Board positions for private and private equity-owned companies are becoming increasingly attractive as the gloss of some listed boards wears thin.
Where once joining a listed company board was considered the pinnacle of a non-executive director’s career, many are now attracted to boards of private and private equity-owned companies. While a number of the core skills and responsibilities are the same, directors of private companies say they spend less time on governance and more time focusing on growth.
The regulatory environment of public listed companies can be very uncomfortable for some businesses because of the disclosure requirements, the additional regulatory and compliance requirements, and the additional risks and liabilities for directors, says Infrastructure NSW chair and non-executive director Graham Bradley AM FAICD.
New impositions on directors from the past few years — including whistleblower, modern slavery and environmental compliance legislation — require public boards to spend a lot of time ensuring that their reporting is accurate and not likely to lead them into liability. While these regulations also apply to some large private companies, they don’t impose nearly as much of a burden on them.
“You add the additional challenge of media coverage due to the high disclosure on everything from pay to policies, and the risks of class action litigation relating to market volatility in your stock and to your disclosures — all these things can become a significant distraction for public company directors,” says Bradley.
Bradley has his own experience of unlisted company boards, including mobile phone tower owner Waveconn, Virgin Australia and a renewable energy company. “I’ve got four or five unlisted companies, which I’m enjoying a lot because I feel I’m more hands-on, more engaged with the strategy and the management, and reading shorter board and committee papers,” he says. “We spend very little of our time in relation to reporting, disclosure, audit, compliance and so on. We do all the right things in that regard, but we spend a lot less time with those matters compared to the listed boards I’ve been on of late.”
There is no requirement for a majority of independent directors on a private board and many have more executive directors, which means there may be more people around the board table with a more intimate knowledge of the business.
It’s easier for an unlisted board to hear about an issue, get to the bottom of it and then get it fixed outside the glare of publicity that often comes with public companies, says Bradley. For instance, if a problem that will affect the company’s immediate profit outlook arises, instead of worrying about crafting a statement to the ASX without panicking shareholders, private boards look for solutions. “We just get on and fix it,” says Bradley.
Leaving the club
Several prominent Australian companies have delisted from the ASX in recent years after being acquired by private equity and superannuation funds, including Sydney Airport, Virgin Australia, Healthscope and Crown Resorts. The trend continues. Funerals group InvoCare, aged care operator Estia and property company Sunland Group were taken off the ASX after being acquired by private equity last year.
During the financial year 2020, the number of ASX-listed companies declined from 2269 to 2188, with de-listings outstripping new IPOs and reverse takeover transactions (RTOs), according to a study by accounting firm William Buck Australia. Listings picked up in subsequent years, when capital markets were awash with money, but William Buck’s director of audit and assurance expects the trend to reverse, particularly in the small cap space, as capital markets tighten and business conditions deteriorate.
For Belinda Gibson FAICD, a non-executive director of the privately owned companies Brisbane Airport and Ausgrid, the key difference with private companies is not having disclosure obligations. This allows for more time focusing on the business rather than whether the company is meeting complex regulations to keep investors fully informed.
Beyond that, directors’ duties are mostly the same. “We all do the AICD courses,” says Gibson. “We all read the AICD materials. We all worry about cyber. We all worry about compliance-type things and the environment. It’s just that there isn’t that bit at the bottom of every paper about, ‘Is the market fully informed?’”
Directors of private companies, such as those held by private equity investors, are usually more hands-on when compared with the more stewardship-type role that directors of listed companies play. Private equity directors can cross the line and have more of a coaching relationship with the CEO, says Helen Liossis GAICD, a Sydney Investors advisory board member and NSW division councillor for the AICD. “They are almost like a quasi-consultant to the CEO. Private equity like the fact that they can ask those hard, detailed questions about operational performance.”
In a listed company, the CEO develops the company strategy and the board reviews and comments on it. It is then presented to shareholders in company communications and investor days. This model is turned on its head in private equity- owned companies, says Adrian Loader, a founding partner of private equity firm Allegro Funds. Private equity firms acquire the business and develop a clear plan for it. They appoint directors to turn the shareholder-approved plan into a strategy with management’s help, then oversee management’s implementation of the strategy.
“Management has input into the strategy, but they aren't dictating it,” says Loader. “Then the board’s role is to help ensure that translates to a budget and to a whole range of other plans — and to keep it on-plan. That drives everything because, as a private equity shareholder, I’m forming a board to roll out an investment plan.”
Loader is on the board of Scyne Advisory, which Allegro acquired from PwC after the accounting giant imploded because of the misuse of confidential information and mismanagement of conflicts of interest. Allegro wanted a board with a conflicts and ethics committee to ensure the problems weren’t repeated. “We brought [former Federal Court judge] Andrew Greenwood from Queensland onto the board to run our ethics committee because, from a risk point of view and getting back on board and managing our risks, we thought, how do we find the best possible director with the right skillsets to help us manage these risks?”
Loader notes that governance structures and effective committees are still important, because private equity funds are taking institutional capital and institutions want to ensure good governance. He advises directors who are asked to join a private equity-owned company board to examine the company’s investment plan, business plan and budget to consider whether they would be able to add value.
Looking after the shareholder
As a non-executive director of a PE-owned company, the director is trying to help the company achieve its business plan and budget so the PE sponsor can achieve its investment plan and exit profitably. “So, you need to speak to the shareholder, which is very different to an ASX business, where you might never speak to a shareholder,” says Loader.
The relationship with shareholders is also a key difference for Grant Murdoch FAICD, who serves as a director on a couple of small private companies as well as on publicly listed OFX, Lynas Rare Earths and Auswide Bank.“You get to see the expression on their face when they’re talking to you, especially if it gets emotional,” says Murdoch.
Where there are several owners of a private company, he sits down with each to assess what they’re looking for and their exit strategy, then brings them together to outline where they’re aligned and where they’re not. With the owners often sitting around the boardroom table as well, meetings tend to be more informal, with some of the governance procedures done away with. Even so, the chair has to judge when to be formal and when not, to ensure all contentious decisions are recorded, including details of how they were arrived at.
“Hindsight will judge you on what was written down at the time,” he says, adding there can be more freedom to take strategic investment decisions in a private company because it doesn’t have to worry about disclosure and the company’s share price. If an investment dents a public company’s profit for two or three years — and hence its share price — the company can become a target for an opportunistic takeover.
Murdoch says it can be more difficult to raise capital for a private company, particularly a smaller one, because they will need to find investors who are prepared to make an illiquid investment. However, balancing that out is the fact that the shareholders are often sitting around the boardroom table, so it quickly becomes apparent if a capital raising has shareholder support.
Formal governance remains important
Listing rules, a formal committee structure and other formal governance mechanisms might not apply to private boards, but they are important for any company wanting to list, says Heith Mackay-Cruise FAICD. He is chair of Orro Group, a technology roll-up player owned by mid-tier Australian private equity firm Liverpool Partners, and a non-executive director of the AICD. Until recently, Mackay-Cruise was chair of UP Education in New Zealand, owned by Pacific Equity Partners.
He says private equity boards are already appointing more independent directors as a result. “If you’re going to be an IPO candidate, and be on the ASX boards, you’ve got to make sure that you have a governance regime in place. It’s not in the best interest of the company to do that with bankers when you’re actually running an IPO process. You want to have a good year or two under your belt.”
Directors joining private equity boards should be aware of what Mackay-Cruise calls “time constraints”. Where directors of listed companies might expect three terms of three years, a director’s tenure on a PE board is determined by the holding fund’s term date.
“The second thing I’d look at is, if they've had it for a little bit, why has it not necessarily performed the way they’ve wanted?” he asks. “Therefore, why are they looking for an independent director? Is it just because they're improving their governance or is there actually something that hasn’t gone right with that business?”
Obviously, independent directors are hired for their independent perspective.
“It’s actually your fiduciary responsibility,” says Mackay-Cruise. “ASIC doesn’t really differentiate on your fiduciary responsibility as director between private or public.”
With no requirement for a majority of independent directors, directors considering joining a private board will want to be comfortable that the asset owners are committed to governance that includes input from independent directors and that the board is to be responsible for the company, not just there for window dressing, says Bradley.
“You need to ask your questions of the chair and, in the case of a private equity board, of the private equity firm, about how they see the board working. By and large, you’ll get a sense of that during the appointment process.”
This article first appeared under the headline 'Crossing Paths’ in the April 2024 issue of Company Director magazine.
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