Rotman School of Management, University of Toronto

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Report: The critical importance of effective private company governance

What does ‘good governance’ look like for private companies?

Privately-owned companies are the most significant drivers of the Canadian economy, contributing up to 67% to GDP. Yet most insights on effective corporate governance derive from research conducted on large public issuers with copious disclosure. We sought to address this gap by going directly to the source and asking private company owners, directors and managers: what drives successful decision-making in your company?

In collaboration with KPMG, we conducted interviews with private companies across Canada about how they make decisions. Most private company owners are wary of the term ‘governance’ since it implies ideas of bureaucracy and a loss of control. For the purposes of this paper, we pared ‘governance’ back to one of its most basic principle: decision making. Every company functions on decisions, with or without formal governance structures.

So what does ‘good governance’ look like for private companies? Our conversations suggest that it depends. We learned that private companies are forging their own paths and there is no ‘one-size-fits-all’ structure or set of policies that works best – the most effective governance approach depends on the needs of the owners and the company. Nevertheless, all decisions can benefit from the injection of an outside perspective.

Key Takeaways:                       

  • Governance models are as diverse as companies

Companies developed familiar and creative approaches to effective decision making ranging from building formalized governance structures that closely resembled public companies (e.g. a fiduciary board and formal board committees) to informal or no structures. Companies can benefit from formalizing governance in a manner that is suited to their needs.

  • Private companies with boards vary in how they compensate their members

The smallest company paid their board members as much as $50,000 a year, while the next highest-paying company paid half the amount.

  • Decisions can benefit from the injection of an outside perspective

Both experts and non-experts can provide a valuable outside perspective to decision makers, though the best way to gain an independent perspective might vary. It may be as valuable to establish a formal fiduciary board as consult with an informal body that can ask penetrating questions, provide advice, and challenge as necessary.                                                                                                                                                                 

  • Good governance can add material value to business decisions

Individuals are prone to making irrational decisions. External influence or an independent perspective provided by an impartial body can enhance outcomes and mitigate against the risks inherent to decisions made by individuals in isolation.





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