The Single Most Important Lever Driving Corporate Value
There are many drivers that can increase the value of a business, but one is more important than any other.
I was recently asked what single lever I would pick if I could pick only one in an attempt to promote growth in corporate value. Without hesitation I said, "Corporate governance" — much to the surprise of the person asking the question who afterward told me he thought I was going to pick EBITDA, free cash flow, market share or some other individual company metric.
What is Corporate Governance?
The term 'corporate governance' means different things to different people. For me, corporate governance is an umbrella term that encompasses all of the things that drive business value and its growth: Ownership behavior, the make-up of the board of directors, strategy, providing direction to management and continually measuring management performance, and so on.
In simple terms, corporate governance refers to the system of mechanisms and processes by which a business is controlled and directed. Broadly, a corporate governance system:
- Consists of rules, practices and processes that establishes, monitors and ensures the achievement of a company’s objectives;
- Sets out the rules and procedures for making business decisions;
- Details the rights and responsibilities of participants in the business, including owners, directors, managers and employees; and
- Monitors all of those things on an ongoing basis to ensure they are complied with.
The Role of Governance in Business Transitions
In successful generational business transitions, there is an evident evolution from an entrepreneurial business model to what an extreme can be thought of as a quasi-public company corporate governance model. This is where the family company has both family member and independent directors, often non-family, non-director business advisors with industry-specific operating experience, and where non-family member (arm’s length) executives head one or more businesses in a business model where the family holding company owns diversified businesses, each with its own different risk profile.
It has been my experience for more than 45 years of interaction with business families that the ones who succeed in multi-generational business transition are the ones that embrace and implement good corporate governance practices. This is where, increasingly over time, their family separates the transition of business ownership from the transition of business management, and where the family business:
- Evolves from being operated as a pure entrepreneurial business model to become a business model that supports entrepreneurism while bringing systematic order and stability to their ever larger and more complex business;
- Recognizes the importance of internally managing the generational transition process;
- Accepts as a first principle that their business is not part of the family per se, but rather a family asset distinct from the family itself; and
- Integrates non-family (1) corporate directors, (2) senior executives, and (3) in some cases, advisory boards into their family business.
Keys to Successful Governance
An article from Boston Consulting titled, "Governance for Family Business: Sustaining the 'Magic' for Generations to Come," addresses governance in family-owned businesses. Suffice to say, the following things are seen by its authors as key success factors in private company growth and successful generational business transition:
- As a starting point, having a clear vision for the business’ strategy, and documenting and articulating that strategy as a basis for management, understanding of both objectives and a formalized methodology for investment planning;
- Having a long-term perspective where private company owners do not have the short-term performance drivers that influence public company boards and management;
- Family members having a firm grip on management where an ability to make important decisions rapidly enables quick and effective reactions to changing conditions;
- Maintaining entrepreneurial spirit and core skills;
- Gaining and maintaining employee loyalty;
- Acceptance of the importance of a board of directors comprised of both family and non-family members selected on the basis of ownership, independence, and/or industry or business function expertise;
- Building and maintaining a robust management platform;
- Developing and continually using a performance management system;
- Continually working on competitive-advantage initiatives while simultaneously working toward ever more structured management; and
- Ensuring the business governance system is easy to understand and flexible such that it can be changed as the needs of the family business and business family evolve.
I suggest the Boston Consulting article is one that all private business owners and their transition advisors ought to read and think about if they are in the throes of, or contemplating, generational business transition.