Improving governance for private companies as a driver of value
The subject of corporate governance is often considered to be primarily the concern of the very largest of businesses. Publicly traded companies are set their governance requirements by their relevant regulatory regimes and in the UK there are well-established requirements for the largest private companies under law and in codes such as the Wates Principles.
However it is no less important for smaller private companies to create the right corporate governance frameworks, particularly where the businesses are not managed solely by their shareholders. In the case of venture capital or private equity-backed companies this will often be set out in documents initiated by the relevant professional investors and negotiated with management and other shareholders, but in all cases there is value to be gained from creating or improving governance and risk management processes in a manner commensurate with available resources and the particular needs and profile of the business.
By “borrowing” the most appropriate features from the applicable requirements for larger companies, and adapting them as appropriate, smaller businesses can create value by promoting good behaviours and procedures, defining an acceptable balance of risk and reward for the organisation and creating greater assurance and confidence within it and outside it. Those smaller companies can also make themselves more attractive to investors, and future acquirors, in the process.
The following are just a few examples of features of the governance regimes for larger companies which could usefully be considered and adopted by smaller ones:
Risk register
To help the business identify and manage the wide range of risks that it may encounter.
Anti-bribery policy
Having such a policy does not of course guarantee that bribery will not happen, but it shows that the business regards the issue to be important and (along with relevant anti-bribery training and communication) and so if the business is later implicated in bribery it will be able to show that it had taken steps to prevent it, potentially leading to less harsh consequences.
Data protection and retention policy
The management of personal data is an increasingly regulated area and such a policy can assist in managing requirements around how data is collected, stored and protected, how long it is retained and when and how it should be deleted or anonymised.
ESG policy
A wide range of stakeholders are increasingly demanding transparency on ESG matters and again having a suitable policy can help identify and manage risks such as environmental impact (eg climate change, pollution), social risks (eg employment practices and community impact) and governance failures (eg corruption, lack of oversight), leading to greater resilience.
Use of AI policy
AI is an increasingly important tool for modern businesses but it brings with it a variety of risks of legal, reputational and operational damage, which can be addressed in part through having an AI use policy.
Use of confidentiality agreements before sharing confidential information
Loss of confidential information can create significant loss to many businesses and having a simple form of confidentiality agreement available for use is one relatively easy way to address the issue.
Scheduling matters reserved for the board or a simpler limits of authority document
Specifying limits of authority is a helpful way to control who needs to get approval from whom before taking specified actions.
Non-executive director appointment letter
In some cases privately owned businesses will benefit from appointing an independent NED, which can be under a relatively simple appointment letter.
What should I do now?
There is no “one size fits all” approach which can be applied here and, of the many potential governance enhancements that can be considered, businesses will always need to prioritise according to their individual needs and available resources, implementing the enhancements that will make the most sense for them.
While not all the points above are legal requirements, implementing a solid governance framework can deliver long-term value. It can build customer trust and, as mentioned above, it can also streamline due diligence in the context of a future exit or fundraising. Certain stakeholders may also insist particular policies and procedures being put in place as a condition to investing, lending or doing business.
Where there are specific legal obligations, being able to show that the business took steps to comply (though an appropriate governance policies and procedures) could result in the business being treated less harshly if there are later breaches – see for example the comments above in relation to bribery.
The subject of corporate governance for private companies is increasingly being seen as a subject in its own right and as an illustration of that one of the authors has recently co-authored a brand-new chapter on Private Company Corporate Governance in the leading precedent work Practical Commercial Precedents (published by Thomson Reuters), which contains examples of some of the documents listed above and others. These can act as a good starting point in the journey that business would do well to take in terms of improving their governance frameworks.
As ESG becomes an increasingly prominent area of focus, the significance of good governance—which is the "G" in ESG—continues to grow. Private companies can anticipate heightened scrutiny of their governance standards from a range of stakeholders including their customers, suppliers, investors, lenders and in some instances special interest groups. Privately held businesses will be expected to address these evolving issues proactively, ultimately generating value for their stakeholders and supporting broader societal prosperity.
As part of our commitment to supporting family and otherwise privately owned businesses to enhance the value of their business, whether for a future sale, or otherwise to ensure best practice, our team regularly advise businesses on their governance models, ensuring they are best suited to that business and their strategy. If you would like our support with a review of your governance policies or procedures, to identify practical recommendations on changes that can be implemented to improve governance and ultimately improve business function, please don't hesitate to get in touch with our team.
