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Surviving—and Thriving—on a Private Equity Board

What to know before accepting that seat

Joining a private equity board has its upsides, starting with the fact that a successful deal could mean a big payout for directors. Yet it’s not for everyone: this type of board service also carries plenty of risk. What should potential PE directors know before accepting a role? On July 16th, Egon Zehnder gathered public company CEOs and CFOs in the United Kingdom to learn more.

Your Shareholders Are More Active

Going from a public company board to a private equity board is not an escape from shareholders; it’s just working with fewer, more involved shareholders. While public company shareholders can be active, many are relatively passive and are not involved in the company on a day-to-day basis. With PE you will have only one or two investors but they will be highly active and engaged with the company and they will be sitting in the boardroom. If there is more than one investor, the role of the non-executive chairman is often to help manage conflict between the investors. For example, they may not agree upon when to exit a company. “Often I’ve felt more like a relationship counsellor – it’s where Swahili meets English: They are not per se aligned,” as one attendee put it.

Diligence Is Your Top Priority

PE is an alluring space with head-turning deals; however, there are big risks, which require extensive attention to details and due diligence. As with a public company, every director must truly understand the numbers, ask to see all relevant documents, including the transformation plan, get comfortable with how agile the company is, and be aware of how aligned the stakeholders are. And that applies at all stages of the PE ownership cycle, including at exit. As one attendee noted, this is also counts for a pre-IPO board. “There are too many examples of prospective board members not doing their pre-IPO due diligence—and the board composition is often not the first thing the PE firm thinks of when planning an IPO.”

Board composition is one of the reasons due diligence often doesn’t rise to the level it should. PE boards are mainly composed of directors with similar expertise. “PE is very focused on specific industry experience, so the boards are less diverse,” one attendee explained. “The risk is group-think.” As a director, you must be keenly aware of this homogeneity, and ensure you are getting the outside perspective you need to make the best decisions on potential deals.

It’s also important to note that while PE companies tend to be agile and open to change, they are not simply focused on deals that are lucrative in the short term. “There is more long-term thinking in PE now,” an attendee explained. ”You need to leave behind a business that is better than the one you bought.”

You’re Expected to Roll Up Your Sleeves

Board service in public companies is governance-heavy and while board members are highly aware of what is happening in the company, they leave the actual managing to managers. However, directors on private equity-owned company boards are expected to be much more active than in a public company, often blurring the line between management and oversight. There is a much greater focus on the commercial side of the business rather than governance. This requires directors to be much more involved in the deal-making process, which is time-consuming and doesn’t always yield results. One piece of advice from the dinner was for directors to choose to work on specific types of deals that align with their interests and expertise rather than being involved in every deal in some way.

No Need to Choose

You do not need to feel pigeonholed into either PE or public company boards. Some directors enjoy both types of board service—they key is to be aware of the differences in director expectations. One attendee suggested adopting a low-ego approach when going from a public company to a PE one is critical, noting that resources are constrained and that if you prioritize size, scale and your name in the paper, PE board service may not be right for you. (Your chauffeur will not be waiting outside.) PE boards are more focused on having board members who want to execute deals and leverage their experience. “The most important thing you bring [to a PE board] are the scars on your back,” an attendee said.

 

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