Corporate governance in private companies: the pitfalls of poor practices and the benefits of well-structured governance

Friday 3 March 2023

Stan Robbers
HEUSSEN Lawyers & Civil Law Notaries, Amsterdam, the Netherlands


Giuseppe Coco
Ughi e Nunziante, Milan, Italy

Ivan Delgado
PEREZ-LLORCA, Madrid, Spain


Roberto Guerrero V
Cuatrecasas, Santiago, Chile

Sandeep Mehta
J Sagar Associates, Mumbai, India

Maria-Leticia Ossa Daza
Willkie Farr & Gallagher, New York, United States

Luciana Tornovsky
Demarest Advogados, São Paulo, Brazil

In this session, a panel of international speakers discussed the importance of adequate and proper corporate governance in private companies. After an introduction of the Committee and the speakers by the Co-Chairs, the session began with a question to the attendees, which was also asked to the panellists: ‘Why should corporate governance be on a private company’s priority list?’

Several reasons were discussed, such as increased confidence of stakeholder attraction for investors, reduction in cost of capital, improvement in top-level decision-making, assuring internal controls, enabling better strategic planning, fewer conflicts and fraud and greater staff retention. It was pointed out that good governance is essential for private companies to remain viable and sustainable.

Panellists concluded that the type of private company is not particularly relevant for the manner and level of introducing good corporate governance, although larger companies may have more rules to observe. External reasons, such as the requirements of banks, cause smaller companies to accelerate introducing governance rules.

The moderators asked the panellists whether, apart from the advantages of having good governance in place, not having a proper corporate governance can also entail risks. These risks, identified by the panellists, include:

  • shareholder primacy and lack of a well-established/independent board;
  • leadership issues;
  • poor strategic and succession planning;
  • family harmony and transparency; and
  • cybersecurity.

Other risks mentioned included: loss of shareholder confidence and trust; difficulty raising capital; no-risk management; increased government oversight; and risk of mismanagement by the operation team. Also mentioned were: no management rules (the officers freeze, inaction, no decision making flexibility); no communication; lack of authorisation matrix; lack of clear information; no code of conduct; lack of inspections; lack of anti-corruption rules; and no proper rules concerning meetings.

The panellists next addressed the topic of what corporate governance means for private companies. Items mentioned were a peaceful environment to operate the business which includes: access to work in the company; compensation; rotation in positions; use of assets (ownership of the intellectual property); and institutional identification etc. It also means the inclusion of independent directors.

The following topic discussed was the position of investors with regard to the corporate governance of the companies in which they invest. It was pointed out that investors require risk mitigating measures such as transparency and accountability. There also needs to be a clear description of tasks and responsibilities (reserved matters included), good record keeping (minutes, filings etc.). Those in private equity/venture capital should therefore be appointed as a board member, particularly CFO. Sophisticated structure leads to more willingness to invest. This topic triggered questions from attendees resulting in interesting discussions and insights. They also touched on topics such as: the composition of boards of directors of private companies; the appointment of independent directors; proper convening and conduct of meetings of both board of directors and shareholders; the appointment of compliance officers including company secretaries; misinformation/information rights; and policies for risk management.

The next question to the panellists was: What is the relevance of professionalism, independence and diversity within the board of private companies? The discussion defined the three traits as follows:

  • Professionalism
    Areas of expertise to boost the business because outside members can bring special skills (eg, legal, finance, strategic, governance, risk management); also good practices by establishing committees (eg, risk, audit, compensation).
  • Independence
    Many interests are represented within a board of directors, while independence brings impartiality, commitment, industry experience, and extensive networking, it also neutralises conflicts among board members and provides a safe haven for outsiders or employees who are not family members. Other relevant aspects of independence include control over the use of the company’s assets and cash, reporting by managers on strategy and financial results, and dual-level signing.
  • Diversity
    To achieve success, a diverse board of directors must include a variety of perspectives, skills, ages, genders, cultures, and ethnicities. Having a diverse board of directors is essential in ensuring effective decision-making, guidance, and risk management. Diverse boards are one of the few low-hanging fruits in ESG implementation.

The final question the Co-Chairs asked the panellists was: What are the main obstacles (cultural, legal, other) that prevent the adoption of appropriate corporate governance? It was pointed out that such obstacles include: lack of legal or statutory rules with strict obligations; de facto shareholder agreements; too strong a leadership for too long; general disbelief in effective benefits of corporate governance; and loss of influence by constituents. Other, similar factors, pointed out included: high implementation costs; supervision by the investors considered as (unwanted) oversight by family-controlled board; and conflict with autocracy and paternalism. This topic triggered various interesting questions from attendees which were addressed by the panellists, providing interesting insights into other jurisdictions than the ones represented by the Co-Chairs and panellists.

As time was running out, leaving much to be further discussed at future sessions, the Co-Chairs concluded the session, thanking all panellists and attendees for their contributions.