NACD BoardVision - Evolving Needs of Private Company Boards (Part 2)
This week's edition of NACD BoardVision focuses on the evolving needs of private company boards. Join Chris Clark, publisher of NACD Directorship, Pamela Packard, director of Brown Jordan International, and Tom Duffy, national managing partner, audit, of KPMG, as they discuss the tone at the top and the relationship between external auditors and boards of private companies.
Christopher Clark: Hi, I'm Christopher Clark, Publisher of NACD Directorship Magazine, and this is BoardVision. Today's subject is governance considerations for private companies. I'm joined today -- again -- by Tom Duffy, National Managing Partner of Audit, KPMG; and Pamela Packard, Director at Brown Jordan International, and I must say, the new President of the New York Chapter of NACD. Welcome back.
Pamela Packard: Thank you.
Tom Duffy: Thanks, Chris.
Christopher Clark: I'd like to continue our conversation on governance considerations. Pamela, you work with external auditors all the time, maybe you have some leading thoughts, or practices here in private companies dealing with the external auditors? And also, I'd like to hear your thoughts on setting the tone at the top.
Pamela Packard: Okay. Well I'll start with the second question first in terms of culture and tone at the top. It's not about the mission statement, the vision statement, and the values that are hanging on the wall in the foyer; it's really about the behaviors that are modeled, the behaviors that are rewarded, and the behaviors that aren't tolerated. And so while one hears all the time, "tone the top," less so "tone at the middle," it's really walking the talk, seeing how things happen in an organization that sets that culture. And as Tom said earlier, if you get the culture wrong, it's very difficult to make that change, and yet it's an imperative. So if it happens, cultures sometimes turn out in the manner in which, you know, it's not going to be beneficial for the organization, so then it's critical that you step forward and realize we have an issue here and we need to make a change? And what are the initiatives we've put into place to make that change happen? Then in terms of relationships with external auditors, when it is a private company, the audit committee has greater flexibility with its relationship than in a public company. Public companies, as you know, have the issues of, the audit committee has to approve any services that are not specifically audited related and are concerned about the volume of those services and how that could impact the view of independence. In a private company, the audit committee likes to reach out to the auditing firm that has not just the audit expertise, but has a whole host of other expertise in consulting and advisory services that can help the company as it's going through its lifespan where it doesn't have the financial resources to commit to hiring a full-time person who's an expert in a particular area, when what the company really needs is a particular project done. And so that's something that has greater flexibility and is a nice attribute of private company relationship with its external auditors.
Christopher Clark: Tom, you're not going to get the last word today, but can you give us three takeaways in relation to that, that relationship between a private company, private company board, and an auditor?
Tom Duffy: Yeah, and I think Pamela hit it directly on, that there is more flexibility in the relationship between the company and an external audit relationship in a private company. The permissions are greater to do more, to help the company in way different than perhaps in the public arena where the, the restrictions around independence and services we can provide are limited. So I think from a company's perspective -- we talked about perhaps gaps earlier as a company evolves. Gaps are created between what the capabilities of management may be, what the board's expertise may be; well, your advisors -- in this case your external auditor -- can help fill a gap, can help provide, either it's a project or help the company look at an area where there's a weakness and help solve that area. So my suggestion is that relationship between the company, the board, and its external auditor can be much more collaborative and can be actually a way for the external auditor to help enhance the business improvement of the company, its prospects; to help them with strategic planning; thought process, to look at that from an external point of view and provide necessary assessments around areas where there might be weaknesses. So the ability to leverage is greater, and I would encourage private company boards, management, to take full advantage of that. And I think the external auditor welcomes that opportunity, which is a very different sort of relationship than the public relationship -- public-client relationship -- that we have. And so I do think it can be a really helpful sounding board, it can be an asset to the company in terms of its being able to think differently and having some external advice from people who see it in other environments as a real chance for them to enhance their performance.
Christopher Clark: Tom and Pamela, I've got to thank you. You gave us wonderful food for thought. I really look forward to seeing the both of you in the very near future.
Pamela Packard: Thank you.
Tom Duffy: Thanks, Chris, and thanks to NACD as well.
Christopher Clark: You're most welcome. On behalf of NACD and KPMG, thank you for viewing today. I'm Christopher Clark, and this is BoardVision.
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