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Executive Summaries May 6, 2019

Governance, a Key Element in Successful Business Succession Planning

One word in particular has been the subject of much attention in recent years: “governance”. Governance is linked to several adjectives including “healthy”, “good”, “bad”, “modern”, and “inadequate”. Expressions that contain the word governance are often overused, misused, and misappropriated. 

As a result, when a company faces any sort of challenge, it is quickly attributed to a governance problem. This is not always the case, but it is true that entrepreneurs can often avoid major challenges by planning and taking appropriate measures in a timely manner. Below are a few important points that will help to demystify governance and make entrepreneurs aware of the increasing importance of governance in business management.

What Do We Mean by Governance?

Several definitions of governance are available in scientific publications, company law, and business-management faculty publications. Many organisations, faculties, and management schools have, in recent years, begun to specialize in the study of governance and the promotion of measures aimed at raising awareness of and improving governance. IGOPP1 defines governance as follows: 

“Governance, in its fiduciary form, consists in implementing all the means for an organisation to achieve the ends for which it has been created in a manner that is transparent, effective and meets the expectations of its stakeholders. Governance is thus made of accountability rules and operating principles implemented by the Board of Directors to define the strategic orientations of the organisation, ensure supervision by management, assess its economic and social performance and promote the emergence of values of integrity and excellence within the organisation.”2 

We can see that governance is comprised of a series of rules and regulations that have been implemented to ensure the overall success of the company. Even though corporate governance rules are often embodied by the company’s Board of Directors, it is not always the board that applies these rules. In order to fully understand the importance of governance nowadays, we must think of it as encompassing all the measures taken by a company to ensure that work is coordinated, goals are defined, control mechanisms are in place to monitor activities, and the interests of its stakeholders are taken into account. 

Who Are the Stakeholders?

The stakeholders of a company are, naturally, shareholders, and also employees and partners, clients, suppliers, community members where it is active, public authorities to which the company is subject, and, generally speaking, all persons and entities with whom the company deals when conducting business. Canadian law differs slightly from US law when it comes to the role of business leaders and directors versus company stakeholders, for example. South of the border, it is generally recognized that directors only have to take the company and its shareholders into account when carrying out their duties. In Canada, it is recognized that the interests of every company shareholder must be taken into account during the decision-making process3

This entails that an entrepreneur, for example, before paying a dividend or repaying a debt, must consider whether the decision takes into account the interests of certain providers and clients and the company banker.

Most of the time, this is a reflex on the part of entrepreneurs, but given the increased importance of governance and its introduction, over the past 15 years, into everyday business language, governance must be carefully considered and taken into account when making both large and small decisions that influence the operations of every company, regardless of its size.

Does Governance Have to Be Analysed When Planning Business Succession?

For several years, it was believed that governance was only applicable to publicly-trade companies or government enterprises. However, it is now generally recognized that it serves a purpose in companies of all sizes and business sectors. We must avoid thinking that the introduction of governance into such business environments can fossilize operations or make the company less versatile. On the contrary, sound governance rules that are tailored to the company serve to maintain flexibility while offering additional protection against improvisation and unnecessary or avoidable risk.

We believe that this becomes particularly evident when the time comes to plan business succession. Whether succession is being planned in the event of a handover to the next generation, an MBO4, or a merger with another company, the governance structure must be carefully considered so as to ensure a successful transition. For example, when a family business is transferred to the founder’s children, the structure of the company’s Board of Directors must be reviewed. What will the role of the primary company founder be? If the founder is a father or uncle, will he remain President of the Board of Directors? Will the company accountant be asked to serve on the Board or to lead an audit committee if the founder wishes to track the results? If the managers and founder acquire the company, how will they divide up the management responsibilities? Who will act as President and who will serve on which advisory committee? 

All of these questions must be considered when finalizing the transaction and also in advance. Parents, for instance, may be hesitant to transfer their company to their children because the parents are unsure whether their children will be capable of adequately fulfilling certain business functions. The implementation of a sound governance structure could alleviate any such concerns. Another solution could involve hiring an Executive Director or a competent Finance Manager if the parents worry about how well their children can manage company finances.

Our team of professionals know exactly what governance entails and they can adapt the structure to the needs of your company.

 

1Institute for governance of private and public organizations, a Quebec company that is renowned as a leader in governance in both the private and public sectors.

2The IGOPP article entitled “Governance in short” can be found here: https://igopp.org/en/igopp/governance-in-short/ (our translation).

3The importance of taking the interests of stakeholders into account came to the fore during a case in the 2000s, following the Supreme Court landmark ruling regarding Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461.

4MBO (Management Buy-Out) involves the purchase of a company by its managers. Please consult Nathalie Gagnon and Geneviève Martin’s article entitled “How Will Selling Your Company to Your Managers Influence the Transaction?” on the BCF website.

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