Corporate Governance for Private Companies

Although much legislation has been passed requiring strong corporate governance policies specifically for public companies, it is extremely beneficial for private companies and non-profit organizations to have corporate governance policies as well. Implementing corporate governance policies is encouraged in order to enhance financial transparency, managerial accountability, and shareholder value.

Strong corporate governance is necessary if you are considering selling your private company or going public. Lacking corporate governance is a red flag for public companies looking to buy because the price of having to adopt their governance all at once can be steep. Private companies that have strong internal control will have a smoother transition in adopting legally mandated corporate governance once they go public. Additionally, smart investors and lenders will be looking for adequate financial statements, management accountability and a competent audit committee before providing equity or financing to a private company. Similarly, adopting corporate governance policies is important for non-profit organizations to help them gain the trust of their donors.

Manager Accountability and Board Composition

A private company in encouraged to have a board of directors composed primarily of independent directors. These directors should be a diverse group of leaders from varied industries who can provide valuable contacts, opportunities, and objective advice. Their expertise should be used for strategic planning, succession planning, and managerial hiring and evaluation.

The board would be responsible for approving and enforcing your company’s code of ethics, policies, and procedures. Outlining these rules also forces your company to develop a more efficient and smooth operating system. Creating these documents may take some time, but having a set of rules for managers and employees to follow is an important value-add to your company.

Financial Transparency

Clear and correct financial statements are important to accurately gauge the financial realities of the company. Developing a formal accounting and reporting process will ensure more financial transparency. To enforce a good accounting system, create an internal audit system that will oversee data and flag any inconsistencies. An example of this could be having two people instead of just one person sign off on checks over a certain amount.

Audit Committees

Depending on the size of your company, putting together a large audit committee may be unnecessary and costly. Still, you can establish policies that create an internal audit function. There should be some sort of whistleblower policy, similar to the independent financial auditing committees we see in public companies. The policy should protect anyone who reports financial or managerial inconsistencies. Enacting these policies will establish a culture of honesty and accountability within your company.

Making Your Company Valuable

Creating and maintaining corporate governance policies for your company will ensure it runs as efficiently as possible and can make your company more attractive in a potential sale or merger, as well as preparing it to go public.

Keren originally drafted and published this newsletter for her firm, Horwitz, Cron & Armstrong. See the original post here.