How Trends in Corporate Governance Vary for Smaller Firms


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Flickr photo from reynermedia on Creative Commons

I work mostly with smaller organizations, especially family-run companies, but I’m interested in corporate governance trends at larger institutions. I’ve written before about why privately held companies might want independent boards of directors. What is good for large institutions is often also helpful in small companies. And sometimes smaller organizations are ahead of stagnated large companies—they can change more rapidly when the need arises.

Here are some recent trends in corporate governance, together with how I think the trends may work differently in large and small companies:

  • Focus on independence and diversity

The Council of Institutional Investors (CII) states in its Corporate Governance Policies that at least two-thirds of a board’s members should be independent. Most small businesses rely primarily on company management to serve as directors. When most of the shareholders are also managers in the organization, this makes sense.

However, as a business grows, a focus on independence becomes more important. Large institutional shareholders will demand a voice on the board, and their opinions might or might not agree with what management wants. Because shareholders are the ultimate decision-makers, their voices should decide who is on the board.

Diversity may or may not be a focus in both large and small companies. Public sentiment desires more diversity in corporate decision-making, and greater racial, ethnic and gender diversity can keep consumer products, entertainment, and other companies with a public base more in tune with its customers. However, shareholders at some institutions may feel less strongly than others.

Here is another trend where small and large companies may diverge. Shareholders at family-run companies are more likely to want continuity and consensus than larger companies with institutional owners. Board diversity is particularly likely to be important where the shareholders are public entities, such as government worker pension plans or universities.

  • More scrutiny of the board, through self-assessment and shareholder assessment

The U.S. National Association of Corporate Directors (NACD) recommends that the Governance Committee of boards should have a process to routinely assess its own performance, the performance of its Committees, and its individual directors. Moreover, a Nominating and Corporate Governance Committee is one of three standing committees—along with an Audit Committee and a Compensation Committee—that the NYSE requires be composed entirely of independent directors.

This self-assessment is a growing trend in corporate boards. Along with self-assessment is an increased scrutiny of the board by institutional shareholders. With only independent shareholders on the governance committees of publicly traded companies, these large shareholders have the opportunity to assess the board and make changes when necessary.

At smaller and privately held companies, self-assessment and shareholder assessment may be less rigorous. But all companies should develop some form of board member assessment. For these smaller companies, it might be an outgrowth of internal succession planning and leadership development.

  • Increased transparency and disclosure

Along with board assessment comes the need for transparency in board activities. Shareholders cannot assess what they cannot see. The NACD expects boards to disclose sufficient information to shareholders to enable them to assess whether the Board is functioning effectively.

What is sufficient information will vary from organization to organization. In larger organizations, what is material to the company’s functioning will be much greater than at smaller companies. But as the number of independent board members increases and there is less involvement of management directors (who presumably know what is going on internally), the amount of disclosure will increase.

  • Attention to a broader array of risks, such as cyber-attacks

It used to be that boards only needed to worry about the corporate balance sheet and CEO succession (and they could avoid the succession issues for years at a time). However, in today’s environment, cyber-crimes will only become more sophisticated, and every organization needs to consider its vulnerabilities, along with those of its suppliers and customers.

Now, not only must directors focus on financial threats, but other existential risks as well. These risks might come a wide variety of causes even beyond cyper-attacks—natural or environmental disasters, terrorism, and public relations debacles.

A good board of directors at any institution, large or small, thinks about these threats. Each organization will need to undertake its own risk assessments, then educate its board of directors about its conclusions.

* * * * *

Flickr photo from thetaxhaven on Creative Commons

Flickr photo from thetaxhaven on Creative Commons

Institutional investors at large organizations will continue to demand greater influence not only on financial strategies, but also on risk assessment and board member assessment. As these demands grow, shareholders at smaller organizations, including family-run companies, need to analyze what makes sense in their companies.

Furthermore, managers interested in developing themselves to be board members someday—regardless of the size of institution on whose board they might serve—would be well served to educate themselves in these areas of corporate governance. To be a serious candidate for any corporate board, an individual needs to be savvy about what shareholders expect in today’s environment.

What other corporate governance trends do you see? Which trends that I mentioned do you think are most important?

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2 Comments

Filed under Diversity, Leadership, Management

2 responses to “How Trends in Corporate Governance Vary for Smaller Firms

  1. Sara Robinson

    Wow this is a good piece of article and thankfully came to know more about the latest trend. Actually I was in a position where back in Sydney, Corporate Governance advice was a stranger to me. But slowly I am catching up with the same and working hard on it like you.

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