We read recently (with great pleasure) a research report, The critical importance of private company governance, published by The David & Sharon Johnston Centre for Corporate Governance Innovation at the Rotman School of Management.
We find this report compelling for two primary reasons:
- First, we love the topic of governance (or, as the authors call it in simple terms – “decision making”) for private companies, because we see this decision-making at play in every business family CMG is privileged to work with. Each of these private companies seems to have its own unique version of it. The Johnston Centre report focuses specifically on what the various forms of decision-making look like, their pitfalls and opportunities – and, most importantly, what other private companies can learn.
- Second, the report covers similar terrain to our own research at CMG. IN 2015 we began a research journey on this topic, and we’re currently in the midst pf phase two (more on that below). As the Rotman authors emphasize, privately-owned companies are the most significant drivers of the Canadian economy, contributing up to 67% to GDP. So why are most insights on effective corporate governance derived from research on large public companies? Why the gap in learning on private, family-run companies? We applaud the authors’ diligence in exploring the topic and closing the gap.
Beyond that, a number of takeaways in the report are particularly interesting to us:
- Decision-making models at private companies are as diverse as the companies themselves. No one size fits all. The research shows that private companies have developed decision-making approaches ranging from formalized governance structures that resemble boards in public companies to no structure whatsoever. Write the authors: “Before conducting these interviews, we never would have guessed that 17 different private companies would have 17 different approaches to governance.” This lines up with an observation we’ve often made in our own work with business families: “If you’ve seen one family office, you’ve seen one family office.”
- An outsider’s perspective can be immensely helpful. Having a voice from outside the company (and the family) can benefit in numerous ways and, consistent with point #1 above. the ways to achieve this external viewpoint can vary widely. Regardless of how it gets implemented, the outsider’s perspective helps, as the authors point out: “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.”
- The emerging role of Family Councils. Not all of a company’s owners (or family members) are always involved in (or even interested in) the strategy and operations of their own business. At the same time, family ownership groups have complex issues to navigate – including succession, estate planning, liquidity issues, family “rules”, policies around investments and dividends, and buying/selling shares. It’s a lot to handle. It’s why some families are forming a ‘family council’ to inform and make decisions on behalf of the entire group of owners and communicate decisions to the company through a single, cohesive voice. These councils can range in size, structure, format, and meeting frequency. Our partner, Bob Gould, has a particular interest in (and passion for) this topic and will be sharing some insights about it in this space in the coming months.
In the meantime, the more research on these topics, the better. This latest Rotman report dovetails nicely with CMG’s own curiosity and exploration of what makes private enterprises successful. It’s a topic constantly on our minds – and really at the core of what we do. It’s why we’re in the midst of the next phase of research on Canada’s business families – in particular, exploring some of the specific “how’s” behind enduring business family success. What are the key ingredients of business families that have found a way to last for multiple generations? What pitfalls should they be looking out for?
We look forward to sharing more and keeping the conversation going.
For now – and if you’re interested – you can read the full governance report from the Johnston Centre here.
Peter Creaghan is a partner at CMG.