As Ireland and the rest of the word grapple with the downturn in the world economy, many companies are looking at costs and ways of making savings. One of the areas they may turn to are the costs associated with corporate governance, and although this may appear to be a quick fix in the short-term, it must be weighed up against the potential long-term damage this can cause to the reputation, business relationships and good standing of a company.

It has been a common assumption that issues of corporate governance were not a concern for private companies, the argument being that private companies were very small one or two-person organisations for which governance was yet another burden in an already over-regulated sector.

In the case of a large proportion of the smaller and larger private companies in Ireland, the board of directors was in most cases synonymous with the shareholders, and poor governance only hurt themselves and not others. In other words, there were no outside parties dependent on the success of the company. Also, if the company was owned by one or two large shareholders, the reality was that all decisions would in any case be made by and in the interests of those shareholders whatever the view of the minority. In addition, other than the Office of the Director of Community Enforcement (ODCE), there is no regulatory body such as the Stock Exchange to account to.

Finally, if the company wished to raise fresh capital, this was to a large extent funded by the board itself and the banks. Inevitability, the banks did not look at the governance of the companies but at the managers and management accounts. However, although this thinking is still quite prevalent, in recent years there has been a significant change in attitude.

Some of the reasons for this change in attitude are:

• Investment made by private individuals in their private companies at the start-up stage often involves them in borrowing money which is secured against their homes. Also, financing of the company itself will often come from bank loans and overdrafts, guaranteed by the management of the company which again may be secured by their homes. It is therefore crucial to have in place a good basic corporate governance structure and process to act as a risk management tool.
  
  
• The ongoing financial needs of private companies, particularly when they are going through an expansion or development stage, are too great for individuals so they need to access capital from other sources such as banks or private equity providers. These sources will often look to ensure that there is good governance through holding regular board meetings, appointing non-executives and having audit committees.
  
  
• Even without development capital, a private company can benefit from a non-executive director with experience of the business sector in which they are operating. Alternatively, the company could use their corporate secretary as a sounding board on corporate governance and statutory issues.
  
  
• If the sale of the company is proposed, the existence of good governance will probably enhance the valuation and will also act as a good defence in any possible claim for breach of duty by a successor board.
  
  
• For private companies converting to public with a view to flotation on AIM or a listing on the Irish Stock Exchange, there may be succession issues as well as a need to access more experience and expertise which the board does not have. The presence of good governance in the form of non-executive directors and the procedures for board meetings and committees can provide that expertise and long-term stability thus addressing the issues of succession.

As a private company develops and its needs become more complex, regard must be made to the obligation and duties imposed on directors in the Companies Acts 1963-2006. If a company does not pay attention to these obligations and duties, it is asking for trouble either in the form of claim made by a successor board following the sale of the company, from the auditor through reporting to the ODCE or from a liquidator. Board governance helps to eliminate the risks of such claims.

For further information please contact Alan Browning.