One of the biggest traps private company boards fall into is “blurring the lines” between management and governance and allowing the boardroom to become the forum for too much decision making, according to a panel of experts.

A special webinar on building governance maturity in private companies heard that boards can easily make inadvertent errors.

James Beasley, head of board advisory, EMEA, at Nasdaq, said private companies often allow management decision-making to enter the governance agenda.

“We see that a lot,” he said. “It’s important to always keep… challenging: is this something that should go to the board.”

The webinar, from Board Agenda, in association with Nasdaq, comes at a time of rising interest and importance of governance in private companies. The government has included large private companies in its definition of “public interest entities” (PIEs) and about 500 businesses now use the Wates principles of governance for private companies.

Independents’ day

Confusing the forums for decision-making is not the only error large private companies can fall into. James Norwood, a veteran non-executive and chief executive, warned another common problem was a failure to put in place “independent challenge.”

Founders often address the need to appoint non-executives by looking to “insiders”, friends and long-standing advisers.

“That worries me somewhat, because then you have groupthink rather than independent challenge,” he said.

Emma Brown, a company secretary with financial services technology firm Stream, said board members could tell their governance was reaching “maturity” by observing boardroom behaviours and whether the board avoids becoming caught up in the “weeds” of every decision.

“How we could test that,” she said, “is really looking at the quality of the information that reaches the board, the quality of the discussion and challenge that goes on between the board and the execs, and how they reach the decisions that happen there.”

Phases of governance maturity

The panel heard that private companies often evolve through several stages when developing their governance, such as the founder-led phase: involving informal decision-making while board and management are “indistinguishable” and with limited reporting.

The next stage may be characterised by investor involvement and a more complicated stakeholder group seeking “structured growth” with more meaningful board meetings, a defined strategy and better reporting. It may include independent challenge, though it may not involve independent non-executives.

The next stage might involve independent non-execs, formal risk oversight, more stakeholder involvement and much more formal governance structure.

A final stage could involve a strong culture, risk oversight and a focus on resilience and sustainability.

Karim Palant, director of external affairs at UK Private Capital, the industry body for private equity and venture capital investors, says there is a clear moment when a founder-led company may be showing growth at which more sophisticated risk management and beefed-up governance might be considered.

This means asking whether “you’ve got the right people that are able to give you a sense of what those risks are and might be, and to scrutinise how ready you are, to provide guidance and support in a really important way,” he said.

In closing advice, Nasdaq’s James Beasley reminded private company boards that their governance should not be judged by how closely it resembled a listed company’s governance structure.

“It’s measured by whether the governance consistently helps the organisation to fulfil its purpose, manage risk, and make better decisions to enable long-term sustainable success.”

Watch the full webinar here.