Board directors play a key role within private organisations’ boardrooms, yet their tasks are not always straight forward. Risk management, getting a grasp on competitive intelligence and defining a company strategy are their top three challenges, according to a survey held among executives.
Corporate governance remains a key issue for private businesses and NGOs, different oversight and direction structures can create considerably different outcomes for the businesses' long term viability. Understanding the challenges faced by board directors across a range of companies and sizes, may provide insight into how board models can be best fine-tuned – by increased focus on areas of concern – to perform their respective function well.
In a new report from Forbes Insight, in association with KPMG, the boardroom environment is plumbed for key trends, and challenges. The report, titled ‘Private Company Governance: the call for sharper focus’, involves 154 private company directors, working for a range of company types: Non-profit (17%), privately funded startup (38%), entrepreneur- or family-owned business (32%), private-equity-owned/venture-capital backed business (39%), and mutually owned/employee-owned/cooperative (16%). The annual revenue of the respondents’ organisations range from 17% in the 100 million to $200 million class, to 6% in the more than $5 billion class, while 30% were in the $1 billion to $5 billion class.
The survey finds a number of key current and ongoing governance challenges faced by organisations. The biggest issue is found to be ‘risk management and oversight’, cited by 28% of respondents. ‘Assessing innovation and emerging competition’ comes in second, also at 28% - however, this category is particularly an issue for $1 billion plus organisations, at 34%, while in the size category down 23% cite it as an issue. The third most cited issue is ‘confirming/establishing company strategy’, which is cited, on average, by 23% of organisations – in this category it is particularly boards of smaller organisations that face this challenge, at 29%.
The areas of least concern to the board members surveyed are ‘divided ownership group’ at 10%, ‘overreliance on management’s information’, at 13%, and ‘director time and workload’ at 16%. ‘Board effectiveness’ is cited as an issue by 17% of responding directors.
The consultancy further asked respondents to identify where board effectives challenges arise. The key area of challenge is in ‘budget/resource constraint’, at 36%. The second biggest area of concern was found to be ‘conflicts of interest/related party transactions’, at 28% - although this was considerably higher at financial services firms (41%) and organisations of $1 billion and up (39%). The phenomenon of ‘overrepresentation of controlling shareholders’ came in third equal (25%) with ‘board serves in advisory capacity only’.
Of least concern to the executives that participated, at 19% and 21% respectively, are ‘lack of formal structure’ and ‘underutilisation of third-party resources/research’.
Improving the board
To improve the function of the board in the area of finance organisation, a number of areas for improvement regarding financial information and the finance organisation were cited by respondents as prudent. These include improved information in the area of ‘financial risk management’, cited by 54% of respondents, improved information for ‘treasure/capital allocation’, at 33%, and ‘tax’ at 27%. The areas of least concern were found to be ‘M&A’ information and ‘accounting’ information, at 19%.
Another area in which the board can be supported in its traditional decision making process is through the use of big data and analytical tools. According to the survey, 41% believe that digital tools will allow them to ‘spot trends (hidden in data)’, 38% say that it will help them ‘support management in the allocation of resources’, while 36% say that it will ‘aid internal audit and risk management’. The two areas cited by the fewest respondents, in terms of potential benefit to the organisation, were ‘more insight on macro/micro trends’ and ‘greater coverage of corporate transactions’.
However, with big data comes concern over data-sharing risks. Overall, 'network security' poses the greatest concern among directors, followed by 'systems integration', 'internal or employee-related risks', 'third-party risk' and 'unsophisticated record keeping'. These concerns reveal that directors regard the safekeeping of big data as a great challenge when it comes to the security of the organisations’ financial information.
Gaining more value from M&A
Greater board involvement can enhance the effectiveness of corporate development and related M&A within a private company setting. Before reaching a deal, executives confirm that their board plays a key role in overseeing the M&A transaction, their role ranges from confirming service and financing providers (44%) to monitoring deal metrics (38%) to gaining M&A expertise at board-level (35%) or establishing a transaction committee (35%). On the other hand, just under a third of executives says that the board only gets involved once deals have reached a pre-set price or value trigger.
When boards play a role in succession planning it can have a profound effect on the valuation of the private enterprise. In current practise, predominantly software companies conduct annual reviews with senior leadership present (48%) whereas one in five of the companies surveyed hire external consultants and search firms to address succession planning. Yet, more boards should play a greater role when it comes to succession planning, with currently 17% of companies operating with an ad hoc approach while 14% work without board input entirely.
Respondents value third-party involvement, such as accounting reviews and audits, as good practise, with benefits such as ‘effective check on internal controls' (45%), ‘benchmarking and best practices’ (39%), ‘speeds time to transaction’ (32%) cited as the top three benefits of using an external auditor.
In summary, the research suggests that there is sufficient cause to take steps to enhance current practice, but that governance at private companies is by no means broken when it comes to financial oversight and information. Key areas for improvement include risk management reporting and analysis, confirming/ establishing company strategy, succession planning and data transparency, among others.