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Private Company Governance

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Private Company Governance PRIVATE COMPANY GOVERNANCE T H E CALL FOR SHARPER FOCUS IN ASSOCIATION WITH: CONTENTS Foreword ...........................................................................2 Key findings ........................................................................3 About this research .................................................................4 Spotlight: Risk, competition and strategy .............................................5 Q&A: Marjorie Bowen, independent director ..........................................8 Greater depth: Boards looking for more ..............................................9 Technology can help… .............................................................10 …But with more data sharing comes greater risk...................................... 11 Other key findings.................................................................. 12 Conclusion: Fine-tuning financial oversight........................................... 15 F OREW ORD Private businesses and their owners face choices in terms of corporate governance. What’s the right governance model for the company? What are the challenges faced in optimizing governance structures and processes? How does governance align with the financial goals of the company and its owners? These governance issues factor into the traditional valuation discount applied to private companies. How do we overcome this discount? Getting beyond the discount —real or perceived— requires private companies to take a hard look at governance structures and processes, financial controls and, as our survey with Forbes Insights highlights, conflicts of interest. Do the costs of greater rigor in strategy formulation and risk management pay off in terms of valuation or access to capital? How can financial processes, information flow and the finance organization be improved? And what do today’s data-driven reporting and business intelligence technologies contribute to performance, and at what cost? Beyond such fundamental decisions, governance models of all companies are in constant need of fine-tuning. Is the organization obtaining sufficient insight regarding its full range of risks and opportunities? Are owners and management teams sharing the right information with the right set of advisors and board members? Is the governance in place today optimal for the vision and objectives of the company and its owners? These and many related issues form the focus of the accompanying research— which we offer with our compliments. We hope you will find what follows both informative and thought-provoking. Sincerely, Salvatore Melilli, Brian Hughes, National Audit National Private Industry Leader, Markets Group Leader, Private Markets Group, KPMG LLP KPMG LLP 2 | PRIVATE COMPANY GOVERNANCE K EY FIND INGS The governance models of private companies are in constant need of fine-tun- ing and enhancement. The survey explores concerns such as: Are organizations obtaining sufficient insight regarding their full range of financial and operational risks and opportunities? Are owners and management teams sharing the right information with the right set of advisors and board members? Is adequate attention being placed on talent evaluation and succession planning in the finance organization? Overall, are governance processes and controls in place today optimal given the owners’ financial expectations? Key findings include: • The top three governance challenges cited by private company directors include improving risk management oversight, assessing innovation and emerging competition, and confirming/establishing company strategy • Other key governance challenges for private companies include achieving regulatory compliance, leadership succession planning and global compliance • The most visible challenges to board effectiveness include budget/resource con- straints, conflicts of interest (including the presence of related party transactions) and a compromised board due to an overrepresentation of controlling shareholders • Directors believe that fast-evolving technologies—such as big data and related analytical tools—may help to spawn more relevant and efficient reporting for management and the board • Private company directors are looking to their governance processes and controls to improve M&A outcomes, enhance financial risk oversight and optimize the finance organization through performance evaluation and succession planning COPYRIGHT © 2015 FORBES INSIGHTS | 3 ABOUT TH I S RES EARCH This report is based on a global survey developed by KPMG and executed by Forbes Insights. The survey was completed by 154 private company directors in September 2015. Key demographics include: • Board member: 100% were serving as a director for at least one private (non-public) company • Company type: Non-profit (17%), privately funded startup (38%), entre- preneur- or family-owned business (32%), private-equity-owned/venture-capital- backed business (39%), mutually owned/employee-owned/cooperative (16%) • Annual revenue: $100 million to $200 million (17%), $200 million to $500 million (16%), $500 million to $750 million (20%), $750 million to $1 billion (10%), $1 billion to $5 billion (30%), more than $5 billion (6%) • Industry: Software (10%), hardware (6%), consumer goods (12%), retail (10%), manufacturing (25%), energy (2%), financial services (21%), professional services (12%), other (2%) For an added layer of context, Forbes Insights approached a handful of senior executives with vast experience in private company governance. We wish to especially thank the one on record: • Marjorie Bowen, independent director 4 | PRIVATE COMPANY GOVERNANCE S POTLIGH T: RIS K , C O M P E T I T I O N AND S TRATEGY The research shows that private company boards need to sharpen their focus on risk, competition and strategy. Despite the fact that many private company direc- the top three cited by senior private company tors (and investors) say that they are in near-constant directors were risk management oversight (28%), communication with company management on assessing innovation and emerging competition corporate strategy and !nances, the shortfall in the (28%) and con!rming/establishing company strategy perceived quality of governance remains signi!cant. (23%) (Fig. 1). Asked to assess a range of key governance challenges, FIGURE WHAT ARE YOUR GREATEST CURRENT/ONGOING 1 GOVERNANCE CHALLENGES? Risk management oversight 28%a Assessing innovation and emerging competition 28%b Confirming/establishing company strategy 23%c Regulatory compliance 21% Leadership succession 18%d Global compliance 17% Board e!ectiveness 17% Director time and workload 16% Overreliance on management’s information 13% Divided ownership group 10% a41% financial services b37% consumer goods c 40% retail d29% $100 million - $500 million COPYRIGHT © 2015 FORBES INSIGHTS | 5 Other key governance challenges for private compa- mation provided by management (13%) or say their nies include achieving regulatory compliance, lead- boards operate within a “divided” ownership group ership succession planning and global compliance. (10%). The challenges—and the lack of insight into these issues—can contribute greatly to the private com- Size plays at least some role in terms of governance pany discount. challenges. The largest companies in the survey (over $1 billion) are more likely to view the assessment of Overall board e"ectiveness at private companies is competition and innovation as signi!cant challenges. also questioned by a signi!cant number of directors Smaller !rms (under $500 million), tend to place (17%) (Fig. 2). This may in turn be in#uenced by greater signi!cance on the challenges of strategic those who indicate directors may be overworked planning and leadership succession. (16%), say their boards exhibit overreliance on infor- FIGURE WHAT ARE YOUR GREATEST CURRENT/ONGOING GOVERNANCE 2 CHALLENGES: BY SIZE? All $1b+ $500m-$1b Under $500m Risk management oversight % % % % 28 29 28 27 Assessing innovation and emerging competition 28% 34% 23% 25% Confirming/establishing company strategy 23% 25% 15% 29% Regulatory compliance % % % % 21 20 26 18 Leadership succession % % % % 18 11 15 29 Global compliance 17% 18% 23% 10% Board effectiveness 17% 14% 23% 14% Director time and workload 16% 23% 6% 18% Overreliance on management’s information % % % % 13 13 15 12 Divided ownership group % % % % 10 9 11 10 6 | PRIVATE COMPANY GOVERNANCE Against this backdrop, boards at private companies Other issues limiting e"ectiveness of many boards face challenges of their own. The most visible are include their serving in an advisory capacity only budget/resource constraints, selected by over a third (25%), irregular meeting calendars (23%) and of private company directors surveyed (36%) (Fig. 3). limited independent representation (22%). One in Over one in four directors surveyed, 28%, say their !ve directors, 21%, say their boards have inadequate boards face con#icts of interest, including the pres- access to or otherwise underutilize third-party ence of related party transactions. And one in four, resources/research—and 19% say their board lacks 25%, say their board’s e"ectiveness is hampered by an formal structure. overrepresentation of controlling shareholders. FIGURE WHAT ARE THE GREATEST CHALLENGES 3 TO BOARD EFFECTIVENESS? Budget/resource constraints 36% Conflicts of interest/related party transactions 28%ab Overrepresentation of controlling shareholders 25%c Board serves in an advisory capacity only 25% Irregular meeting calendar 23%de Limited independent representation 22% Underutilization of third-party
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