Board composition, meeting discipline, corporate structure, culture: the corporate governance fundamentals are well understood. The challenge is knowing when to address them.
Michael Moore, Head of Corporate Structuring at KPMG Law LLP, makes the case for acting sooner than you think.
For many of Ireland’s most successful private businesses, growth has been built on hard work and lean decision-making. As revenues scale and ambitions expand, existing company structures may not be the ones that take you further.
Michael Moore, a partner at KPMG Law LLP, works with medium and large private businesses on corporate governance, corporate structuring and legal strategy. His message is that the governance decisions you make today will determine the opportunities available to you tomorrow.
In the business start-up phase, the founder or founding group make decisions quickly. That model has advantages but it has a ceiling.
“As you grow and you’re on that glide path, you need to look up the food chain,” says Moore. “If you want to go into new territories, or take on private equity investment, you need to demonstrate that the company is run in an efficient and sensible manner.”
The most visible expression of governance maturity is board composition. “You need to move away from a board that consists solely of shareholders or family members and bring in independent, non-executive directors who add skills and objectivity,” Moore advises.
The non-exec skill sets that matter most will depend on the company’s strategy, but Moore points to legal, financial and technology expertise as broadly applicable starting points. Beyond that, sector knowledge and international market experience may also be relevant.
Moore recommends five to seven directors for smaller growing companies, rising to around 12 for larger private organisations. The recruitment process itself warrants serious thought. Looking within your existing networks is a reasonable starting point but it is rarely sufficient.
“You need to understand your roadmap for the years ahead, identify where you’re deficient relative to more sophisticated organisations, and fill those gaps in a sensible way.” A robust vetting process for non-executive directors that clarifies time commitment and duties is also essential, Moore adds.
How the board operates in practice is equally important. “Frequency is less important than the quality of the meetings,” he says. “It’s better to have less frequent but more substantial meetings than to convene monthly just for the sake of it.”
In Moore’s opinion, directors require timely and structured information circulated in advance so that meetings are spent on decisions rather than briefings. Moore’s preferred model is concise divisional reports supported by more comprehensive background material for those who need it.
The most effective boards maintain a productive tension between internal executive participation and external oversight. “It’s very important to strike a balance between the participation of management at board level and then to have oversight from people who are external from the business and who can bring objectivity and challenge internal management.”
Technical governance matters but in many large private businesses the greatest governance weakness is behavioural. Dominant founders or controlling shareholders can create environments where decisions go unchallenged and management learns to keep their heads down rather than speak up.
“If people have good ideas and they’re afraid to air them at senior level, that’s an unhealthy environment,” says Moore. “Culture comes from the top and owners have to be open to other perspectives and to being challenged.”
In Moore’s view, boards that can do this consistently are the ones that make the best decisions over time.
Moore also makes the case for early-stage corporate structuring, as the lower your business valuation the easier and less costly it is to put the right structure in place. For most owner-managed businesses, the key step is establishing a personal holding company through which shares in the trading company are held.
This provides flexibility for future capital events, such as enabling sale proceeds to flow into the holding company where they can be reinvested tax-efficiently before the owner decides if and when to extract them personally.
“As values grow, restructuring in a tax-neutral way becomes much more difficult,” Moore cautions. “You don’t need to overcomplicate things but putting a structure in place with some foresight at an early stage will provide far greater flexibility in the future.”
KPMG Law LLP advises private and family businesses on corporate governance, corporate structuring and legal strategy. To discuss how KPMG Law LLP can support your business, contact Michael Moore, Head of Corporate Structuring at KPMG Law LLP.
Partner, Head of Private Enterprise, National Chairperson of Audit Committee Institute
KPMG in Ireland
