Boards Of Private Equity Portfolio Companies: Ideas And Suggestions
For the uninitiated, as of right now there are 4,322 private equity firms with over 92,494 portfolio companies listed in the Private Equity Info Database. While these portfolio companies are generally private, their boards often include independent board directors.
Within the context of private equity, boards of directors are not subject to the same requirements as their public company counterparts. However, regardless of architecture, a soundly constructed and well managed board is a strategic asset.
Good governance and a thoughtfully established and focused board can bring extensive value. This is true for both public or private companies although the look and feel of each of these boards may be quite unique. With regards to boards of private equity portfolio companies, the very act of implementing good governance brings with it structure, accountability, process, discipline, and oversight that will facilitate growth and the achievement of goals. Of course, within the context of private equity there is always the possibility of ultimately going public and establishing best practices of good governance early on will be helpful in this regard as well.
In all cases, the board of directors should provide independent thought and astute advice. Board members bring expertise in a whole host of arenas and should help owners think through strategic alternatives, new challenges, and obstacles as well as financials and even potential exit strategies. With respect to boards of private equity portfolio companies, the board will be partially comprised of owners (sometimes from more than one PE firm) and as such, the independent directors must provide a complement to these directors and bring expertise in areas that they themselves do not possess. Highly qualified independent directors will respectfully challenge assumptions and bring an outside perspective to insiders who may be so immersed in the company that their objectivity is obscured.
The director on a private company board will also tend to dismount from the typical 30,000-foot strategic perch typical of public company boards. Depending on the size and stage of the private equity portfolio company, the board director may be called upon for access to his or her network. This may be for purposes of exposure to potential new clients, acquisition targets or perhaps those in governmental or regulatory roles that are essential to the company’s success. Involvement in commercial aspects of the company tends to go with the territory and for many directors this is a welcome opportunity to get a bit more involved than is typically the case on a public company board.
Often the private equity portfolio company will have a recently retired CEO on its board. This operator can provide mentorship for the CEO and senior management of the company. This executive may be a sounding board for the CEO in addition to performing the typical directorship role. He or she may be battle tested in an area the company is working in or a goal the company is trying to achieve. Having access to someone who has been through it (often more than once) can be important, particularly for the less experienced operator. A secondary but no less essential benefit of having a former CEO on the private equity portfolio company board is that they may be able to step in and run the company, at least temporarily, if something befalls the current leader.
Private equity firms may look to augment diversity through the recruitment of outside directors to their portfolio company boards. Institutional investors and other stakeholders are extremely focused all manners of ESG including diversity. This is not just for social good but because diversity has been proven again and again to improve business results. It is only a question of time before those institutional investors in private equity add to their decision criteria how well a private equity firm scores on diversity related metrics. As such, recruiting a solidly qualified board director who also happens to be diverse can add a whole host of benefits.
The outcomes of being strategic and proactive when creating a board of directors are far-reaching. Selectively curating specific expertise and experience is akin to recruiting exactly the right player to join a team heading for the playoffs. Casting a wide net for precisely the right person can mean the difference between many winning seasons, or not.