cate ambrose

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!


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


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


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

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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

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CORPORATE GOVERNANCE TOOLKITSample screen

mockup


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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Ownership

Controls


Risk Management

Board

Special Cases

This Toolkit

LAVCA

How to / Tutorials

External Links

CG Primer

CG Stats

Free Publications


Shared Items

Edit my profile


My CG Locker:

•Items saved: #xx

•Items shared: #xx

Go

Sample screen

mockup


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


Ownership

Controls


Risk Management

Board

Special Cases

This Toolkit

LAVCA

How to / Tutorials

External Links

CG Primer

CG Stats

Free Publications


Shared Items

Edit my profile


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.


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

cate ambrose

Economy & Finance