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

Viral Acharya, Conor Kehoe and Michael Reyner

Journal of Applied Corporate Finance, 2009, vol. 21, issue 1, 45-56

Abstract: 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.”

Date: 2009
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