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 US’s 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 PwC’s 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 still-challenging 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 close-minded 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 public-company boards have a risk committee). That nearly 20% of private companies have a risk committee shows they are clearly setting their own compass vis-à-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 ain’t broke, don’t fix it’ attitude among some private-company executives because they don’t 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, there’s 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.”

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1.   2011 Forbes America's Largest Private Companies List

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Colleen Krieger
Edelman for PwC’s Private Company Services
Tel: +1 (212) 277-3725
colleen.krieger@edelman.com