Corporate Governance of LBOs: The Role of Boards

Abstract:     
This paper examines board composition and CEO turnover when a public company is taken private by a private equity group in an LBO, using a new data set of all public to private transactions in the UK between 1998 and 2003. We find that when a company goes private, the board size is reduced and outside directors are replaced by LBO sponsors. LBO sponsors' presence on the board is higher for more complex and challenging transactions, suggesting intensive involvement of private equity when its supervision is needed. We also find that the presence of LBO sponsors on the board decreases CEO turnover and its sensitivity to performance, but increases operating performance. This suggests that effective monitoring of private equity reduces the reliance on short-term performance and allows for a longer term horizon for CEOs. It also calls into question the traditional view of CEO turnover as a sign of an effective board.

Number of Pages in PDF File: 55

Keywords: Boards of Directors, Private Equity, Leveraged Buyouts, CEO Turnover, Corporate Governance

JEL Classification: G24, G30

working papers series