PRINT THIS PAGE Corporate Governance29/08/2007. Source: SJ Berwin. Simon Witney 
Private equity and venture capital firms have always been justifiably proud of their corporate governance model. Alignment of interest between investors and managers is difficult to achieve in listed companies, with a diverse and largely indifferent shareholder base. But it is much less of a problem when a dominant shareholder, and invariably one with real industry and business expertise, oversees the executive management team. Elaborate, expensive (and often ineffective) devices to ensure that managers act in the best interests of the company - rather than their own - are not necessary, and the executive team works with the shareholders to deliver real business improvements, and to maximise shareholder value.
In a speech delivered in Amsterdam this week, Javier Echarri - the Secretary-General of the European Private Equity and Venture Capital Association (EVCA ) - emphasised that the private equity model involves "thorough strategic planning and focus on value creation over longer time horizons", and enhances the effectiveness of the board. He refers to independent research which confirms that venture capitalists have a measurable" direct and positive influence" on the corporate governance of portfolio companies. That will be no surprise to anyone in the industry, and there is every reason to suppose that the same is true for larger deals too.
In the face of this apparent truism, it is perhaps strange that some have questioned this governance model recently. It seems clear that private equity backed companies are going to be in better shape than most to build stronger businesses that deliver good returns for their investors.
But, of course, what concerns some of those who have asked those questions is not whether the private equity model operates to deliver better shareholder value, but whether it does so at the expense of the interests of wider stakeholders. And that is a legitimate question to ask, especially when the companies concerned are large - and therefore have a very wide impact on society generally.
But we should not assume that this question is being asked for the first time. European law is well accustomed to regulating the way that companies - public and private - operate. Laws moderate their activity, and protect those that they deal with, in almost every sphere. Creditors are protected; employees are protected; pension fund beneficiaries are protected; the environment and customers, and everyone else that the business touches, are all offered protection by myriad laws and regulations. And, of course, those laws do not discriminate between public and private companies. They apply equally to all.
For some, that does not go far enough. They argue that we should actually make directors accountable to a wider group of stakeholders than just shareholders. That we should give others, not just a voice in the way that the company is run, but a legal right to hold directors to account. And in a number of European countries - Germany, for example - that right is actually enshrined in the legal structure of larger companies, through a two tier board with employee representation.
That model was recently evaluated in the UK, in a root and branch review of British company law - and rejected. It was rejected in favour of the concept of "enlightened shareholder value", which is now enshrined in the law (effective from this October). The new law on directors' duties in the UK will require all directors - of public and private companies alike - to act in the way "most likely to promote the success of the company for the benefit of the [shareholders]", but in doing so to have regard to the interests of a wide variety of stakeholders. That means that stakeholder interests are acknowledged by the law, but that directors are only accountable to their shareholders. Those that reviewed the law argued that making directors accountable to everyone would mean they were - in practice - accountable to no one, but that well managed companies could not ignore the interests of outsiders, whose co-operation was essential if the company wanted to achieve its goals.
Private equity investors, now more than ever, have to demonstrate that they are "enlightened" investors; that they promote effective governance structures which have regard to all relevant stakeholder interests, because that is the way to build more successful businesses. Fortunately, that is not a new idea either. It is inherent in the private equity model.
The above is intended for information only and does not constitute legal advice. You should consult a suitably qualified professional before taking any action on any particular matter.
This is an extract from a weekly bulletin produced by SJ Berwin providing an update of legal and tax developments that relevant to the European private equity community. If you would like to be added to their mailing list please send an e-mail to sjbnetworks@sjberwin.com
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Jonathan Blake or Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com.
06 July 2007
www.sjberwin.com
|
