Private equity governance is driven by value growth, not just compliance. There’s a 100% focus on realizing major growth in shareholder value, either in the short or long-term. Transformation of the board or C-Suite may be required. Shareholders make decisions which are often made by the board of a public company. e.g. CEO appointment or termination. Change management principles are critical.
Private equity governance has six major differences from many public companies
#1 Private equity governance is driven by realizable value growth, not just compliance. The key is realizable value growth. Private equity will exit at some point, thus value growth is based on what someone will be willing to pay for the shares. Value growth is enabled by three sets of changes: 1) sales growth via acquisitions or organically expanding, such as geographic expansion; 2) improvements in the business model; 3) improvements in the management team.
#2 There’s a 100% focus on realizing major growth in shareholder value. Decision-making is simple when the most important criteria is “How does this impact future shareholder value?” Private equity has the mindset of “Who will buy? Why will they buy? What maximizes the amount they will pay?”
#3 The time frame may be short or long-term. Some private equity firms make “quick fixes” to enable a quick exit with significant increase in shareholder value. Some private equity firms focus on long-term growth and planning for a strong future growth story to be able to attract buyers at exit time. Surveys show that many public company directors focus decision making on the short-term. Many shareholders, including mutual funds, do not have a long-term horizon because they only hold the shares for the short-term.
#4 Transformation of the board or C-Suite may be required. Change starts at the top. Director and C-Suite changes may be made. Many public company transformations fail because the transformation is focused on the bottom layers of the organization, while the top layers are unchanged.
#5 Shareholders make decisions which are often made by the board of a public company. The decisions which have the greatest impact on realizable value are made by private equity: when to sell the company, under what terms and conditions; setting the strategy and approving the strategic plan; appointing or terminating the CEO; and approving major business changes such as entering a new line of business or major changes to financial leverage.
Note that all the above decisions could be made by a public company board of directors. It really comes down to the difference in the people with the authority to make decisions: people on a typical public company board versus private equity decision makers.
#6 Change management principles are critical: the shareholders, board and C-Suite all have a sense of urgency to achieve financial results from a future exit; the core group of shareholders, board and C-Suite have the commitment and authority to make all required changes; the core group and overall business have a commonly understood and clear vision of what the future success looks like; all business decisions are based on achieving the vision; there are short term wins; all hiring and promotion decisions as well as all new projects and initiatives help achieve the new vision; leadership development programs and succession plans help achieve the new vision; and there is regular, perhaps weekly, communications among the shareholders, board and CEO.
The future vision – there is common understanding among private equity, the board and management as what the future company will look like in order to maximize shareholder value, upon exit. Everyone is committed to the strategy, the strategic plan which builds a business model maximizing value creation. This is all built on a thorough understanding of the customer and marketplace.
The above is perhaps the greatest difference from a public company board. A McKinsey survey of company directors showed that many did not understand the strategy, how the company created value, nor the market place.
In order to achieve growth in value, private equity may make changes to: the board, the C-Suite, the strategy, and the strategic plan. How often does the board of an under-performing public company make those same transformational changes?
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