A survey of U.S. private company CEOs by tax and advisory services firm PwC found that 80% are adopting elements of a corporate governance strategy. The study—known as PwC’s Trendsetter Barometer—reported the views of 221 chief executives of privately held American businesses; they were surveyed between April 20 and July 18, 2012. CEOs of family-owned businesses were among those queried, though PwC’s report does not separate their responses from those of their non-family counterparts.
Formal corporate governance is not required of U.S. privately held companies. Ken Esch, a partner in PwC’s Private Company Services practice, says it’s noteworthy that these firms are instituting governance policies and procedures voluntarily. “One of the real driving factors was the financial crisis,” Esch says. Good governance, he notes, “makes sense in these economic times.”
The survey found most respondents’ governance strategies are centered on short-term financial issues, such as financial governance and fiscal planning, rather than long-term concerns such as succession. The top two areas of formal corporate governance were financial reporting (cited by 71% of respondents) and fiscal planning (cited by 61% of respondents).
“The Great Recession probably drove businesses to take a much harder look at how they manage risk within their business,” Esch says. “When things were crashing, they really needed to make sure they had control over their financial statements so they were making good business decisions.”
Trendsetter CEOs were asked about the potential advantages of corporate governance. Two financial benefits were cited most often as having major importance: accurate and reliable financial statements (65% of respondents) and fiscal scrutiny in areas such as capital expenditures and ROI (56%). Other major benefits were greater focus on the company’s long-term health, including succession and long-term strategy (cited by 54% of respondents) and accountability of top management (53%).
Uncertainty affects succession planning
Only 33% of Trendsetter CEOs said their business has a formal, documented succession plan. PwC’s Esch says the financial crisis likely pushed succession to the back burner. “Succession planning is not top of mind for all of these companies,” he says. “The owner or founder is much less willing to hand over the keys to the company when there’s so much turmoil in the market.”
Of the business leaders who reported that they have formal succession plans, most (82%) said their plans identify the likely primary successor, and the majority (83%) of the respondents said they believe that person is capable of taking control today.
Yet the vast majority of Trendsetter respondents were more concerned with mitigating current financial risks than with setting a strategy for the future. Their top priority has been to make it through the crisis, Esch notes. “You want to make sure that you’ve used the money that you’ve earned in a way that will ensure the long-term success of the business,” he says.
Boards’ focus
Trendsetters’ assessment of their boards’ main responsibilities offers more evidence of the emphasis on near-term fiscal issues. More than nine of ten (92%) said their board’s chief duty was monitoring company performance, and over three-quarters (77%) cited oversight of the capital budget and key operating budgets as a main responsibility. By contrast, only 52% of respondents said succession planning was a main board responsibility.
The survey found that only 27% of the board members at these companies are independent, outside directors. “I think that over time, that will change,” notes Esch, who points out that in many cases, these companies’ boards are newly formed. “The first step in the process is, ‘Let’s set up the board’; then, we can consider who should be on it,” Esch says.
Once companies have proved to be on solid footing, management teams will begin to focus on achieving long-term goals and planning more aggressive strategies, such as buying a competitor, expanding into global markets or launching new products. “They can look to the board for direction around these [plans],” Esch says. CEOs whose companies have no experience in global markets know they must seek the counsel of outsiders in order for their global expansion plans to bear fruit, he points out.
“A measured approach in adopting these strategies makes sense.”
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Main areas of corporate governance
| Financial governance | 71% |
| Fiscal planning | 61% |
| Regulatory compliance | 61% |
| Long-term corporate strategy | 56% |
| Risk management | 54% |
| Corporate performance | 49% |
| Executive performance & compensation | 49% |
| Talent management/business succession | 43% |
Source: PwC’s Trendsetter Barometer, 2Q2012
Main board responsibilities
| Monitoring company performance | 92% |
| Overseeing/approving capital budget and key operating budgets | 77% |
| Setting corporate strategy | 76% |
| Overseeing risk management | 71% |
| Evaluating top executives’ performance | 67% |
| Setting/approving compensation for top executives | 66% |
| Succession planning | 52% |
Source: PwC’s Trendsetter Barometer, 2Q2012
Corporate governance benefits
| Potential benefit | ||||
| Major | Minor | None | Not reported |
|
| Accurate and reliable financial statements | 65% | 20% | 13% | 2% |
| Fiscal scrutiny (capital expenditures, ROI, etc.) | 56% | 28% | 13% | 3% |
| Focus on company’s long-term health (e.g., succession, long-term strategy) |
54% | 34% | 9% | 3% |
| Top management accountability | 53% | 27% | 17% | 3% |
| Regulatory compliance | 40% | 35% | 22% | 3% |
| Risk management (continuity planning,crisis management, etc.) | 39% | 45% | 15% | 1% |
| Corporate ethics (e.g., code of conduct) | 36% | 39% | 22% | 3% |
| Decision making about executive compensation | 29% | 48% | 20% | 3% |
| Corporate social responsibility (environmentally friendly practices, workforce diversity) |
17% | 55% | 25% | 3% |
Source: PwC’s Trendsetter Barometer, 2Q2012