The value a board can bring

About Owen Gibson

Owen Gibson is a partner in the Wellington office of PwC specialising in advice to privately owned and emerging businesses. He has spent his career advising on growth, strategy and governance issues and has acted as a director, trustee and board member of numerous businesses and not-for-profit entities.

The importance of good governance

Having experienced ongoing success and conquered earlier growth challenges successfully, business owners and directors can sometimes be resistant to structured governance.

Governance in privately owned businesses

Governance is just as important, if not more so, in privately owned businesses than in large and listed entities. Some family and privately owned businesses are larger and more complex than many listed businesses. Our research shows a significant number of owners of privately owned businesses will be looking to exit their businesses in the next five years and that two of the key value drivers is the establishment of an effective and structured management team and equally well structured and effective board.

Coupled with the succession issue, banks and financiers are getting increasingly persistent about appropriate governance, particularly where there are large debt facilities. Banks will push heavily for structured governance as they believe all businesses can benefit from an independent sounding board. Where a business has raised capital, the investment will generally come with a boardseat(s) relative to the size of the investment.

Tips for success

Have realistic expectations of what governance can do

It's important to keep in mind that there is no silver bullet. Good governance doesn't mean all the answers are at the table. However, you can often see the immediate benefit of a quality independent director. I have recently been involved with a client, an owner of a substantial business, who introduced their first independent director to the board. The director was very experienced with wide ranging skills and immediately posed questions and engaged with us as advisors over key issues without dipping into day-to-day management.

Be willing to listen

One of the key challenges to resolve when introducing independent directors is the ability to accept challenge and robustness for the value it will generate rather than seeking acceptance. Problems tend to arise when the predominantly family or management boards do not appreciate being questioned or having their decisions challenged. An independent director with answers that always match those of leadership is, in essence, ineffectual.

Choose diversity and independence

Look for directors who can add value, merely appointing an outsider does not immediately create value.

Diversity is an important criteria, as are the breadth of the skills, experience and perspective.

n looking at independent directors it is important that the owners and existing directors don't see them as representing a particular cause, that is, being there on behalf of the bank or an external investor or shareholder. To provide the value the board need to work together and often in privately owned businesses the independent director needs to build relationships with the owners, shareholders and wider stakeholders such as other family members to ensure they can contribute effectively.

Consider the chair carefully

It is also important to carefully consider the chair of the board, be it a member of the existing board or someone independent. A good chair can create significant value and ensure the board is effective. The role is vital in keeping the board focused on the key issues and drawing out the best from the directors and their various perspectives. The chair should also work closely with the CEO and a good one can provide the pathway from a closely held private board though to a diverse and successful independent board.

When the time is right

Setting up first boards is not only a small company issue. Many substantial businesses are in the same boat, facing the transition from closely held governance to an effective board with independent directors and oversight.

There is usually a trigger point for considering moving to more formal governance. This can be part of a succession process, ie a sale to external investors or management; pressure from external financiers or banks or a significant step in the business eg expanding overseas or looking to sell all or part of the business.

Moving to formal boards can be challenging when no structure has been provided, particularly when external advisors have been in solely technical roles.

Advisory boards can be a good stepping stone but do need to be used with caution and with an eye to what they are. Decision-making must still rest with the owners but the advisory board can provide insight and guidance. The most useful advisory boards are ones where meetings are held regularly, agendas and minutes are kept and views are widely canvassed however at the end of the day the entrepreneur still moves on and makes their own decision with the advice to hand.

At PricewaterhouseCoopers we work with businesses to identify where independent governance is appropriate, point them in the right direction and discuss the benefits of quality external governance.

We also encourage business leaders to consider good governance as part of their journey both personally and for the business.

In summary, there is clear value in private businesses having a board if all the stakeholders work together, and see the long-term value that can be created. The board is a good independent board and has the right mix of skills and experience.

Find out more about starting up a board