Question

Describe ways in which an organization’s business model may affect its approach to governance oversight. Provide examples that contrast publicly held companies from privately held companies.

Answer 1

The main function of a governance operating model is to organize operational, financial, risk-management and reporting processes so that the board receives the information it needs to put good governance into practice and business units can conduct their work in compliance with regulations and strategic goals. The governance operating model also extends the organization’s governance framework down to the level of roles, responsibilities and reporting in order to bridge the gap between the governance framework and operational realities.A governance operating model, which defines the mechanisms and interactions through which governance is put into action, can be an important tool for boards to enhance their oversight capabilities while enabling management to implement governance initiative.

Components of a Governance Operating Model

A governance operating model consists of four main components:

1. Structure, which includes organization design and reporting structure, committee structures and charters, and control and support function interdependencies.

2. Oversight responsibilities, which define board oversight responsibilities, committee and management responsibilities, accountability matrices, and management hiring and firing authority.

3. Talent and culture, which enable the behaviors and activities needed for effective governance by establishing compensation policies (particularly regarding incentives), promotion policies, business and operating principles, performance measurement and management, training, and leadership and talent development programs.

4. Infrastructure, which comprises governance and risk oversight policies and procedures, reports, measures and metrics, management capabilities, and the enabling IT and communications support.

Differences between a Private vs Public Company

Access to Capital and Liquidity

Being able to access public markets to raise new money, as well as the benefit of liquidity (being able to easily sell shares), is the biggest benefit for public companies. When a business undergoes an Initial Public Offering (IPO) with the aid of investment banking professionals, it becomes much easier for it to raise additional funds. The funds can be used for growth, mergers and acquisitions, or other corporate purposes.

Once the company is listed, investors can easily move in and out of the stock by buying and selling shares that trade on a stock exchange.

Reporting Requirements

Public disclosure requirements are another main difference between the two types of businesses and a major drawback of being public.

Valuation of a Private vs Public Company

Publicly traded businesses are much easier for market analysts and investors to value than their private counterparts. The main reason is due to the amount of information that’s readily available, thanks to the reporting requirements (discussed above), as well as equity research reports and coverage by equity research analysts.

Both types of companies can be valued using the same three methods: comparable company analysis, precedent transactions, and discounted cash flow (DCF) analysis.