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Corporate Governance:A tool to unlock enterprise value at private firms
Presented by Cate AmbrosePresident and Executive DirectorLatin American Venture Capital Association
September 2009
Agenda
• Why is Corporate Governance relevant for Private Equity and Venture Capital fund managers?
• Why is LAVCA promoting a Corporate Governance Toolkit?
• What are the key elements of Corporate Governance that can unlock value in privately held companies and how?
• What is the LAVCA Corporate Governance Toolkit?
Results of 2008 fund manager opinion survey
Source: 2008 Investor Opinion Survey for Private Capital Fund Managers
Almost all surveyed fund managers stated that
Corporate Governance is as great a factor to decide an investment as the target
company’s financial position
Fund Managers prioritize CG in their investment decisions
Yet, we don’t see a stampede of business owners calling for help with implementing Corporate Governance frameworks!
Source: 2008 Investor Opinion Survey for Private Capital Fund Managers
Why private business owners don’t care about CG?
1. Corporate Governance is only relevant to large, public corporations dealing with corruption cases
2. I don’t see the point of having controls, a board, etc. when my partner and I have been running the company for years without them
3. I don’t want to spend limited company resources in the systems and processes needed to implement Corporate Governance
4. I already have a board in place and know all about my company’s financial status, so why care?
5. What is Corporate Governance, anyway?
Why is Corporate Governance Relevant to LAVCA?
Highly relevant issue for fund managers
• Private sector dominated by small and family-owned businesses, often lacking basic elements of financial transparency, appropriate ownership and board of directors
• Improving corporate governance is a major theme within investment strategies -- not out of good will, but because it is the key to generating long-term value
Unmet demand within our mandate
• Core mandate to support best practices and standards• Strong expressed demand from Latin American fund managers
Platform for future growth
• Toolkit as a platform for education on the subject, but also to learn more about the issues that concern most to our region
• System is being conceived from the beginning as a two-way dialogue between the users and LAVCA, to generate new data, reports and learning materials
• Ownership
– Agency conflicts; ownership structures; stockholders rights; minority rights; incentive investment horizons and disalignments between types of owners
• Controls
– Control levels, relationship between internal controls and CG, role of internal / external auditors, risk mitigation tools
• Board of Directors
– Role and responsibilities of a good BOD; key decisions; how to select the right BOD (profile of members, selection, compensation, evaluation)
• Conflicts of Interest
– Examples (and implications to the companies) of conflicts of interest around provider/owner, board voting and other key relationships within the CG scope (including the issues raised by family-owned businesses)
• Risk Management
– Evolution and stages of company growth and key risk management tools; succession planning for leadership; employment policies for family-owned businesses
AREAS OF CORPORATE
GOVERNANCETHAT CAN
ADD VALUETO PRIVATEBUSINESSES
Ownership Structure and Conflicts of Interest
Uninvolved stockholders
Active Stockholders
Board of Directors
Employees
Daily / Quarterly
Less than 5 years
5 to10 years
10 to20 years
More than 20 years
Leve
l of i
nvol
vem
nent
an
d in
tere
st
Time horizon for investment
Open market investors
Venture Capital
Private Equity
Pension Funds
Family
Internal and External Controls
Source: 2008 Investor Opinion Survey for Private Capital Fund Managers
EL CONTEXTO EMOCIONAL DE UN DIRECTORIO
Board of Directors: Not all boards are created equal…
REPRESENTATIVEVery-well regarded, VIP-like, but very limited time available
PROFESSIONALCommitted and knowledgeable
PASSIVEThey don’t get it… and don’t WANT to get it!
COUNTRY CLUBLots and lots of goodwill..!!
Leve
l of K
now
ledg
eHi
ghLo
w
HighLowLevel of Committment
Key Questions
• Who shoud be in? (Selection)
• How can they be kept engaged? (Compensation)
• How can they ensure value-addition?(Evaluatin)
• How can they be more efficient as a team? (team work dynamics, tools, processes)
Based on: Thin on top, Bob Garratt
Conflicts of Interest
Risk Management and Family Businesses
• Succession planning
• Family-member employement policies
• Family and business relationship and conflicts of interest
You never actually own a Patek Philippe. You merely take care of it for the next generation.
Founder(s)
• Leadership transition• Succession planning• Estate planning
Society of brothers
• How to keep team together and harmonious
• Sustainability of family property• Succession planning / competition
Cousin “confederation”
• Assignment of ownership: dividend policy, debt, earnings levels
• Stockholder liquidity needs• Conflict resolution within family• Role and level of involvement of
family patriarchs• Vision and mision of family
patriarchs
2nd generation
3rd generation
CORPORATE GOVERNANCE CHALLENGES THROUGHOUT THE FAMILY BUSINESS CYCLE
John Ward, Creating Effective Boards for Private Enterprises (Family Enterprise Publishers, 1991).
LAVCA CORPORATE GOVERNANCE TOOLKIT
LAVCA Corporate Governance Toolkit v1.0
•Content
•Tools, templates
•External links
•Resources
•Checklists
Features of the current version of the Toolkit
• The tool would be most useful if adapted to complement an educational or training environment
• Users like to share their own experiences with the rest, and they mentioned that the interactivity provided by questionnaires is good, but they also expected some “feedback” coming from the system
• With minimum push from our side, we observed increased interest for the topic and our Toolkit/Training products
• We continue to receive requests for training from potential partners, including Endeavor, who is interested in using the toolkit as part of a larger training program for their entrepreneurs throughout Latin America
• Based on the user feedback, LAVCA believes that the Toolkit platform could be enhanced by adding interactive features, a new navigation structure and the ability to collect and compare user data
Pilot results and initial user feedback
Educational support
Distribution requests
Further opportunities
Corporate Governance Toolkit
About Resources Contact usMy CG locker
MAIN TOPICS ABOUT RESOURCES CONTACT USMY CG LOCKER
Ownership
Controls
Conflicts of Interest
Risk Management
Board
Special Cases
This Toolkit
LAVCA
How to / Tutorials
External Links
CG Primer
CG Stats
Free Publications
Feedback?Saved Items
Shared Items
Edit my profile
Signed as: amuslera | Log off?
New? Register here Sign in
User
PassORRegister
Why you should register?Corporate Governance means different things to different people. The more we know about you, the more valuable the information and tools we can provide. If you want to learn more about what kind of content you will find in this toolkit, please check this short demo
Developed by Sponsored by
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CORPORATE GOVERNANCE TOOLKITSample screen
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Corporate Governance Toolkit
About Resources Contact us
THEORY & CONTEXT
Content Item #1
Content Item #2
Content Item #3
EVALUATION TOOLS
Content Item #1
Content Item #2
Content Item #3
EXTERNAL RESOURCES
Content Item #1
Content Item #2
Content Item #3
WORKSHOP ACTIVITIES
Content Item #1
Content Item #2
CASE STUDIES & TEMPLATESContent Item #1
Content Item #2
My CG locker
OWNERSHIP CONTROLS RISK MANAGEMENT BOARD SPECIAL CASESCONFLICTS OF
INTEREST
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MAIN TOPICS ABOUT RESOURCES CONTACT USMY CG LOCKER
Ownership
Controls
Conflicts of Interest
Risk Management
Board
Special Cases
This Toolkit
LAVCA
How to / Tutorials
External Links
CG Primer
CG Stats
Free Publications
Feedback?Saved Items
Shared Items
Edit my profile
Signed as: amuslera | Log off?
My CG Locker:
•Items saved: #xx
•Items shared: #xx
Go
Sample screen
mockup
Corporate Governance Toolkit
About Resources Contact usMy CG locker
OWNERSHIP CONTROLS RISK MANAGEMENT BOARD SPECIAL CASESCONFLICTS OF
INTEREST
My CG Locker:
•Items saved: #xx
•Items shared: #xx
Go
MAIN TOPICS ABOUT RESOURCES CONTACT USMY CG LOCKER
Ownership
Controls
Conflicts of Interest
Risk Management
Board
Special Cases
This Toolkit
LAVCA
How to / Tutorials
External Links
CG Primer
CG Stats
Free Publications
Feedback?Saved Items
Shared Items
Edit my profile
Signed as: amuslera | Log off?
Home>Ownership>Content Item #XX
Continue reading
• Content Item #XX• Content Item #XX
Tools & Other resources
• Content Item #XX• Content Item #XX• Content Item #XX• Content Item #XX
Content Item #XX TitleLos temas de propiedadresultanfundamentales en todaslasdiscusiones de gobernabilidadempresarial. Son lasdefiniciones a nivelaccionarial el elementocaracterísticoydiferenciador de GobiernoCorporativo.
Para empresascerradasyfamiliares los elementos de propiedadincluyenlasdisposicionesbásicas del funcionamiento de lasasambleas de accionistas, los mecanismosprovistospara un tratoequitativo de todos los accionistas, asícomodisposicionessobreeventualesconflictos de interésque se generan en el planoaccionarial.
En estasecciónhablaremos de los derechosbásicospara la protección de accionistas, los elementosfundamentales de lasasambleas de accionistascomoescenario natural de participación de los dueños de la empresa, lasdisposicionesclásicaspara la protección de los intereses de accionistasminoritariosylasnormasgeneralespara la administración de conflictos de interés a nivelaccionarial.
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Sample screen
mockup
System
Network BNetwork A
Distribution Model and System Structure
LAVCA
PARTNER A
• Regardless of where the site sits, the DB will be centralized at LAVCA• All usage information will be captured and consolidated by LAVCA• LAVCA keeps rights of use to create and distribute reports based on aggregate data
• Ability to manage Partners and End users directly
• Access to all system data
• Ability to manage own profile• Share data within their network(s)• Benchmark within their network(s); limited
benchmarking with whole system
PARTNER B PARTNER N
END USER N
END USER 2
END USER 1
END USER N
END USER 2
END USER 1
END USER N
END USER 2
END USER 1
….• Ability to manage a sub-set of end users• Full visibility to their own network• Limited benchmarking with whole system