit.

Balancing Immediate Concerns with the Long View

Although private companies do not face the short-term, quarterly-earnings pressure that their public counterparts confront, financial concerns remain pressing for many private businesses in today's stillchallenging economy. A majority of Trendsetter companies are nonetheless applying corporate governance principles to long-term corporate strategy. An even greater percentage, however, are applying those principles to more-immediate issues, such as financial reporting and fiscal planning. Private companies are less focused on succession planning just one-third of them have a formal, documented succession plan.

Main areas of corporate governance at private companies:

Clearly, private companies recognize the importance of accurate financial reporting," says Esch. "Unreliable numbers lead to ill-informed business decisions something few companies can afford to make in what remains a tough business environment. Such an environment also underscores the need for a solid leadership pipeline. Many private companies, however, are neglecting this issue. Although failing to identify and groom the next leader has been a historical shortcoming among private businesses, it could prove especially problematic in today's economy. Lack of a succession plan suggests uncertainty about a company's future, whereas a clearly communicated plan signals that the company is here to stay."

Board of Directors More Than Two-Thirds of Private Companies Have One

Seventy-one percent of Trendsetter companies have a formal board of directors. Seventy-three percent of those boards meet quarterly or more frequently, suggesting that having a board is more than just a formality for private companies.

Private-company boards Main responsibilities:

Although roughly one-quarter (27%) of private-company board members are independent, outside directors, a large majority (71%) of private-company boards are chaired by the company's CEO. A closeminded approach, however, is not the picture that emerges from the survey results 71% of Trendsetter companies consult outside advisors on key matters such as risk management and IT strategy.

"Over the past decade, we've seen private-company executives increasingly appreciate the principles of corporate governance and their corresponding business benefits particularly better risk management and a stronger bottom line," says Esch. "A number of private-company executives sit on public-company boards, where corporate governance requirements have become ever-more stringent these past 10 years. As a result, those private-company executives have been able to test-drive aspects of corporate governance, determining which ones are most effective. That, in turn, has helped them pick and choose elements of corporate governance that best suit their own companies."

For some private companies, those elements include board committees devoted to audit oversight (37% of Trendsetter companies), compensation (31%), and risk (19%). While audit and compensation committees are mandatory for public companies, risk committees are not (a small minority of publiccompany boards have a risk committee). That nearly 20% of private companies have a risk committee shows they are clearly setting their own compass vis--vis corporate governance, rather than following a strong precedent set by their public-company peers.

Risk a Key Area of Focus

Nearly three-quarters (74%) of Trendsetter companies have a formal set of internal controls in place to reduce risk (including risk of fraud) and promote efficiency across a variety of areas in their business.

Internal controls Focus on risk reduction and greater efficiency:

"A strong emphasis on risk cuts across both a company's growth objectives and cost-reduction efforts," says Esch. "Take an area like supply chain. Companies seeking growth abroad must increasingly rely on suppliers in other countries, where safety standards can vary widely across regions. A tainted product could undermine a company's growth objectives. Likewise, corporate profitability is easily undercut by supply chain inefficiencies. Internal controls can go far in mitigating these types of risk and waste. The second of these goals reducing waste is clearly top of mind for Trendsetter executives, who rank accounts payable the chief area of focus for internal controls."

Corporate Governance Critical for a Successful Exit Strategy

While most Trendsetter companies plan to remain private, all of them will eventually be faced with the decision about who will lead the business in the future. No CEO lives forever he or she will eventually have to exit the stage. In the case of a family business, the exit plan may consist of passing the business on to the next generation. In other cases, a company may be contemplating an initial public offering (IPO) or a sale to a third party.

Among Trendsetter companies, only 2% are considering or pursuing an IPO, and just 6% are looking to sell their business to an outside buyer. For such companies, having key elements of corporate governance in place is a prerequisite to achieving either of those goals.

Even if our clients are uncertain whether M&A activity or an IPO is in their future, we want to put corporate governance on their radar so that they are prepared for a range of business opportunities, says Esch. "As for leaders who intend to keep their companies private, they also benefit from viewing their company's future through a corporate governance lens. Again, adequate succession planning is critical. By clearly communicating a transition plan for their companies, leaders send a reassuring message to key stakeholders and the marketplace. That message can help maintain or even boost a company's value."

One Size Does Not Fit All

Despite the acknowledged benefits of corporate governance, not all private companies may feel a need to implement it via formal policies, or at least not for now.

Corporate governance can help private companies respond to the changing marketplace, says Esch. However, there may be an if it aint broke, dont fix it attitude among some private-company executives because they dont have the bandwidth, appetite, or budget to implement corporate governance. Still, it is important to consider the potential benefits, especially in a challenging business environment.

Such benefits may be of greater interest to the upcoming generation of business leaders than to those currently at the helm. Up-and-comers are likely to be thinking long-term and more strategically, with an eye toward ensuring that the business will thrive beyond the current generation. Ultimately, when and how to apply corporate governance will vary with each company.

Because private companies are not bound by the same rules and regulations that govern public companies, theres a wide range of corporate governance practices among our clients, says Esch. As most of those companies will tell you, running a successful enterprise can't be boiled down to a single formula. Likewise, one prescribed set of corporate governance standards won't be equally effective for all private companies. The key is to determine the level of corporate governance that delivers the greatest benefit to your particular business.

A Corprate Governance Code for Trinidad and Tobago

Story Created: Apr 7, 2013 at 11:22 PM ECT ( Story Updated: Apr 7, 2013 at 11:22 PM ECT )

Corporate governance is about building strong, sustainable businesses and institutions. It applies to all forms of organisations the publicly listed company, a privately held company, large conglomerates, small businesses, the family owned business, a school, a church, an NGO, a government Ministry. Corporate Governance has real and tangible benefits for companies: it increases investor confidence; reduces risk and the cost of capital and improves the effective functioning of an organisation. Corporate governance refers to the systems and processes through which a company is directed and controlled. Corporate governance specifies the distribution of rights and responsibilities among the organisations stakeholders (including shareholders, directors, and managers) and articulates the rules and procedures for making decisions on corporate affairs. (See figure). Thus, corporate governance provides the structure for defining, implementing, and monitoring a companys goals and objectives, and ensuring accountability to appropriate stakeholders. Various local international financial crises make the case for urgent corporate governance reforms. The dramatic collapse of the CL Financial empire and the almost unbelievable revelations emerging from the Commission of Enquiry are indicators of the significant weaknesses in our corporate governance systems as well as the vulnerability of small open economies such as ours to global events.

A study conducted by Syntegra Change Architects Limited in collaboration with the United Nations Conference on Trade and Developmnet (UNCTAD), revealed important aspects about the scale, nature of the challenge and the path forward for corporate governance reform in Trinidad and Tobago.

The key findings of the study reveal that T&T has the lowest reporting requirements for corporate governance disclosure among 45 nations reviewed. Equally noteworthy, even though the disclosure requirements are so low (only 5 out of 51 reporting requirements are met, using UNCTADs widely accepted international benchmar,) 94% of companies listed on the T&T Stock Exchange have been found to disclose more than the minimum required in this country. However, the average disclosure is still

below 50% of what Boards of Directors in other emerging markets disclose about their governance practices to their shareholders and the investing public. Legislative or regulatory reforms under way in T&T are not yet proposing more public disclosure. Instead there appears to be a trend towards more regulation. However, relying only on the Regulators to prevent crises is not a recipe for success. T&Ts Corporate Governance environment, like that of all other countries, is too complex to be controlled sufficiently by regulators alone. Shareowners, the investing public and the media have crucial roles to play in ensuring that firms are governed properly. Furthermore, governance is not only about ensuring compliance with standards. Instead, it is about leadership and steering organisations safely towards sustained success. Evidence of organizations failures in other countries and T&T suggest that lower disclosure, leads to poorer information for decision making, and reduced as well as weakened accountability. Such a weakness in the T&T Corporate Governance System has severe effects on the functioning of the whole corporate governance system of a firm, with, as mentioned above, the end effect being reduced investor confidence, increased risks by the stakeholders, and the actual functioning of the companies negatively affected. Over the past few years there has been some movement in the right direction. However continuing on the same path with an over-dependence on the Regulators is not a viable option. The corporate governance system would have crucial weaknesses that would likely lead to a lot of value being destroyed, opportunities missed, and legitimate interests not met. The Chamber endorses the call for a multi-stakeholder, multi-pronged approach to Corporate governance reform where: 1. The business community (including the 88 companies in which the state has an active interest) as well as the NGO community need to increase their awareness, knowledge of, and alignment with good governance practices. 2. The media needs to increase its understanding, investigation, and reporting of corporate governance matters. 3. Investors, private and especially institutional, need to increase their knowledge and advocacy for good corporate governance in their interest. 4. Owners need to be more informed of their rights and knowledge about how to evaluate the performance of the directors they appoint to look after their interests. Without increased engagement of the above four groups, the regulators job would be too great and complex, with failure virtually pre-programmed. There are many other situations in T&T where it would be valid to say that we have the laws, and even if they are imperfect, we would make huge strides if we only enforced what we already have. This cannot be said for Corporate Governance. The Chamber supports the development of a Corporate Governance Code for Trinidad and Tobago that will be the common benchmark for good practices. Increased public disclosure on corporate governance practices through further legislative and regulatory amendments along with promoting awareness and education about what corporate governance really is will be a step in the right direction as Trinidad and Tobago proceeds on its developmental path.

With the launch of the Corporate Governance Code for Trinidad and Tobago on Monday, the Chamber has demonstrated our commitment to building awareness and knowledge about the need for governance and transparency. We continue to advocate for good governance and call on like-minded corporate citizens to join in the drive

Private Companies Home>Organizations>Private Companies From our experience four major attributes influence governance of private companies:

Business is personal. In private companies, the weight of financial success or failure is borne by a limited number of owners, whose financial circumstances are often impacted directly by the cash flow and tax implications of the business.

Leaders have broad responsibilities. Regardless of the size of the business, leaders in private companies often cover a very broad set of responsibilities.

Accountability is private. By its very nature, a private company is accountable to a known group of owners. Accountability is every bit as stringent as it would be for a public shareholder group, but in a private company there may be more opportunity for vetting action steps and results directly with the ownership. The dynamic of private accountability doesnt change the underlying feeling of deep responsibility to an important group of stakeholders with whom the leaders likely have close personal relationships, but it can provide an opportunity to influence a longer-term view for driving growth and managing risks.

Transition is inevitable. Private companies face the issue of sustainability, including succession and/or transition. No matter what form the transition takes, it needs to be planned and accounted for over time, including the establishment of long-term goals and strategies, and contingency plans to pursue them.

All business owners and investors, of course, expect to succeed. The challenge, however, is to achieve success. Regardless of whether you define success as faster growth, better returns, sustainability, owner wealth, or future ownership transition, achieving it requires you to plan and execute effectively, and identify ways to increase business profits and manage risks.

What Does Corporate Governance Mean for Private Companies? By Philip K. Smith, Gerrish, McCreary Smith, PC

We have all heard the term corporate governance. We all know it has major implications for SEC publicly reporting institutions. But should private companies be concerned at all with corporate governance issues? The short answer is, yes, even private companies need to be mindful of corporate governance issues, but just in a different manner than public companies.

The Sarbanes-Oxley Act, which was the genesis of the corporate governance movement, does not apply to private companies. However, some regulatory agencies have begun to apply a trickle down effect by strongly suggesting that some of the requirements of that Act be applicable even to private companies. While we do not advocate that private companies undertake the burdens associated with Sarbanes-Oxley, we do recommend that private companies consider the adoption of certain corporate governance procedures that are realistic, not costly, and which lead to the ultimate goal of enhancing value. Some of these tactics are outlined below.

Director Education Directors of all companies are under increasing scrutiny and have tremendous amounts of responsibility. Some states are beginning to require mandatory education for directors of financial institutions and an ongoing emphasis on education by boards is a great way to promote corporate governance. We suggest that organizations specifically allocate money in the budget for director education each year.

Board Evaluation More and more boards are examining their composition in light of corporate governance concerns. The mix of inside directors versus outside directors may be a focal point as well as the expertise of directors. When a vacancy occurs on the board, it is not uncommon for boards now to seek out individuals with financial experience or other areas of specialization. This also points out the continuing need for director evaluation. Many boards are conducting either informal or formal evaluations of directors to ensure the continuing diligence of their efforts.

Audit Committee Corporate governance for public companies requires an audit committee composed entirely of outside directors and with that audit committee having the responsibility for hiring the banks auditor and for receiving the reports directly from the banks auditor. That is a suggested practice, even for private companies, and it does not add much additional cost.

Action Planning Meetings Most organizations now conduct some form of strategic planning and we encourage boards to do so with focus on core topics where individuals are assigned responsibility and with specific timelines for completion. Yearly planning sessions have become the norm for all institutions desiring to maintain proper corporate governance and fulfill the directors roles to stockholders.

Executive Session The wave of corporate governance concerns has legitimized the use of the executive session. Historically, executive sessions were only held at times when the directors wanted to meet without the knowledge of senior management for the purpose of reviewing, evaluating and, in most situations, eliminating management. However, the ability of all outside directors to have sessions without senior management is an appropriate corporate governance technique for public and private companies and one that no longer implies that management is doing anything wrong.

Avoiding Micromanagement Because the directors job is so important, there is a premium placed on their time and, as a result, proper corporate governance avoids micromanagement. Management should not be hesitant to advise the board if it begins to take up topics that management believes should be handled with only an oversight function. Directors should maintain a big picture approach toward their institution.