PRIVATE COMPANY GOVERNANCE

[Pages:18]PRIVATE COMPANY GOVERNANCE

THE 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

FOREWORD

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, National Audit Industry Leader, Private Markets Group, KPMG LLP

Brian Hughes, National Private Markets Group Leader, KPMG LLP

2 | PRIVATE COMPANY GOVERNANCE

KEY FINDINGS

The governance models of private companies are in constant need of fine-tuning 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 constraints, 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 THIS RESEARCH

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%), entrepreneur- or family-owned business (32%), private-equity-owned/venture-capitalbacked 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 P OTLI G HT: RIS K , CO M PE TITIO N AN D STR ATEGY

The research shows that private company boards need to sharpen their focus on risk, competition and strategy.

Despite the fact that many private company directors (and investors) say that they are in near-constant communication with company management on corporate strategy and nances, the shortfall in the perceived quality of governance remains signi cant. Asked to assess a range of key governance challenges,

the top three cited by senior private company directors were risk management oversight (28%), assessing innovation and emerging competition (28%) and con rming/establishing company strategy (23%) (Fig. 1).

FIGURE

1 WHAT ARE YOUR GREATEST CURRENT/ONGOING GOVERNANCE CHALLENGES?

Risk management oversight

Assessing innovation and emerging competition

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%

13% Overreliance on management's information

Divided ownership group

10%

a41% financial services b37% consumer goods c 40% retail d29% $100 million - $500 million

28%a 28%b

COPYRIGHT ? 2015 FORBES INSIGHTS | 5

Other key governance challenges for private companies include achieving regulatory compliance, leadership succession planning and global compliance. The challenges--and the lack of insight into these issues--can contribute greatly to the private company discount.

Overall board e ectiveness at private companies is also questioned by a signi cant number of directors (17%) (Fig. 2). This may in turn be in uenced by those who indicate directors may be overworked (16%), say their boards exhibit overreliance on infor-

mation provided by management (13%) or say their boards operate within a "divided" ownership group (10%).

Size plays at least some role in terms of governance challenges.The largest companies in the survey (over $1 billion) are more likely to view the assessment of competition and innovation as signi cant challenges. Smaller rms (under $500 million), tend to place greater signi cance on the challenges of strategic planning and leadership succession.

FIGURE

2 WHAT ARE YOUR GREATEST CURRENT/ONGOING GOVERNANCE CHALLENGES: BY SIZE?

Risk management oversight Assessing innovation and emerging competition Confirming/establishing company strategy Regulatory compliance Leadership succession Global compliance Board effectiveness Director time and workload Overreliance on management's information Divided ownership group

All

$1b+

$500m-$1b Under $500m

28% 29% 28% 27%

28% 34% 23% 25% 23% 25% 15% 29%

21% 20% 26% 18%

18% 11% 15% 29%

17% 18% 23% 10%

17% 14% 23% 14%

16% 23% 6% 18%

13% 13% 15% 12%

10% 9% 11% 10%

6 | PRIVATE COMPANY GOVERNANCE

Against this backdrop, boards at private companies face challenges of their own. The most visible are budget/resource constraints, selected by over a third of private company directors surveyed (36%) (Fig. 3). Over one in four directors surveyed, 28%, say their boards face con icts of interest, including the presence of related party transactions. And one in four, 25%, say their board's e ectiveness is hampered by an overrepresentation of controlling shareholders.

Other issues limiting e ectiveness of many boards include their serving in an advisory capacity only (25%), irregular meeting calendars (23%) and limited independent representation (22%). One in

ve directors, 21%, say their boards have inadequate access to or otherwise underutilize third-party resources/research--and 19% say their board lacks formal structure.

FIGURE

3 WHAT ARE THE GREATEST CHALLENGES TO BOARD EFFECTIVENESS?

Budget/resource constraints

Conflicts of interest/related party transactions Overrepresentation of controlling shareholders Board serves in an advisory capacity only Irregular meeting calendar Limited independent representation Underutilization of third-party resources/research Lack of formal structure

28%ab 25%c 25% 23%de 22% 21%f 19%g

a41% financial services b39% $1 billion and up c36% manufacturing d39% audit committee chair e37% consumer goods f33% retail g47% retail

36%

COPYRIGHT ? 2015 FORBES INSIGHTS | 7

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