private company governance - KPMG - US€¦ · Private businesses and their owners face choices in terms of corporate governance . WhatÕs ... governance challenges ... private company

PRIVATE COMPANY GOVERNANCE

IN ASSOCIATION WITH:

T H E C A L L F O R S H A R P E R F O C U S

C O N T E N T S

Foreword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

About this research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Spotlight: Risk, competition and strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Q&A: Marjorie Bowen, independent director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Greater depth: Boards looking for more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Technology can help… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

…But with more data sharing comes greater risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Other key findings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Conclusion: Fine-tuning financial oversight. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

2 | PRIVATE COMPANY GOVERNANCE

Private businesses and their owners face choices in terms of corporate governance. What’s the right governance model for the company? What are the challenges faced in optimizing governance structures and processes? How does governance align with the financial goals of the company and its owners? These governance issues factor into the traditional valuation discount applied to private companies. How do we overcome this discount?

Getting beyond the discount —real or perceived— requires private companies to take a hard look at governance structures and processes, financial controls and, as our survey with Forbes Insights highlights, conflicts of interest.

Do the costs of greater rigor in strategy formulation and risk management pay off in terms of valuation or access to capital? How can financial processes, information flow and the finance organization be improved? And what do today’s data-driven reporting and business intelligence technologies contribute to performance, and at what cost?

Beyond such fundamental decisions, governance models of all companies are in constant need of fine-tuning. Is the organization obtaining sufficient insight regarding its full range of risks and opportunities? Are owners and management teams sharing the right information with the right set of advisors and board members? Is the governance in place today optimal for the vision and objectives of the company and its owners?

These and many related issues form the focus of the accompanying research—which we offer with our compliments. We hope you will find what follows both informative and thought-provoking.

Sincerely,

F O R E WO R D

Brian Hughes, National Private

Markets Group Leader,

KPMG LLP

Salvatore Melilli, National Audit

Industry Leader,

Private Markets Group,

KPMG LLP

COPYRIGHT © 2015 FORBES INSIGHTS | 3

The governance models of private companies are in constant need of fine-tun-ing and enhancement. The survey explores concerns such as: Are organizations obtaining sufficient insight regarding their full range of financial and operational risks and opportunities? Are owners and management teams sharing the right information with the right set of advisors and board members? Is adequate attention being placed on talent evaluation and succession planning in the finance organization? Overall, are governance processes and controls in place today optimal given the owners’ financial expectations?

Key findings include:

K E Y F I N D I N G S

• The top three governance challenges cited by private company directors include

improving risk management oversight, assessing innovation and emerging

competition, and confirming/establishing company strategy

• Other key governance challenges for private companies include achieving

regulatory compliance, leadership succession planning and global compliance

• The most visible challenges to board effectiveness include budget/resource con-

straints, conflicts of interest (including the presence of related party transactions)

and a compromised board due to an overrepresentation of controlling shareholders

• Directors believe that fast-evolving technologies—such as big data and related

analytical tools—may help to spawn more relevant and efficient reporting for

management and the board

• Private company directors are looking to their governance processes and controls

to improve M&A outcomes, enhance financial risk oversight and optimize the

finance organization through performance evaluation and succession planning


This report is based on a global survey developed by KPMG and executed by Forbes Insights. The survey was completed by 154 private company directors in September 2015.

Key demographics include:

• Board member: 100% were serving as a director for at least one private (non-public)

company

• Company type: Non-profit (17%), privately funded startup (38%), entre-

preneur- or family-owned business (32%), private-equity-owned/venture-capital-

backed business (39%), mutually owned/employee-owned/cooperative (16%)

• Annual revenue: $100 million to $200 million (17%), $200 million to $500 million

(16%), $500 million to $750 million (20%), $750 million to $1 billion (10%), $1 billion

to $5 billion (30%), more than $5 billion (6%)

• Industry: Software (10%), hardware (6%), consumer goods (12%), retail (10%),

manufacturing (25%), energy (2%), financial services (21%), professional services

(12%), other (2%)

For an added layer of context, Forbes Insights approached a handful of senior executives with vast experience in private company governance. We wish to especially thank the one on record:

• Marjorie Bowen, independent director

A B O U T T H I S R E S E A R C H

Despite the fact that many private company direc-tors (and investors) say that they are in near-constant communication with company management on corporate strategy and !nances, the shortfall in the perceived quality of governance remains signi!cant. Asked to assess a range of key governance challenges,

the top three cited by senior private company directors were risk management oversight (28%), assessing innovation and emerging competition (28%) and con!rming/establishing company strategy (23%) (Fig. 1).


The research shows that private company boards need to sharpen their focus on risk, competition and strategy.

S P OT L I G H T: R I S K , C O M P E T I T I O N A N D S T R AT EGY

Director time and workload

Board e!ectiveness

Global compliance

Leadership succession

Regulatory compliance

Confirming/establishing company strategy

Assessing innovation and emerging competition

Risk management oversight a

b

c

d

Overreliance on management’s information

Divided ownership group

a41% financial services b37% consumer goods c 40% retail d29% $100 million - $500 million

28%

28%

23%

21%

18%

17%

17%

16%

13%

10%

1FIGURE

WHAT ARE YOUR GREATEST CURRENT/ONGOING GOVERNANCE CHALLENGES?

Other key governance challenges for private compa-nies include achieving regulatory compliance, lead-ership succession planning and global compliance. The challenges—and the lack of insight into these issues—can contribute greatly to the private com-pany discount.

Overall board e"ectiveness at private companies is also questioned by a signi!cant number of directors (17%) (Fig. 2). This may in turn be in#uenced by those who indicate directors may be overworked (16%), say their boards exhibit overreliance on infor-

mation provided by management (13%) or say their boards operate within a “divided” ownership group (10%).

Size plays at least some role in terms of governance challenges. The largest companies in the survey (over $1 billion) are more likely to view the assessment of competition and innovation as signi!cant challenges. Smaller !rms (under $500 million), tend to place greater signi!cance on the challenges of strategic planning and leadership succession.


All $1b+ $500m-$1b Under $500m

Risk management oversight 28% 29% 28% 27%

Assessing innovation and emerging competition 28% 34% 23% 25%

Confirming/establishing company strategy 23% 25% 15% 29%

Regulatory compliance 21% 20% 26% 18%

Leadership succession 18% 11% 15% 29%

Global compliance 17% 18% 23% 10%

Board effectiveness 17% 14% 23% 14%

Director time and workload 16% 23% 6% 18%

Overreliance on management’s information 13% 13% 15% 12%

Divided ownership group 10% 9% 11% 10%

2FIGURE

WHAT ARE YOUR GREATEST CURRENT/ONGOING GOVERNANCE CHALLENGES: BY SIZE?

Lack of formal structure

Underutilization of third-party resources/research

Limited independent representation

Irregular meeting calendar

Board serves in an advisory capacity only

Overrepresentation of controlling shareholders

Conflicts of interest/related party transactions

Budget/resource constraints

f

g

ab

c

de

a41% financial services b39% $1 billion and up c36% manufacturing d39% audit committee chair e37% consumer goods f33% retail g47% retail

36%

28%

25%

25%

23%

22%

21%

19%

3FIGURE

WHAT ARE THE GREATEST CHALLENGES TO BOARD EFFECTIVENESS?


Against this backdrop, boards at private companies face challenges of their own. The most visible are budget/resource constraints, selected by over a third of private company directors surveyed (36%) (Fig. 3). Over one in four directors surveyed, 28%, say their boards face con#icts of interest, including the pres-ence of related party transactions. And one in four, 25%, say their board’s e"ectiveness is hampered by an overrepresentation of controlling shareholders.

Other issues limiting e"ectiveness of many boards include their serving in an advisory capacity only (25%), irregular meeting calendars (23%) and limited independent representation (22%). One in !ve directors, 21%, say their boards have inadequate access to or otherwise underutilize third-party resources/research—and 19% say their board lacks formal structure.

What are your current a!liations? I’ve worked with quite a few companies, but currently, I’m an independent director on three boards: one a public medical device maker, one a publicly reporting entity—but its equity is 100% controlled by another company—and the third is a privately held company owned partially by private equity (PE) and a management/ founder group.

What is your view on the state of governance at private companies? What I see in private ownership, governance is re-ally driven by the nature and the objectives of the shareholder base. There’s a spectrum of owners. At one end of the spectrum, there’s the PE, hedge fund world, where they are very interested in governance, best practices and managing those companies with the best of both worlds: the dis-cipline of the public company without necessar-ily all of the minutiae of reporting and disclosure. You have the management structure and com-mittees like a public company, but the focus is on a longer exit and not each quarter. At the other end are companies that are major-ity shareholder controlled, maybe family owned. They may have a board, but more in the spirit of “we need someone to talk to—maybe looking over our shoulder just a bit. We appreciate your view,” but that doesn’t mean we’re going to take succession planning seriously or take the other actions you suggest.

What do you view as the key roles of governance? Boards are there to monitor management and help them focus on long-term success. What is their strategy? How can they perform better? Another key job is to hire and fire management. When you have PE and hedge fund participation, hire/fire is a key role. But when you have family ownership, most of the hire/fire toolbox [goes missing].

What do you see as the benefits of enhanced governance for private companies?

Let me first say, there is also a spectrum of public company boards—from those who really and truly value an independent board to those who have one because they have to. I am for-tunate to have been involved with [the former] companies, where management is continually seeking best practices, they’re open with their board, there’s no undue management or insider pressure on decision making.

As for private companies [pursuing] greater gov-ernance, there are tradeo!s. The benefits are clear: you benefit from having a diverse group of highly experienced executives on your side, enhancing your processes, strategies, planning and operations.

But this comes at a cost. Engaging [a slate] of experienced and independent executives in stra-tegic planning, financial analysis, audit and other committees—that takes time and money. And—it’s work for the owners or managers keeping the board informed and collaborating.

How should owners decide how far to go in independent governance?

Ultimately, I think it depends on the vision. The board structure is evidence of where the owners and managers are taking the company. The greater the alignment of your management structure to your strategy; the more discipline in the reporting; the better your controls; the more you are functioning in ways similar to a public company: the more prepared you are to handle new investors and capital. If a private company is committed to growth and leadership in its industry, there will likely be board involvement.

Engaging [a slate] of experienced and independent executives in strategic planning, !nancial analysis, audit and other committees—that takes time and money. And—it’s work for the owners or managers keeping the board informed and collaborating.

Marjorie Bowen, independent directorQ&A

GOVERNANCE MODELS: A CHOICE DRIVEN BY VISION


Governance at private companies can be further improved by providing greater transparency and insight regarding the finance organization.

G R E AT E R D E P T H : B OA R D S LO O K I N G F O R M O R E R E L E VA N T M E T R I C S A N D I N S I G H T


The top two areas for improvement regarding !nancial information and the !nance organiza-tion include !nancial risk management (over half, 54%, rising to seven out of 10 or 68% at consumer goods companies) followed by treasury/capital allocation (one-third overall but rising to just under half at manufacturing !rms) (Fig. 4). Third place is a tie between tax and credit decisions, each registering 27%—though the former climbs to 47% within retail.

Since !nancial risk management garners the top vote for where the board needs greater information, it is appropriate to point out the challenges in !nancial risk oversight. One in !ve private company executives, 19%, say their !rms face challenges in attracting and retaining talent within their !nance groups (Fig. 5). Fourteen percent say they need more !nancial expertise on their board, rising to one in four among consumer goods companies. Other key challenges include lack of transparency (13%) along-side limited accuracy and timeliness (12%) in internal !nancial reporting.

M&A

Accounting

Controller

Credit decisions

Tax

Treasury/capital allocation

Financial risk management

f

b

c

a

a68% consumer goods b46% manufacturing c47% retail

54%

33%

27%

27%

25%

19%

16%

4FIGURE

WHICH OF THE FOLLOWING ASPECTS OF THE FINANCE ORGANIZATION’S WORK WOULD YOU LIKE YOUR BOARD TO HEAR ABOUT IN GREATER DEPTH?

In particular, executives see big data and related ana-lytical tools helping their boards to spot trends (41%), support management decision making in resource

allocation (38%) and improve audit and risk manage-ment (36%) (Fig. 6).

The good news is that executives believe that fast-evolving technologies may help to spawn greater board effectiveness among private enterprises.

T EC H N O LO GY C A N H E L P…

Implementation of new accounting standards

Lack of independent audit

Audit committee workload

Quality/consistency of third-party services

Accuracy and timeliness of financial reporting

Internal transparency of company’s finances

Financial expertise on the board

Attracting and retaining talent in the finance organization

a

a26% consumer goods

19%

14%

13%

12%

12%

10%

8%

7%

5FIGURE

WHAT IS YOUR TOP CHALLENGE IN FINANCIAL RISK OVERSIGHT?


Overall network security is the greatest red #ag at 32%—climbing to 47% at !nancial institutions (Fig. 7). Systems integration ranks second in concern

at 22%, followed by internal or employee-related risks (16%) and third-party risk (16%).

The downsides to the promise of big data are the associated data-sharing risks. Here, directors from private companies expressed concern over the security of their currently private financial information.

… B U T W I T H M O R E DATA S H A R I N G C O M E S G R E AT E R R I S K

More insight on macro/micro trends

Greater coverage of corporate transactions

Fine-tune external audit or accounting review

O!er greater assurance by third-party providers

Aid internal audit and risk management

Support management in allocation of resources

Spot trends (hidden in the data) 41%

38%

36%

36%

32%

29%

25%

6FIGURE

HOW WILL BIG DATA AND ANALYTICAL TOOLS IMPACT HOW DECISIONS ARE MADE IN THE BOARDROOM?


• Using the board to get more value from M&A

Greater board involvement can enhance the e"ec-tiveness of corporate development and related M&A within a private company setting. The survey probes the degree of board involvement within an M&A setting. Forty-four percent of executives say their board plays a key role in con!rming service and !nancing providers (Fig. 8). Slightly fewer, 38%, say the board goes so far as to actively review deal metrics both before and following a transaction.

The same percentage of executives indicate their !rms can currently lay claim to a board-level expert in M&A.

In addition, over a third say their boards are active in establishing a transaction committee for each new deal, while 30% say their boards do not become involved until a transaction meets or exceeds a pre-set price/value trigger.

The research also reveals other insights related to financial information and the board. The survey shows that companies are:

OT H E R K E Y F I N D I N G S

Unsophisticated record keeping

Third-party risk

Internal or employee-related risks

Systems integration

Network security a

a47% financial services

32%

22%

16%

16%

12%

7FIGURE

WHAT DO YOU VIEW AS THE GREATEST CHALLENGE OVER THE SECURITY OF YOUR COMPANY’S FINANCIAL INFORMATION?


• Engaging the board in succession planning for the finance organization

Boards should also play a greater role in succession planning—another area that can have a profound e"ect on the valuation of a private enterprise. Forty-eight percent conduct an annual review with senior leadership, rising to seven out of 10 among soft-ware companies (Fig. 9). One in !ve hire external

resources such as consultants and search !rms, rising to 32% among consumer goods !rms. The bad news: 17% currently exhibit an ad hoc approach to succes-sion planning, while 14% conduct this work without board input.

Managed by senior leaders (without board input)

Ad hoc

External resources and search firms

Annual review with senior leadership 48%

21%

17%

14%

9FIGURE

HOW DOES YOUR BOARD APPROACH SUCCESSION PLANNING, PARTICULARLY WITHIN THE FINANCE ORGANIZATION?

a

b

a69% software b32% consumer goods


Engages in deals above a pre-set price/trigger limit only

Establishes a transaction committee

Has a board-level expert

Monitors deal metrics during and after the transaction

Confirms service and financing providers 44%

38%

38%

35%

30%

8FIGURE

IN OVERSEEING M&A TRANSACTIONS, OUR BOARD:

Though they may be private, such companies none-theless see value in a third-party accounting review or audit. Nearly half, 45%, say such work can be an e"ective check on internal controls—including controls over !nancial reporting (Fig. 10). Third- party involvement can also be a boon to benchmark-

ing and best practices, say 39% of respondents. Other bene!ts include speeding time to transaction in M&A (32%), meeting the demands of suppliers or lenders (31%) and generally, increasing creditworthiness (29%).

Note that just as technology is expected to improve overall board e"ectiveness, executives believe that advances in technology, data and related analytics should also enhance the value of services received from their accounting !rms or independent auditors.

In particular, 37% of executives say such technolo-gies in the hands of their third-party providers will help to raise the con!dence level of the board, investors and executive leadership in terms of the quality and accuracy of !nancial audits (Fig. 11). The same percentage of participants, 37%, say such tools can help identify new or unexpected areas of risk and control weaknesses.

Another key bene!t is greater capacity to drill down and explore complete data sets in more precise and interactive ways to provide value-added insights, cited by 36% of respondents. Thirty-one percent of executives say these tools will also help meet the changing expectations of the capital markets for richer data to assess company performance. Other bene!ts include providing scalable audit tools that are able to work across multiple ERP systems (29%) and leveraging company investments in technology so that data from a company’s existing systems can be put to use to improve audit e"ectiveness (29%).

Increases creditworthiness

Expected or required by suppliers or lenders

Speeds time to a transaction

Benchmarking and best practices

An e!ective check on internal controls and/or internal controls over financial reporting

b

a

c

de

a59% manufacturing b50% financial services c44% software d53% retail e37% consumer goods

45%

39%

32%

31%

29%

10FIGURE

WHERE IS THE VALUE IN A THIRD-PARTY ACCOUNTING REVIEW OR AUDIT?


• Reaffirming the role of an external auditor

Governance at private companies is by no means broken, but when it comes to financial oversight and information, there is room for improvement. The research suggests that there is sufficient cause to take steps to enhance current practice. Key areas for improvement include:

• Risk management reporting and analysis—financial and otherwise

• Confirming/establishing company strategy

• Succession planning within the finance organization

• Data transparency and structured financial reporting

• Technologies for reporting, control and analysis

So is the organization obtaining su$cient insight regarding its full range of risks and opportunities, including those that could enhance or hinder corporate valuations? Is management sharing the right information with the right set of advisors

and board members? In essence, is the governance in place today to optimize value? As the research suggests, a closer look will likely highlight a range of issues requiring added focus.

Help to raise the confidence level of the board, investors and executive leadership in the quality and accuracy of financial audits 37%

Identify new or unexpected areas of risk and control weaknesses resulting from the audit 37%

Offer a new capacity to drill down and explore complete data sets in more precise and interactive ways and provide value-added insights 36%

Meet the changing expectations of the capital markets for richer data to assess company performance 31%

Provide scalable audit tools that are able to work across multiple ERP systems 29%

Leverage company investments in technology so that available datafrom a company’s systems can be effectively used in the audit 29%

11FIGURE

HOW DO YOU MOST EXPECT ADVANCES IN TECHNOLOGY, DATA AND ANALYTICS TO ENHANCE THE VALUE OF THE SERVICE YOU RECEIVE FROM YOUR ACCOUNTING FIRM OR INDEPENDENT AUDITOR?

C O N C LU S I O N : F I N E-T U N I N G F I N A N C I A L OV E R S I G H T A N D I N F O R M AT I O N


KPMG PRIVATE MARKETS GROUP

You know KPMG, but you might not know KPMG’s Private Markets Group (PMG). We are dedicated to working with businesses like yours. Whether you are an entrepreneur, family business, or a fast-growing company, we under- stand what is important to you. By providing industry perspectives and proactive guidance, our PMG professionals help privately owned companies achieve their strategic objectives throughout each stage of the business life cycle. Our global network provides integrated audit, tax, and advisory services wherever you grow your business.

Learn more at kpmg.com/us/privatemarketsgroup.

ABOUT FORBES INSIGHTSForbes Insights is the strategic research and thought leadership practice of Forbes Media, publisher of Forbes magazine and Forbes.com, whose combined media properties reach nearly 75 million business decision makers worldwide on a monthly basis. Taking advantage of a proprietary database of senior-level executives in the Forbes community, Forbes Insights conducts research on a host of topics of interest to C-level executives, senior marketing professionals, small business owners and those who aspire to positions of leadership, as well as providing deep insights into issues and trends surrounding wealth creation and wealth management.

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FORBES INSIGHTS

Bruce RogersChief Insights O!cer

Erika MaguireProject Manager

EDITORIAL

Kasia Wandycz Moreno, Director Hugo S. Moreno, DirectorWilliam Millar, Report AuthorDianne Athey, Designer

RESEARCH

Ross Gagnon, DirectorKimberly Kurata, Research Analyst

SALES

North AmericaBrian McLeod, Commercial [email protected] Muszala, ManagerWilliam Thompson, Manager

EMEATibor Fuchsel, Manager

APACSerene Lee, Executive Director

Documents

private company governance - KPMG - US€¦ · Private businesses and their owners face choices in terms of corporate governance . WhatÕs ... governance challenges ... private company