Private Equity Vs. PLC Boards in the U.K.: A Comparison of Practices and Effectiveness

14 Pages Posted: 19 May 2009

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Conor Kehoe

McKinsey & Company, Inc.

Michael Reyner

MWM Consulting

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Abstract

Finally, whereas PE board members undergo an intensive “due diligence” process when joining boards, have frequent ongoing contacts with management, and focus heavily on the cash-generating capacity of the business, initiations of plc board members are much more formal and ceremonial, their dealings with operating management are few and limited, and the information provided them has an “accounting” orientation and covers a broad range of subjects and corporate “responsibilities.”Whereas PE boards report near-complete alignment of objectives between executive and non-executive directors, plc boards are described as having multiple commitments to and priorities that are divided among multiple stakeholders.Whereas PE boards view their role as “leading” the strategy of the firm and overseeing its execution by top management, plc boards are described as “monitoring” or “accompanying” strategies that are proposed and executed by management.Perhaps the most visible of these differences is the “single-minded” focus of PE boards on “value creation,” as contrasted with the focus of plc boards on issues of “governance” and “compliance.”Using in-depth interviews with 20 executives who have served on both PE and plc boards of relatively large U.K. companies, the authors provide a number of suggestive insights into such differences:The consistently higher returns generated by the most successful private equity firms have been attributed in part to their willingness to take on high levels of debt and their ability to exit from their investments at attractive multiples. But recent research suggests that the largest contributor to the superior performance of the best PE firms has been their ability to improve the operating performance of the companies they buy. And as the authors of this article argue, a key source of such improvements are fundamental differences in the way boards function in the public and private realm.

Using in-depth interviews with 20 executives who have served on both PE and plc boards of relatively large U.K. companies, the authors provide a number of suggestive insights into such differences:

Perhaps the most visible of these differences is the “single-minded” focus of PE boards on “value creation,” as contrasted with the focus of plc boards on issues of “governance” and “compliance.”

Whereas PE boards view their role as “leading” the strategy of the firm and overseeing its execution by top management, plc boards are described as “monitoring” or “accompanying” strategies that are proposed and executed by management.

Whereas PE boards report near-complete alignment of objectives between executive and non-executive directors, plc boards are described as having multiple commitments to and priorities that are divided among multiple stakeholders.

Finally, whereas PE board members undergo an intensive “due diligence” process when joining boards, have frequent ongoing contacts with management, and focus heavily on the cash-generating capacity of the business, initiations of plc board members are much more formal and ceremonial, their dealings with operating management are few and limited, and the information provided them has an “accounting” orientation and covers a broad range of subjects and corporate “responsibilities.”

Suggested Citation

Acharya, Viral V. and Kehoe, Conor and Reyner, Michael, Private Equity Vs. PLC Boards in the U.K.: A Comparison of Practices and Effectiveness. Journal of Applied Corporate Finance, Vol. 21, Issue 1, pp. 45-56, Winter 2009, Available at SSRN: https://ssrn.com/abstract=1394688 or http://dx.doi.org/10.1111/j.1745-6622.2009.00215.x

Viral V. Acharya (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Conor Kehoe

McKinsey & Company, Inc. ( email )

1 Jermyn Street
London, SW1Y 4UH
United Kingdom
+44 (0)20 7961 5988 (Phone)

Michael Reyner

MWM Consulting ( email )

12 Charles II Street
London, SW1Y 4QU
United Kingdom
+44 (0)20 7484 1050 (Phone)

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