How private companies can benefit from establishing corporate governance

Corporate governance has become a popular topic. While it primarily pertains to the governance of public companies, it can be a useful set of policies and procedures to help guide a private company by fostering discipline and informed decision-making. 

“Historically, private company boards have been more casual in how they’re organized and how they act, but more recently private company boards and their stockholders are looking for more accountability,” says Christopher Ivey, shareholder and co-chair of the corporate and securities practice at Stradling Yocca Carlson & Rauth.

Smart Business spoke with Ivey about corporate governance for private companies and best practices for its implementation. 

How does corporate governance operate in a private company setting?

The primary roles of a company’s board are supervising management, providing strategic direction and approving material actions. These roles are enabled through good corporate governance. A fully functioning, independent board that’s not controlled by the founder is more likely to exercise authority to make difficult decisions, including management changes. Beyond management changes, good corporate governance instills a level of discipline and accountability that the board may not otherwise be inclined to undertake. It also sends a good message to stockholders.

Should the board of a private company have legal or contractual obligations?

Corporate governance is not required in a private context with the exception of some regulated industries. Board members do, however, have fiduciary and legal obligations to stockholders to fulfill their duties of care and loyalty. Good corporate governance facilitates board members adhering to their fiduciary duties.

Corporate governance should be principle-based as opposed to operating by a rigid set of rules. However, codes of conduct and good committee charters can act as a guide. 

Generally, what are some best practices for corporate governance?

Establish policies that help create an effective board of directors, such as director independence.  

Form an audit committee of independent board members to oversee audits — internal control systems, risk management, detecting and preventing fraud — and meet alone with auditors. Also, if practical, get audited financial statements, as banks and institutional investors may require them. But whether audits are required or not, having accurate financials leads to better-informed business decision-making.

Consider having a compensation committee of independent board members to recommend senior officer compensation and structure, and administer equity incentive plans. Officers on the board shouldn’t be making their own compensation decisions.

Additionally, you may want to have a corporate governance and nominations committee that can identify director candidates, evaluate board performance and establish a code of ethics/conduct. Similarly, other committees can be formed to handle special tasks as appropriate.

How insulated should the board be from the rest of the company?

It’s important to have transparency. At a minimum, transparency ensures clear disclosure of conflicts of interest so everyone understands each individual’s potential personal gain or interest in the matter being deliberated. Beyond that, clear communication among board members and management is important to make good, clear, strategic decisions with the best information available.

Should all private companies establish corporate governance policies?

Avoid having governance policies and committees solely for governance sake. Corporate governance should facilitate allowing the board and management to focus on running the business. You don’t want to consume all of your time just checking the corporate governance boxes.

Private companies should choose elements of corporate governance policies that work best for them. Don’t do it just because everyone else is doing it. Do it to the extent it’s appropriate for your context.

Christopher Ivey is a shareholder and co-chair of the corporate and securities practice at Stradling Yocca Carlson & Rauth. Reach him at (949) 725-4121 or [email protected].

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