When non-executive directors, chairmen, executives and investors are asked to identify high-performance boards that they have either sat on or engaged with, they inevitably point to private equity (PE) portfolio boards as opposed to PLC boards.
While it is widely accepted that there are a number of highly effective PLC boards, the consensus is that in general PE portfolio boards exhibit higher and more consistent levels of effectiveness and performance.
Is this a fair comparison, given the significantly broader, more diverse shareholders and regulatory requirements that PLCs support, compared with the private, highly focused, agile environment in which PE portfolio boards operate?
Engaged corporate governance
In a McKinsey report which studied outperformance in 70 private-equity deals, a key success factor identified was significant improvement in the effectiveness of the board—what McKinsey termed “a more engaged form of corporate governance”.
And, a ground-breaking research paper from 2008, Private Equity vs PLC Boards in the UK: A comparison of Practices and Effectiveness, chairmen and CEOs with experience of operating on both PLC and PE boards were asked to compare the effectiveness of both types of board. The authors also assessed key board parameters across FTSE100 boards and high-level data from 66 UK PE portfolio company boards.
Seventy-five percent of participants felt that PE boards were clearly superior in effectiveness and adding value, while none felt that PLC boards were better.
In an era of unprecedented scrutiny of PLC boards and activist shareholders, do the findings of this research still apply in terms of PE portfolio boards being more effective than PLC boards? I believe they do and that the key to understanding this is the intrinsic deep partnership model between the executive team, PE partner and non-executive directors.
From the very start of a PE engagement process with a company, an experienced PE partner is assessing not only the scale of business opportunity but the openness of the CEO and executive team to partnering at a deep level with the PE firm.
Once a deal is completed, this strong shareholder–executive–board member alignment can often enable a board to literally go up the gears in terms of its performance. Initially, this manifests itself most visibly in a far more intense involvement by the PE board members and non-executive directors in the operational/financial reporting and performance of the company.
While this can often be disconcerting for an executive team, it often results in an extreme focus on performance and value creation, underpinned by a far stronger partnership in the strategy area between the executives and non-executive board members than would traditionally be seen in a PLC board.
Not all plain sailing
So is it all plain sailing for PE portfolio boards? Not quite—the strong partnership model that underpins a PE portfolio board has some downsides in terms of the PE board members and non-executive independent directors being genuinely independent of the CEO and executive team. This, for example, impacts on the ability to deal with an underperforming or problematic CEO.
While in many cases, a PE firm represents the majority shareholder, PE portfolio boards can sometimes be overly focused on an exit scenario or timeframe that does not take into account the interests of complete shareholders of the company. PE portfolio boards often neglect senior talent development below the level of the executive team.
Finally, PE portfolio boards are also still evolving in terms of their focus on social responsibility, community impact and the longer-term needs of all stakeholders in the company.
What PLC boards can do
So what does this all mean for PLC boards and how they can achieve outstanding levels of effectiveness and performance?
While clearly the diverse shareholder groupings, quarterly reporting cycle and onerous regulatory requirements present unique challenges to PLC boards, I passionately believe that PLC boards can replicate key aspects of the board partnership model that highly effective PE portfolio boards demonstrate.
The role of the non-executive director on a PE board compared with a PLC board strongly underscores this. While countless research studies have demonstrated that the calibre and experience of non-executive directors on both PLC and large PE portfolio boards are quite similar, the amount of time a non-executive director spends in their PE portfolio board role is often more than three times that of a non-executive director on a PLC board.
This additional time is spent developing a far deeper understanding of the business, active engagement with the executive team and importantly playing a key role in the development of the company strategy. This is in marked contrast to the challenges many PLC non-executive directors face in genuinely being involved in company strategy formation.
Remuneration structures also differ significantly, with PE portfolio board non-executive directors highly incentivised to drive strong value-creation. This is in contrast to PLC board remuneration structures, which are focused on supervision and oversight of the executive team.
I believe there is some middle ground here to fully leverage the expertise of independent non-executive directors on PLC boards, enable them to partner more effectively with the executive team and incentivise outstanding performance in a sensible structure that shareholders would support.
In summary, the fundamental component that underpins superior levels of effectiveness and performance in PE portfolio boards compared with PLC boards is a deeper partnership model between execs and non-execs at the board, comprising a shared approach to strategy, operational excellence, shareholder value-creation and focused decision-making.
While the PE business model is a more natural foundation for a high-performance board team, PLC boards have the opportunity to enable a similar high-performance board team.
In recent years, independent external board reviews have been an important catalyst in highlighting the challenges around PLC board effectiveness and barriers to achieving a high-performance board team.
The chairman’s leadership and approach of the CEO and executive team to partnering effectively with independent non-executive directors are absolutely critical to this.
Kieran Moynihan is managing partner of Board Excellence, which enables boards to excel as high-performance teams.