CEO Insider

The Benefits of Good Governance: Risk Mitigation and Sustainable Value Creation

As leaders of organizations, founders and CEOs get a large share of the credit and the blame for business developments, both good and bad. But the decisions to influence and inspire a company’s vision, values, culture, and direction should not be made in a vacuum. While CEOs certainly play a part in setting the stage for a company’s long-term success, a meaningful factor is at play that boils down to one word: governance.

No matter the type and size of a business or organization, strong governance practices can ensure that the organization protects itself from big risks and builds a foundation for long-term value creation. Good governance also helps to identify the roles and authority of all stakeholders, from the CEO and board to its shareholders, lenders, customers, suppliers, and employees.

Good governance, therefore, is a critical aspect to any organization’s long-term success. It not only holds CEOs accountable to a higher standard and sets a range of governing controls, but also enables that organization to weather transitions and maintain an upward trajectory. Good governance is an investment —sometimes a big one — in thoughtful decision-making. This goes for huge public companies, tiny private businesses, and the many organizations in between.

The Good in Governance

For all the good that governance does in managing business interests, it’s still misunderstood, and this confusion has led many private companies to forgo the process altogether. Research by KPMG has found that private companies perceive a shortfall in the quality of their governance. Nearly one-third of private company directors expressed concern that risk management oversight was one of their greatest ongoing governance issues, while another third said assessing innovation and emerging competition was among the top challenges. One-quarter of respondents identified confirming and establishing company strategy as a governing weak spot.

Some smaller companies may see governance as a practice reserved for publicly listed corporations, not for some startup, newer venture, or family business. If so, they aren’t seeing it correctly. Private entities are just as complex and in need of monitoring as those freely traded on the stock exchange.

Examples abound. Uber’s long public-relations nightmare is a direct result of shoddy governance that reflected a toxic culture within that company’s C-suite. Volkswagen cheating on emissions tests and lying to the public is another great example of terrible governance, as the German manufacturer’s reputation has taken a massive hit. Same with Wells Fargo turning a blind eye to millions of fraudulent accounts being created. Without a doubt, companies of all sizes need to establish governance, set up a board, and institute proper controls so that no one is above the law and the entire organization is protected from the vicissitudes and caprices of any one individual. Otherwise, organizations open themselves up to higher risk.

Most private companies don’t think they can afford a board of directors, but consider that a board can grow in lockstep with the company, which means you can have a less expensive board to start and then increase the fees and compensation over time. (Some companies can even create boards that operate for free, but in the long run, you get what you pay for.) This flexible approach allows you to improve the caliber of your board members, strengthen the processes, and add to the time commitment as your company increases its market share.

Governance and growth can exist without one another, but the better proposition is when the two concepts are married. Growth often occurs when companies are in new and burgeoning industries: When companies begin outperforming industry peers, you’ll often find a correlation between that growth and good governance.

You’ll also see that good governance does wonders for limiting a company’s risk. When a situation goes awry, good governance can prevent the situation from growing worse or spiraling out of control.

Does this mean you need to stack your board to ensure good governance? Not necessarily. We’ve worked with companies ranging in size from $20 million to $100 million in revenue that have supported boards with as few as three people and as many as 11. In our experience, a board of five to seven members is optimal. It’s always about striking the right balance between industry experts, functional experts, and workhorses. In other words, you want both experience and efficiency.

So how does a small company ensure it’s making the right choice with its board and governance?

  1. Recruit to offset deficiencies. When recruiting board members, don’t narrow the field to only industry experts. Look at your weaknesses and deficiencies to inform your decisions on who would be ideal. If, for example, you excel at sales, then find at least one or two board members who can help with operations or finance. Alternately, if operations are your strong suit, then find board members who can help with sales.
  1. Get to the difficult questions. If you’ve been in a board meeting, you know it often entails a PowerPoint presentation. But wouldn’t a better use of everyone’s time be a Q&A? Creating a dialogue can provide an opportunity to seek counsel on critical business matters with functional experts and focus the board’s attention on operational challenges. CEOs and management teams should be starting with their hardest questions first: What’s going to destroy the company? What are the biggest areas of risk? How is the competition impairing the business model? What will customers choose instead?
  1. Structure the process. As a CEO, you need to develop a rhythm with a board: What’s the monthly, quarterly, and annual engagement? How often do you communicate with board members? One of the easiest ways is to involve the board members early in the decision-making. If you’re working on strategic direction, consider presenting a number of options for their feedback, not approval. This allows you to gain valuable insights while still maintaining control. And then by providing periodic updates, you alleviate board temptation to interfere with daily operations.

CEOs have a duty to their predecessors and future stakeholders of the company, which is why ensuring good governance is crucial for you. You serve as the steward of a community, culture, and set of ideas, and this requires you to surround yourself with people who can support and protect both the history and the future of the business. Don’t leave anything to chance. You simply must commit to proper oversight, no matter what.

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Martin Stein
Martin Stein is the founder and managing director of Blackford Capital, focused on dramatically transforming lower middle-market industrial enterprises through exponentially profitable growth.