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New guidance on corporate governance for private companies

Napthens - August 19th 2010

Earlier this year, the Institute of Directors (IOD) published the first edition of Corporate Governance and Principles for Unlisted Companies in Europe. This initiative offers guidance for unlisted (i.e. largely private) companies, particularly owner-managed, family business or founder–entrepreneurs.

What is it?
The paper provides guidance and best practice frameworks to deliver “company processes and attitudes that add value to the business, help build reputation and ensure its long term continuity and success”. It seeks to define roles and responsibilities, as well as the distribution of power amongst directors, shareholders, other board members and even stakeholders such as employees, suppliers and local communities.

Who is it aimed at?
The guidance is primarily aimed at unlisted companies established by family members or co-founding entrepreneurs, and is useful food for thought to subsidiaries, joint ventures and even social profit organisations.

  • What are the main principles?
  • The size and composition of the board of directors should be appropriate to the company’s activities; should meet regularly to discharge its duties and be supplied in a timely manner with appropriate information
  • The board is responsible for risk oversight and should maintain a sound system of internal controls to safeguard shareholders’ investment and the company’s assets
  • Family-controlled companies should establish family governance mechanisms that promote coordination and mutual understanding amongst family members, as well as organise the relationship between family governance and corporate governance
  • There should be a clear division of responsibilities at the head of the company between the running of the board and the running of the company’s business
  • The board should present a balanced and understandable assessment of the company’s position and prospects for external stakeholders and establish a suitable programme of stakeholder engagement.
  • What are the possible benefits?

A planned and controlled strategy can bring genuine commercial benefit, including:

  • Improved attitudes and behaviours as a result of decision processes which clearly show actions being taken in line with company strategy or policy.
  • Increased attractiveness to potential investors or financial backers, showing clear focus, strategy and professionalism
  • Defined lines of accountability, which allows for clearly developed and thought out lines of management, responsibility, and evaluation
  • Clearer understanding within family businesses of who is responsible (or not) for performing certain functions and who has the final say.
  • A clear strategy allows for combined efforts in working towards milestone events for the business, eg succession issues, acquisition and financial projections.

What practical steps can I take?

Read the guidance and consider adopting a clear governance plan for the business. This can be contained within an appropriate shareholders’ agreement or joint venture agreement, which is something we can help you with.

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