June 30, 2021

Private Equity Governance

In today’s tightly regulated economy, good corporate governance may be the best way to create lasting value. A strong sense of corporate governance means the board of directors is likely to meet more regularly, have clearly defined responsibilities, and find it easier to maintain control over the business. It will also have a better handle on risk management and reduce opportunities for fraud and corruption. Within the private equity (PE) industry, corporate governance has become more critical than ever, for both institutional investors and fund managers.

It’s clear that good governance, combined with
expert boards within portfolio companies, is
crucial to returning value to investors.

Building the Right PE Board of Directors

Adding value requires PE firms dedicate more time, energy, and resources to their portfolio companies than ever before. Leveraging outside talent to bolster management teams and help drive growth can be significant. Appointing the right independent directors, for example, is vital. Such directors help assess the portfolio company’s value-creation possibilities and the landscape within the industry.

But finding the right independent directors to fill these crucial appointments can be challenging. “Independent directors with industry experience are an excellent source of strategic ideas and guidance for inorganic growth, and often open doors for introductions to companies that might not otherwise be on the market,” says Rita-Anne O’Neill, a partner and co-head of the global private equity group at Sullivan & Cromwell LLP. “In addition, independent directors who have prior public company board experience or are financially literate can help ensure that a portfolio company is governed with discipline and maintains good corporate formalities—which not only helps with current oversight of the portfolio company, but also makes for a smoother exit—whether by sale or IPO.”

While building the best board for your PE firm’s portfolio companies, don’t forget to include diverse perspectives. Directors can’t underestimate the role diversity plays in governance, particularly in the boardroom. It’s critical to remain relevant in an increasingly competitive world. Companies that fail to dip into the ever-deepening talent pool of diverse, well-educated, and ambitious individuals risk hindering value creation, compromising sustainability, and undermining their long-term competitiveness.

Check out our resource on Board Diversity here.

ESG and Private Equities: Transparency in Governance

Independent directors alone will not improve governance, however. Regulatory scrutiny of PE firms is increasing, and limited partners (LPs) are demanding greater transparency. LPs are also increasingly focused on non-financial performance metrics such as environmental, social, and governance (ESG), and diversity. LPs want details beyond policies and initiatives. They want to see actual ESG performance at portfolio companies and diversity at the investment professional and portfolio board level. Focusing on ESG considerations can minimize risk and reduce cost over the long term. For portfolio companies to outperform their peers, ESG Consideration cannot be ignored.

Corporate Responsibility for PE Firms

Responsible investing is a growing issue. PE firms are increasingly aware of their public image and the need to behave ethically. By integrating ESG considerations into all aspects of the PE process, including target sourcing, due diligence, and deal negotiation, board oversight, and route to exit, firms can generate value. ESG allows firms to manage and track financial sustainability and compliance with the prevailing regulatory climate. Ultimately, those PE firms not thinking about ESG policies and sustainability may quickly fall behind the competition.

Private-Equity-Boards

Investors’ influence on the PE industry has grown substantially in recent years. Increasing pressure from regulators and shifting investor demands will continue to shape the industry, causing fund governance practices to change. “Alignment regarding owners’ vision is key,” says Mr. Baumoel. “Owners working toward different visions will likely not be successful. The right PE investor can bring a compelling vision to a board to forge this alignment. The wrong PE investor can dilute alignment, fracture the board, and disrupt corporate performance.” Going forward, the push for transparency will be a defining factor, with fees and performance calculations likely to be an essential trend in fund governance.

Strong corporate governance has become an essential tool for managing and growing PE portfolio companies. By improving governance systems, firms can boost returns for investors.

Check out our resource on the link between ESG and Investing here.

Governance Technology Partners

Supplying the best board portal available empowers our clients to implement efficient governance practices. Let’s start the conversation and see if Govenda is right to be your governance technology partner. Schedule a demo today.

Tag(s): Governance , ESG