Preventing the Next Storm: Corporate Governance


turnaround engagementMuch has been and continues to be written about corporate governance.  Every time a major company such as Enron, Wells Fargo or VW faces a scandal and become headlines, people ask “Where was the board?”

Most people only think about corporate governance in the context of public companies.  Many small to medium size privately held companies do not have functioning boards.  After all, they are private and need answer only to, at most, a small group of owners.  Directors are often members of senior management or, in the case of family-owned businesses, members of the family.  In the latter case, directors are often directors because they are members of the family and not because of any special business acumen.  Board meetings become family meetings.

Consistent Formal and Periodic Oversight

Most successful private companies understand the benefits of consistent formal and periodic oversight, including the need for independent directors with business experience.  Independent directors often have more of a professional rather than personal relationship with the owners.  In other words, they are willing to constructively challenge management and owners regarding critical issues impacting the operating and financial performance of the business.  They are expected to be fully prepared for each board meeting and on call if serious issues arise between regularly scheduled meetings.  Finally, they are paid for serving, although some owners will call this an unnecessary expense.

While all of the above may sound like common sense, experienced restructuring professionals tell stories about how private companies lose their direction and become distressed because they lack independent oversight.  The reason is simple—when companies falter management denial is often the primary impediment to a successful resolution of the critical issues.  Management does not take an unbiased view of the issues.  Independent directors can provide that unbiased view.  Indeed, many distressed companies would not be distressed if they practiced good governance, beginning with a board that includes independent directors.