Governance, Leadership and the Wild West
Public company Governance – Governance with a capital G – has received a lot of attention over the last few years. We’ve had a number of important reviews including Cadbury, Greenbury, Hampel, Higgs, Myners and Walker. Financial services business have the new Senior Managers Regime to deal with. Any business with interests in the USA has had Sarbanes Oxley to think about as well. And that’s on top of the basic stuff: the Companies Act, Health & Safety, the Bribery Act, the Prudential Regulation Authority, the Financial Conduct Authority and lots more. If you’re a Board member of a company of any size, particularly in financial services, there’s plenty of Governance with a capital G to think about.
Now, capitalism being capitalism, the market has found more than one solution to the question of governance. Private Equity (PE), as we know, has taken off in the last decade or two. Billions have been raised by a huge variety of funds offering a huge variety of strategies. This contrasts with the smaller sums raised on the public markets. For example, in 2015 PE in the USA raised over $180bn of new capital, six times as much as was raised in public market IPOs.
Many PE houses look a lot like old-fashioned conglomerates, the sort of thing you used to find on the stockmarket. Why has the quoted conglomerate fallen out of favour while its unquoted equivalent has grown like topsy?
At the risk of making sweeping generalisations, my own experience of PE is start with bolder assumptions than the average quoted company’s Board. There are plenty of exceptions, of course, but often PE supports bigger, more transformative strategies and follows them through with commitment.
I realise that private equity is a bit Wild West for many people but it’s subject to the same laws, taxes and regulators as everyone else. There are responsible industry bodies such as the BVCA and InvestEurope. Some firms have signed up to the highest levels of governance including the United Nations Principles for Responsible Investment (UNPRI). In the UK the (voluntary) Walker Guidelines embody private equity’s self-regulatory approach to transparency and reporting.
Private equity’s governance model – with a small g – can be more loosely defined because it is tighter by its very nature. The main investors are on the Board. There is a ready dialogue between management and the investor. It’s much easier to pick up the phone to the PE partner and run something past her or him. Decisions get taken quickly on the basis of good-quality, shared information. It’s a closer partnership of interests and therefore requires less codification. Lenders recognise how well it works, which is why they are comfortable with higher levels of leverage than they will offer to any public company.
If you’re a Board member or in the senior leadership team of any type of company - quoted, family or private equity - there are plenty of governance, or Governance, requirements to think about. In the midst of it all, it can be hard to remember the essentials. Even (especially) in the Wild West, careful selection, development and focus of your leadership team are as vital as they have ever been.
© Patrick Macdonald 2016
This article is based on a speech I gave recently at a Building Societies Association Chairman's Seminar