The Case for Agility in Governance Systems

Foreword

The sharing of knowledge, case studies and insights is an important part of our living research mandate at the Advisory Board Centre. In a rapidly evolving sector, the flexibility and agility of the advisory board function is its strength. Certified Chair™ Christopher Gibbs, shares an important insight into the performance of governance systems.

Christopher was Engineering Director at Cathay Pacific from 2007 to 2017 before joining HAECO, global aircraft maintenance company, as Group Director from 2017 to 2021. He is now a Senior Advisor at Navier Consulting and completed the Certified Chair Executive Program in 2022.

His direct governance experience, and the role of advisory boards in enhancing governance structures, is both informative and insightful.

The Case for AGILITY IN GOVERNANCE SYSTEMS

Private equity company performance has been superior to that of publicly held companies, leading to the steady growth of private equity.

Calpers, the largest US public pension fund, recently announced that it will increase its holdings in private markets from 13% to 17%, and by more than $30bn.  It will correspondingly reduce its allocation to stock markets and bonds.  They state that in the last decade private equity returns averaged an annualised 11.8% versus 8.9% for public equities.  More broadly The Economist reports that institutional investors have increased their allocation to private equity to 10% from 6% five years ago.  Lastly McKinsey state that PE assets have doubled since 2018.

It is important to understand the causes of private equity’s higher returns, leading to rapid growth.  A higher level of agility in governance systems at PE-held companies is a major driver of superior performance.  There are many aspects of private equity board governance which public companies could learn from.

Learnings from PE Governance

The performance of the boards of private equity-held companies is enhanced firstly since they are a lot smaller, often comprised of seven or eight directors rather than at least double this for publicly-held.  This size advantage enables a higher quality discussion at board meetings, faster decision making, and increases the connection between the board members and the company.

Private equity boards ensure that there are enough directors who really know the business.  As well as the company CEO and CFO, and two to three representatives of the investor, there will be two or so external directors with intimate and senior industry knowledge.  This industry knowledge will be direct and relevant, not, as on many public boards, knowledge of adjacent industries, or of industry financing rather than the real operation.

Private equity boards tend to be more thorough than public through a higher director commitment.  PE boards often meet more frequently and for longer with more open discussion.  Directors have a higher involvement outside the formal meetings, such as giving advice one-to-one to the exec team, attending trade events, contributing their network.  Director commitment to public boards varies, but it is still not unusual to have directors breezing in and out of rigid, formal board meetings, and unable to contribute significantly.

The quality of information presented is often better at PE company boards than public.  Board packs at public companies can easily run to a totally indigestible hundreds of pages, not even well summarised.  The excuse given is that this volume is required for governance but either this is not true, or that information can be relegated to appendices.  The real reason is that the exec management are often hiding behind the voluminous papers, or do not want to give non-execs easy access to the information which would enable them to contribute more.  PE board packs are crisper, less lengthy, and designed to stimulate valuable discussion.

PE boards achieve better alignment of director and company interests through directors investing in the companies with their own money.  Directors are then more motivated to ensure they are contributing to strong company performance.  There should be no conflicts of interest, such as over-incentivising the short term, providing the investments are well structured.

PE companies are more flexible and nimbler is using external specialists.  They use consultancy firms extensively, witness the build-up of large PE customer-facing consultancy practices.  The issue is not whether consultancies are useful or not, it’s using them well, in their area of expertise, against a tight well managed brief, for example aiding an acquisition evaluation.  PE-owned firms are more ready to use headhunters to fill vacancies in their investments.  This use assists the PE-owned board to be more decisive than a public board in moving on non-performing executive managers.

M&A transactions have been a minefield for public boards with an awful record for value adding deals.  A key issue is that public boards are often un-practiced in M&A, and overly rely on advisers such as investment bankers who often have their own rather than the company’s best interest at heart.  PE companies are well practiced in M&A with a well-developed playbook which includes best using advisors.  Public companies need to draw on PE experience by recruiting in the right talent so that external parties can be managed well.

The Way Forward for Public Boards

There are two ways for public companies to use PE experience to improve their governance.  Firstly, simply learning from PE, adopting smaller, more knowledgeable, more committed boards, with crisp board packs well discussed, best using externals when appropriate.  Secondly, they can set up versatile advisory boards which, if set up right, will have many of the characteristics of PE boards.

Given the current large public company governance and hence performance shortfall, with many well-publicised failures, it’s imperative to learn from superior PE board oversight.

Author: Christopher Gibbs, Senior Advisor, Navier Consulting.  The views expressed in this article are the author’s own.