Corporate Governance Moves up the Agency Buyers’ List of ‘Must Haves’

Corporate governance. There. I’ve put it in the first sentence so those not interested in the subject can stop reading.

But if you’re interested in selling your agency, you might want to read on, because #corporategovernance is moving up the list of ‘must haves’ that potential buyers look for when considering an acquisition.

This point was brought home to me recently when attending a webinar hosted by #AgencyHackers with @SimonLatarche from #MilestoneAdvisory presenting. Corporate governance represents one of the ten factors that go to make up their agency valuation scorecard.

Not surprisingly, their scorecard is still weighted to financial elements such as ‘profitable growth’ and a ‘strong balance sheet and cashflow’ but the fact that corporate governance has now earned its own place on the scorecard demonstrates the importance that it now being attached to this area – and why agency sellers will damage their chances of achieving a good price for their agencies if they ignore it.

An article of this length can do scant justice to the subject, but I’ll attempt to highlight the key aspects of corporate governance and will put forward some recommendations on how an appropriate ‘Corporate Governance Framework’ (CGF) can be put in place at short notice.

?‘I Pay My Taxes’

?But first, why does this area matter so much now? Surely there is already a plethora of legislation that provides an appropriate regulatory framework within which an agency can operate? Keeping up with, and adhering to, the growing number of laws surrounding employment law and company law alone should be sufficient to prove the agency is legit and so a sound investment?

Well, no actually. Consider the reaction ecommerce businesses get when they attempt to justify how little tax they pay. “We pay all the taxes due under UK tax legislation”, they bleat. But in the meantime, their reputations as good corporate citizens get shredded.

In other words, remaining on the right side of the law is no longer enough and this, to my mind, is where a good corporate governance framework comes in.

The four basic principles or pillars of governance are accountability, transparency, fairness, and responsibility and I’d argue that those ecommerce companies clearly fail the fairness test.

I recognise that corporate governance has historically been associated with the rights and treatment of shareholders, and the roles and responsibilities of the board of directors and I will address those point later on in this article, but my focus is on the issues surrounding integrity and ethical behaviour and disclosure and transparency. These talk to the first three of the above four pillars.

Because these areas of corporate governance are the ones that really, really count.

Let’s consider by how much and by whom.

Staff Vote with Their Feet

Telling a potential new member of staff that their place of work meets the Health and Safety at Work etc, Act 1974 is the very definition of a necessary but not sufficient condition!

In other words, it won’t be enough to persuade him or her to join the agency. What might tip the balance however, will be to point them towards appropriate codes of conduct that are in place at the agency and which address areas such as its business ethics, corporate values, and social and environmental responsibilities.

Because let’s be clear, these were Millennials’ preferences but have become Gen Z expectations.

Clients Expect more Than Just Great Creativity at Low Prices

It’s a fact. Brands are starting to factor in ESG practices into their agency consideration. One procurement specialist predicts that whereas ESG makes up 5% of a pitch score currently, this will rise to 20% in the future.

And the The IPA’s Report ‘Gaining the Competitive Edge, The increasing role of ESG in marcomms decision-making’, makes for salutary reading here. Amongst their key take-aways from the report, they note: ‘ESG…is increasingly an active, day to-day consideration for brands, with 80% considering ESG important to current day to-day practices. Agencies must utilise this shift in momentum and walk their clients through creative ESG-focused ideas and processes”.

To Investors Governance Counts the Most

The number of words printed about the ‘E’ and ‘S’ in ESG (Environment, Social, Governance) is disproportionate to those printed about the ‘G’, but investors would prefer it was the other way round.

Potential investors know that an agency that can demonstrate strong governance can mitigate risks more easily (so is less of a risk); is more likely to be profitable in the long run and is more likely to attract and retain good quality staff and clients.

?Where to Start?

Evidence that a strong corporate governance framework is in place, then, is a must have for a would be agency seller. Luckily, getting one is relatively straightforward. The interwebby is full of organisations that have published their’ s from Government departments (Passport Office) to banks (Barclays, HSBC) to NGOs.

Most are simply boilerplates, much of which is irrelevant to a SME such as an unlisted creative agency. But with some heavy editing, a version can be created that is fit for purpose for an agency.

Nearly all these CGFs are underpinned by two important elements: policies and committees.

Policies Work

Written policies may bring the more free-spirited agency heads out in spots but for many of us, they perform a vital role, ticking many of the principles of governance in one go. Policies such as Codes of Conduct hold those responsible to account, they provide greater transparency and by their very nature, represent fairness.

Neither staff nor clients view them as unnecessary pieces of bureaucracy but as ‘windows’ offering a direct line of sight into an agency’s true self.

Committees Play A Role Too

If written policies bring free spirited agency leaders out in spots then committees may make their tongues blister. But again, my experience of committees is they perform an equally vital role in bringing corporate governance to life.

Agencies of virtually any size could consider setting up one or more of the following

i.????????????????Remuneration Committee

Ideally a Remuneration Committee should be chaired by a Non Executive Director (NED) with appropriate experience. That could sound expensive but consider the benefits.

The Remuneration Committee can introduce a degree of objectivity around that most sensitive of subjects, staff remuneration (or compensation), and so bring down the emotional temperature during annual pay reviews.

Remuneration Committees can also be tasked by the Board with running competitive salary benchmarking studies or drafting policies (that word again) on topics like Long Term Incentive Programmes (LTIPS), bonus schemes, retention strategies and so forth. These topics can get gnarly and so a degree of detachment is always useful.

ii.???????????????ESG Committee

This Committee is really useful for empowering staff, especially those that have a passion for this subject. And implementing an ESG policy that has been designed by the agency’s staff speaks volumes for its inclusivity. ?

iii.??????????????Risk Committee

Risk committees are more commonly known as Audit and Risk committees or Risk and Compliance committees and as such, are populated with finance types. At their narrowest, their remit is to ensure the integrity of the agency’s financial reporting and audit process and to oversee the maintenance of sound internal control and risk management systems.

But at its widest, its remit can be extended to include factors like reputational risk – which could therefore include non-finance types. In fact, creating a more ‘risk-aware’ culture can mean including senior management from across the agency.

The agency’s greatest risk is probably losing its largest client and devising an appropriate ‘risk mitigation’ strategy definitely should involve more than just the finance team.

Back to the boring bits

I’ve chosen to focus this article on those areas of governance that represent soft or hygiene factors but I recognise that the sharp end of corporate governance involves areas such as the rights and treatment of shareholders, the interests of other stakeholders and the role and responsibilities of the board.

Suffice to say that this stuff is important too and many a would-be seller has got tripped up at the due diligence phase because a long forgotten minority shareholder has re-emerged on the shareholder register or the Articles of Association have not kept pace with the company’s growth.

In these situations, caveat emptor becomes caveat venditor (‘let the seller beware’)!

Closing Remarks

It would be wrong to think of corporate governance as an optional extra or a bolt-on to think about just before putting the agency up for sale. In reality, and especially regarding all things ESG-related, actions speak louder than words.

Having a code of conduct is a hollow claim if it doesn’t guide behaviours and written policies remain just words if they don’t create actionable responses.

Good corporate governance upholds a company’s integrity. It would be unthinkable to imagine an agency being sold without it. ??