The Voice of Experience: Public versus Private Equity Boards
Few directors have served on the boards of both private and public companies. Those who have give their views here about which model works best.
April 2015 | by David Delaney
Advocates of the private-equity model have long argued that the better PE firms perform better than public companies do. This advantage, these advocates say, stems not only from financial engineering but also from stronger operational performance.
Directors who have served on the boards of both public and private companies agree—and add that the behavior of the board is one key element in driving superior operational performance. Among the twenty chairmen or CEOs we recently interviewed as part of a study in the United Kingdom, most said that PE boards were significantly more effective than were those of their public counterparts. The results are not comprehensive, nor do they fully reflect the wide diversity of public- and private-company boards. Nevertheless, our findings raise some important issues for boards and their chairmen.
When asked to compare the overall effectiveness of PE and public boards, 15 of the 20 respondents said that PE boards clearly added more value; none said that their public counterparts were better. This sentiment was reflected in the scores the respondents gave each type of board, on a five-point scale (where 1 was poor and 5 was world class): PE boards averaged 4.6, public boards 3.5.
Clearly, public boards cannot (and should not) seek to replicate all elements of the PE model: the public-company one offers superior access to capital and liquidity but in return requires a more extensive and transparent approach to governance and a more explicit balancing of stakeholder interests. Nevertheless, our survey raises many questions about the two ownership models and how best to enhance a board’s effectiveness. How, for example, can public boards be structured so that their members can put more time into managing strategy and performance? Moreover, can—and should—the interests of public-board members be better aligned with those of executives?
How Both Models Add Value
Respondents observed that the differences in the way public and PE boards operate—and are expected to operate—arise from differences in ownership structure and governance expectations. Because public companies need to protect the interests of arm’s-length shareholders and ensure the flow of accurate and equal information to the capital markets, governance issues such as audit, compliance, remuneration, and risk management inevitably (and appropriately) loom much larger in the minds of public-board members. Our research did indeed suggest that public-company boards scored higher on governance and on management development. However, respondents saw PE boards as more effective overall because of their stronger strategic.
In almost all cases, our respondents described PE boards as leading the formulation of strategy, with all directors working together to shape it and define the resulting priorities. Key elements of the strategic plan are likely to have been laid out during the due-diligence process. Private-equity boards are often the source of strategic initiatives and ideas (for example, on M&A) and assume the role of stimulating the executive team to think more broadly and creatively about opportunities. The role of the executive-management team is to implement this plan and report back on the progress.
By contrast, though most public companies state that the board’s responsibility includes overseeing strategy, the reality is that the executive team typically takes the lead in proposing and developing it, and the board’s role is to challenge and shape management’s proposals. None of our interviewees said that their public boards led strategy: seventy percent described the board as “accompanying” management in defining it, while thirty percent said that the board played only a following role. Few respondents saw these boards as actively and effectively shaping strategy.