What is the purpose of this article?

Provide a framework which enables public company shareholders, boards of directors, C-Suite, and other to begin discussing what is governance.

This article is written from a Canadian perspective.  Governance varies significantly around the world.

This article does not provide legal advice.

You can download a PDF of this article from: What is public company governance V2

What are the critical learnings in this article?

You have to determine what exactly is meant by governance in your public company’s specific situation.  No outside expert can tell you because there is no one single answer

What is a public company?

The definition and characteristics of what is a public company depends upon the where the company is legally based.

• In Canada a public company is “a company whose shares trade on a stock exchange”¹
• “German Public Limited Company (Aktiengesellschaft-AG) is a company having a legal personality of its own. It ownership is organized via shares of stock. As a general rule, the shares of stock can be transferred by the stockholders.  A public company can be listed on a stock exchange (listed company) or not (unlisted public company)”²

What is corporate governance?

“Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and members of the company’s ecosystem.  Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. ^“1

This definition has 4 components:

• Relationships among the company’s ecosystem members.
• Decision making i.e. setting objectives and approving action plans.
• Action plans i.e. means of attaining those objectives.
• Performance monitoring of the objectives, action plans, relationships.

Discussion around governance is often very silo based and depends upon the specific background of the governance advisor e.g.

• Lawyers often start with the Business Corporations Act. Sometimes the legal framework is a social purpose corporation, such as a B Corp., or a partnership or a joint venture.
• Regulators often start with financial risk management guidelines.
• Accountants often start with quality of financial statements.
• Consultants have a variety of different points of view.
• IT (Information Technology) governance advisors have an IT-centric perspective.
• Values, morals, and ethics may not be seen as a critical part of corporate governance.

Etc.

Often there this is a legal perspective of acting in the best interests of the corporation or the shareholders or other members of the company’s ecosystem.  What does this actually mean? Two example questions, for which I don’t have the answer:

• If climate change is real, should the company reduce or eliminate it’s impact on global warming, even if that reduces company profits, shareholder dividends, and compensation for the board of directors and C-Suite?
• Should the company lobby governments to reduce or eliminate environmental laws and standards in order to increase company profits?

After company management, its board, and its shareholders have heard from several different advisors, there is a confusing and disjointed picture of governance with limited shared understanding.

In Canada, there is a broad range of decision making authority in a public company. Some of the possibilities are listed below.

• Public company with no controlling shareholder. Shareholders elect directors and approve major change. Thus, the board directors have the bulk of decision making authority, but may delegate much of this authority to the CEO.
• In certain cases, shareholders with a large equity or voting interest in the company have the legal right to appoint a director or directors.
• A public company may have a voting trust. One person had the authority to vote all of the shares in the voting trust.  There are situations where the voting trust controls more than 50% of the votes. This often enables the person who votes the trust’s share to have major influence on company decision.
• A public company may have dual class shares. Some shares may have no voting rights. Some shares may have multiple votes.  Thus, a person, or group, with a small amount of equity may have voting control of the company.  This may occur with company founders or the founding family.
• Financing agreements may have terms and conditions which constrain the company’s decision making and may even provide the financers with decision making authority in certain situations.
• OSFI (Office of the Superintendent of Financial Institutions) requires pre-notification of the appointment of officers or nomination of directors for the financial Institutions OSFI regulates. OSFI then has the opportunity to share any concerns or comments.

An interesting example of public company governance and the role of the board of directors occurred in Canada in fall 2021. The board of directors of Rogers Communications (a multi-billion dollar company) removed Edward Rogers, the board chair. Mr. Rogers, who controlled 97.5% the voting shares, then removed a number of directors and put in place directors who re-appointed him as board chair.  What I observed was, if directors did not do as they were told by a shareholder, the shareholder would then replace them with directors who would do as they were told.

What are your next steps?

• Identify the decisions within your company’s ecosystem which have the greatest impact on value.
• Define who has the authority to make those decisions. As noted above, many decisions impact your company are made by people outside of your company.
• Remember that some people, who don’t have legal authority, may still have moral persuasion powers (e.g. If OSFI in Canada expresses major concerns about a potential board director, what will the financial institution do?).
• Look at the regulatory regimes and governance practices of the different jurisdictions your company operates in, provides services or products, or has suppliers in.
• Consider different scenarios. Who makes decisions can be very different in crisis than in the situation where everything is wonderful.

 Footnotes:

¹ https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/public-company

² https://www.german-probate-lawyer.com/en/glossary/def/public-limited-company-aktiengesellschaft-ag.html

What further reading should you do?

What is the purpose of your company?

https://koorandassociates.org/corporate-governance/what-is-the-purpose-of-your-company/

What is corporate governance?

https://koorandassociates.org/corporate-governance/what-is-corporate-governance/

How does the board of directors create value?

https://koorandassociates.org/corporate-governance/how-can-the-board-of-directors-create-value/

“What CEOs really think of their boards”, Jeffrey Sonnenfeld, Melanie Kusin, and Elise Walton.  Harvard Business Review 2013 April

https://hbr.org/2013/04/what-ceos-really-think-of-their-boards

“Does your board really add value to strategy?”, Professor Dieder Cossin and Estrelle Metayer, IMD Global Board Center

https://www.imd.org/research-knowledge/articles/board-strategy/

What is the purpose of this article?

• Enable shareholders, board of directors, and C-suite to have a discussion regarding what is different about PE (private equity) governance.
• This article provides general concepts. You need to understand your specific situation.  You should consult your lawyers for legal advice.  This article does not provide legal advice.

You can download a PDF of this article from: What is different about private equity governance V2

What are the critical learnings in this article?

• PE shareholders and PE governance is focused on value creation.
• In a private company with PE shareholders, the decision making authority of the board of directors and of shareholders can be very different from public company governance.

Where does PE fit into the overall governance framework?

There is a broad range of how decision making is structured in different types of companies.

• Public company with no controlling shareholder. A founder might still have effective control, even though they have less than 50% of the voting shares.
• A public company may have a voting trust. One person had the authority to vote all of the shares in the voting trust.
• A public company may have dual class shares. Some shares may have no voting rights. Some shares may have multiple votes.  This enables founders and families to retain voting control of a company even when they have a minority of the shares.
• A public or private company may have PE shareholders. They may have certain rights, such as being able to appoint a certain number of board directors.
• In a private company, PE may have a wide range of governance options.

PE and management are aligned with a common focus on long-term value creation.

Shareholders, the Board and C-Suite all focused on value creation with a common set of metrics.

• Decisions are based on maximising this long-term value, even if short term quarterly or yearly profits are impacted.
• PE firms often have exit time horizons, often between 7 and 10 years.
• The bulk of potential management compensation is aligned with the value shareholders achieve when they exit.
• There some PE funds with long-term or perpetual time horizons, which require more complex compensation structures and metrics for management.

Public company shareholders and management are often not-aligned.

• Many public companies do not have long-term value creation metrics, targets, or regular reporting of results against these targets.
• Many shareholders, such as pension funds have a long-term time horizon. The board of directors and management are often focused on quarterly and yearly targets, and achieving the public guidance they have issued.
• Management compensation is often not aligned with shareholder returns. For example, when share value drops: management is often issued new stock options at a lower price; management is still given major bonuses; etc.

The PE asset class has outperformed public company markets.

PE has outperformed public market benchmarks over the last five-, ten-, and 20-year periods.¹

Public companies often have little significant long-term value creation.

Mark Leonard, CEO of Constellation Software, in his April 20, 2018l CEO letter. “Qualified and competent Directors are very rare, and not surprisingly, the track record of most boards is awful. According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one – month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-bill rate over that period. This means that 4% of boards oversaw all the long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.” ²

PE company board directors and shareholders have a deep understanding on the company.

PE boards and shareholders may:

• Have deep involvement with the company, unlike many public company boards.
• Have two-way communications with the CEO and C-Suit weekly or more often.
• Have support staff to analyze ongoing company reporting and do follow-up questions.
• Regularly assess whether or not there is the right CEO.
• Require the CEO to have a coach.
• May have a board director or PE shareholder deeply involved in critical value creation initiatives such as M&A.

Public company boards often:

• Take the approach of “noses in, fingers out”, unlike private equity which has fingers in.
• Have limited two way communications engagement with the CEO and C-Suite.
• Only have third-party analysis of the company when there is a crisis or major event.
• Assess whether there is the right CEO only when there is a crisis.
• Do not have directors deeply involved in critical value creation activities.

The majority of public company directors have limited understanding of their companies.

A McKinsey survey of board directors showed that most had little understanding of their companies. Only 16 percent said directors strongly understood the dynamics of their industries, just 22 percent said they were aware of how their firms created value, and a mere 34 percent said they fully comprehended their companies’ strategies.³

What are some of the decision making differences between a public company with no controlling shareholder vs a private company controlled by PE shareholders.

In public company some of the decisions with the greatest impact on long term value are made by the board e.g.

• Approving the CEO’s strategic plan.
• Approving major business changes or major changes to financial leverage.
• Appointing or terminating the CEO.
• Nominating directors, who require election by the shareholders.

The above decisions in a private company controlled by PE are often made by the shareholders. Sometimes the shareholders may set the strategy and appoint a new CEO to carry out the new strategy.

Fundamental corporate transactions (e.g. sale of company, merger, sale of substantially all assets of corporation) often require shareholder approval.  The decision making process can be much faster in a private company.

PE shareholders may the authority to restrict or even over-ride the decision making authority of the board of directors.

• PE shareholders may have a unanimous shareholders agreement, which specifically limits the decision making authority of the board of directors and reserves certain decisions for shareholders. In this scenario, PE shareholders have the potential to veto any board decision or make any decision on behalf of the company.
• PE shareholders may have certain veto powers over certain company decisions even without controlling votes.
• PE shareholders may be in a voting trust enabling one individual to make decisions based on the voting rights of all the trust members.

What are your next steps?

If you are in a PE governance environment, either a stable situation or transitioning:

• Step 1 is to document the expectations of the key members your governance environment, which may include: PE shareholders, the board directors, C-Suite, regulators, etc.
• Step 2 identify the differences in expectations.
• Step 3 outline the principles and process for moving towards a common set of expectations.
• Step 4 assess your legal governance documents relative to expectations and make the required changes. Not all expectations can be included in legally binding documents.
• Step 5 put in place an ongoing process to monitor and manage expectations.

What if you’re not in a PE governance situation? Your next steps are the same. You will still need to understand and manage the expectations of major shareholders.

 Footnotes:

¹ A year of disruptions in the private markets McKinsey Global Private Markets Review. April 2021, Page 22

² https://www.csisoftware.com/docs/default-source/investor-relations/presidents-letter/presidents-letter-april-2018-final.pdf

³ “Corporate Boards need a facelift”, Eric Kutcher, (McKinsey Partner) McKinsey website, May 4, 2018

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/corporate-boards-need-a-facelift

What further reading should you do?

What is corporate governance?

https://koorandassociates.org/corporate-governance/what-is-corporate-governance/

What are your company’s decision making principles?

https://koorandassociates.org/corporate-governance/what-are-your-companys-decision-making-principles/

What is the purpose of your company?

https://koorandassociates.org/corporate-governance/what-is-the-purpose-of-your-company/

What is the purpose of this article?

Enable shareholders, the board of directors, C-Suite, and advisory board to discuss your company’s decision making principles.

You can download a PDF of this article from: What are your company’s decision making principles

What are the critical learnings in this article?

• Decision making principles enable better decision making, resulting in faster growth and more profits.
• Decision making principles are inter-related with your company’s: purpose; values, morals, and ethics; value creation; and corporate governance.

What is the purpose of decision making principles?

• Principles are the guidelines within which people make decisions. If rapidly growing or large companies have centralized decision making for every decision, the result is slow moving paralysis. If people in the company make any decision they feel like, the result chaos.
• Successful employee empowerment depends upon principles.
• Decision making principles enable better decision making.

What is the context for decision making principles?

There are five aligned and inter-related sets of concepts:

• What is the purpose of your company?
• What are your company’s values, morals, and ethics?
• How does your company create value?
• What is corporate governance?
• What are your company’s decision making principles?

What are four examples of decision making principles?

The number and type of principles are unique to each company at a specific point in time.

#1The founder and CEO of a global transaction company had one simple principle. Keep customer application latency below xx milliseconds. If latency increased beyond this point, the company would quickly lose customers, regardless of any additional functionality.

#2 Staples was founded in 1986 with three core principles:¹

• Provide a one-stop shop for all of the products consumed in the office.
• Offer everything at half price.
• Provide a convenient place to shop.

#3 Tim Cook, early 2009 on a conference call with analysts, shortly after Steve Jobs went on a medical leave.

“We believe that we are on the face of the earth to make great products, and that’s not changing. We are constantly focused on innovating. We believe in the simple not the complex. We believe that we need to own and control the primary technologies behind the products that we make, and participate only in markets where we can make a significant contribution. We believe in saying no to thousands of projects, that that we can really focus on the few that are truly important and meaningful to us.  We believe in deep collaboration and cross-pollination of our groups which allow us to innovate in a way that others cannot. And frankly, we don’t settle for anything less than excellence in every group in the company, and we have the self-honesty to admit when we’re wrong and the courage to change.  And I think, regardless of who is in what job, those values are so embedded in this company that Apple will do extremely well.”²

#4 Ray Dalio (Founder of Bridgewater Associates, an investment firm with $150 billion (USD) in assets.  Ray’s personal wealth is estimated at $15.6 billion (USD)) wrote a 540 page book filled with his life and business principles.³

What are your next steps?

• Review your existing documentation regarding: the purpose of your company; your company’s values, morals, and ethics; how your company creates value: your current corporate governance structure; and any existing decision making principles.
• Interview and survey members of your company’s ecosystem to assess the degree to which your documentation reflects current reality.
• Assess the degree of alignment among: purpose; values, morals, and ethics; value creation; corporate governance; and any existing decision making principles.
• What are the differences between the perceptions of the ecosystem members and your company’s documentation?
• What are the ecosystem member perceptions in the cases where your company has no documentation?
• Analyze the above, including by ecosystem member.
• What are the implications for your company?
• Determine what improvements need to be made to the behaviour of your employees (this includes board of directors, CEO, C-Suite, every employee, and contractors)
• Determine where a principle (or a few principles) could have the greatest impact on: achieving purpose; enabling moral, values, and ethics; and growing value.
• Some possible areas which could have a major impact on value could include: selection and exiting of board directors; selection and exiting of CEO and C-Suite; the experience cash-paying customers and users have when interacting with your company; making strategic decisions; etc.

 Footnotes

¹ David G. Thomson,  Master the 7 essentials of high growth companies, (Hoboken, New Jersey, 2010) John Wiley & Sons, Page 174

² Walter Isaacson, Steve Jobs, (New York, 2011), Simon & Schuster, Page 488

³ Ray Dalio, Principles,  (New York, 2017), Simon & Schuster

What further reading should you do?

What is the purpose of your company?

https://koorandassociates.org/corporate-governance/what-is-the-purpose-of-your-company/

Why are morals, values, and ethics important?

https://koorandassociates.org/values-morals-and-ethics/

https://koorandassociates.org/values-morals-and-ethics/why-are-values-morals-and-ethics-important/

How does your company create value?

https://koorandassociates.org/creating-business-value/what-is-value-growth/

What is corporate governance?

https://koorandassociates.org/corporate-governance/what-is-corporate-governance/

What is the purpose of this article?

• Enable the family to discuss their overall governance structure, including the purpose of the family and family governance.
• The article identifies potential components of family governance.
• This article is focused on what to do, not how to do it. There is no advice on how to structure governance for your specific family situation.

You can download a PDF of this article from:  What is different about family governance V2

 What are the critical learnings in this article?

• Wealth management is only a small part of family governance.
• Purpose, legacy, values, morals, and ethics are the foundation of family governance.

What is family governance?

Family governance involves a set of relationships among: family members, family components such as family holding company, the family office, and other family ecosystem components.  Family governance also provides the structure through which: the shared values and objectives of the family are set, the objectives of the family components are set, and the means of attaining those objectives and monitoring performance are determined.

Based on the above definition, there are four aspects to corporate governance:

• The focus is on relationships among different people and groups of people,
• Setting values and objectives. People determine values and set objectives.  People have different interests and personal values and objectives.  The conflicts of interest need to be understood and managed to agree upon some shared values and objectives.
• Determining how to achieve values and objectives. People have to develop plans which reflect what they will do to achieve the values and objectives.
• Monitoring performance. The performance of people is monitored. Everyone needs to understand the personal consequences of not achieving values and objectives.

What is the purpose of governance?

Governance is the mechanism by which the purpose, values, and objectives of the family are achieved.

A critical challenge of family governance is understanding and managing the broad range of conflicts of interest.

What are the components comprising family governance?

#1 What is the purpose of the family?

Why does the family exist?  Is it to provide a certain lifestyle for certain family members?  Is to enable wealth transfer to future generations? What benefit to communities and society, if any, should the family provide?  What constraints or negative impact to communities and society should the family be committed to, if any?  The purpose of the family is intimately tied to the values, morals, and ethics of the family.

What is the definition of a family member? Who may, or may not, be a family member?  This can become complex, as people marry, divorce, have common-law relationship, have children outside of any formal relationship, as children are adopted, etc.

The greatest legacy for the founder(s) is to be able to see that memory, legacy and values will carry on through a family which remains joined. Family governance is critical to this.

#2 What is the purpose of the Family Constitution document?

The family constitution includes:

• The values, morals, and ethics of the founder(s).
• Other values.
• What the family members can expect from the family businesses and investments.
• Employment policy regarding family members in family businesses.
• The overall family governance structure, e.g. family assembly, family council, etc.
• Who is a family member and who attends the Family Assembly i.e. spouses and partner or only direct descendants. At what age do children start to attend and participate in the Family Assembly.

There can be additional policy documents, approved by the family council, but not part of the constitution e.g. investment policy, philanthropy guidelines.

The family constitution should be signed by each family member.

#3 What is the Family Council

• It is the family council that helps bind the family across generations, by emotional bonding. Trusts and other legal documents alone will not be successful in keeping the family together.
• The family council: engages the family; resolves issues (there can be angry and passionate disputes); celebrates the family; starts the education of future generations; and enables blunt discussion about the future and the policies embedded in the family constitution.
• Articulating and gaining commitment to a common understanding of the legacy, shared vision, identity, values, and purpose.
• Managing the transition from controlling founder(s) to subsequent generations. Ideally the new governance is in place in time for the founder(s) to see that it is working, and to be comfortable that the family will continue to be bound together in future.
• Resolving family differences, which are often emotional and based on different perceptions.
• The family council may enable a once-a-year family assembly where all members of the family come together. There, the family council provides an update as well as learns the views and preferences of the entire family. This can be an opportunity to build (or destroy) trust between the council and the family, as well as among the family.
• The family council may represent different branches of the family.
• The family council provides the legacy, emotional, and policy context for family philanthropic activities, including family foundation(s).
• The family office provides the support required, and daily management of family council activities.

#4 What is the Family Investment Committee

• The family investment committee recommends the investment policies which direct the investment activities of all the entities falling within the family governance structure. The investment policy is approved by the Family Council.
• The investment policy is designed knowing that there can be swings in asset valuations and asset liquidity.
• The investment policy also needs to consider the degree to which different family members depend upon income from the family assets.

#5 What is the purpose of a Family Holding Company (or companies)?

• Having a wide range of family assets under a single governance structure, with a single board of directors.
• Decisions regarding asset management reflect the overall direction of the family, rather than individual family members.
• Enabling generational wealth transfer.

#6 What is the purpose of Family Trust?

• Shielding assets from creditor claims.
• Avoiding the probate process.
• Avoiding legal challenges to asset dispersal.
• Enabling generational wealth transfer.

#7 What is the purpose of the family foundation (or foundations)

• It helps bind family members, providing continuity of family values, and illustrating there is more to the family than growing and sharing wealth.
• Family members on the foundation board(s) can actively participate, and make a contribution to the family. The guidelines and policies guiding the foundation(s) are set by the family council.

#6 What is the purpose of a Family Bank (or other family controlled financial institutions?)

• Provide finance and financial tools for family members and family controlled assets.

#8 What is the purpose of the family office

• Supports the family members and family components with the day-to-day administration and management of the family’s affairs.
• The services provided by a family office may include: asset management (this may include homes around the world, planes, yachts), cash management, risk management, financial planning, tax, accounting, travel arrangements, school arrangements, insurance, personal and property security, data security, vetting of employees and contractors, hostage & ransom negation, etc. The family office will depend upon third party service providers.

#9 What is the purpose of the Family Assembly?

• Create emotional bonds between family members who may not otherwise meet frequently.
• Provide non-binding feedback to the Family Council.
• Provide training and education e.g. estate planning, taxes, etc.
• Identify future leaders e.g. potential Family Council members.

What are the biggest challenges faced by family governance?

• The family losing its understanding and commitment to long-term vision, identity, values, and purpose. This is a challenge as the family grows in size over the generations.  The family council and family office are key to helping new family members understand and commit to the non-financial legacy.
• Gradually revising the shared vision, identity, values, and purpose over the generations. What was appropriate 50 years ago may not be appropriate 50 years from now.  Managing the desire for continuity with the need for change, which can result in passionate disagreements.  The legacy is not forgotten but actually evolves.
• Family conflicts can easily arise, especially with multiple branches and multiple generations. A key issue can be the decisions around growing the family’s wealth vs distributing the family’s wealth.
• The leaders find it hard to “let go”. The founder(s) may have built their wealth, based on being the decision-maker(s).  But to have a successful legacy, the founder(s) should transition to, and see, a new governance model in place.  The same challenges apply to the CEO of the family office (who should be a non-family member), as well as chair of the family council.  Thus, the succession planning for these two roles is critical and different from what one would see in traditional corporate governance.
• The family wealth could suffer dilution or shrinkage due to high expenses, poor tax planning, or distributions to the current generation of family members. It can be difficult for individuals to defer immediate spending in order for wealth to be available for the next generation. It is key to build in the concept of “stewardship” – that the wealth is being passed onto the current generation, who must ensure that wealth is also passed onto the next generation.  The stewardship also applies to all the non-financial aspects which have been identified.
• Entitlement is often an issue. Young family members may grow up with wealth and feel entitled as they become adults.  The family constitution should have principles around this.  As Warren Buffet said “Give each child enough money so that they can do anything, but not so much that they can do nothing”.  This approach to guidance as to how parents raise their children, can be a source of family conflict.
• Intense and transparent communication with the family. If the family does not know what is happening, the family will not care. And without the emotional commitment arising from caring, the family will dissolve.
• The subsequent generations attempt to run the family and business the same way the founder did (i.e. the family makes many investment and business decisions). The founder(s) have been successful this way.  The facts show that family businesses with majority of independent directors outperform the average public company (except in health care and financial services).  This can be a source of family conflict when subsequent generations believe they are just as competent, if not more competent, than the founder(s).

What are your next steps:

• Determine which components of family governance apply to your situation, taking the amount of your wealth into consideration.
• Perhaps all that is appropriate is have a will and powers of attorney and discussed those with your heirs and trustees. Even in this case, you’ll need to consider whether step-children and step-grandchildren should be heirs.
• Perhaps there are more components of family governance you need to execute, but you’ll do it yourself.
• Perhaps you need third parties to manage your wealth and the related financial management e.g. tax planning
• Perhaps you need to execute all components of family governance, given the size of your wealth, as well as your legacy wishes. This will require third party help to create and manage your multi-generational governance structure.

What further reading should you do?

Why are values, morals, and ethics important?

https://koorandassociates.org/values-morals-and-ethics/why-are-values-morals-and-ethics-important/