. 2021. Simon Witney. Cambridge University Press (International Corporate Law and Financial Regulation Series).
Private equity as an asset class is older than many readers of this review. It is a faster-growing a part of the investment universe than listed corporations, whose number is declining. With regard to the legal responsibilities of the manager and the board of directors, in addition to the monitoring efforts of (mostly) institutional investors, Simon Witney is the primary study of its kind to look at how corporate governance and responsible investing work in private equity, and the way the 2 functions actually work together. Witney is a visiting professor on the London School of Economics and Political Science and has worked as a personal equity lawyer for over 20 years.
Many investors may skip over issues that take care of corporate governance, but they’ve far-reaching implications for improved investment practice. The writer defines corporate governance in private equity as the assorted rules that govern who makes decisions in private equity-backed corporations, in whose interests the selections are made, and the way they’re made. According to Invest Europe, private equity firms act as lively investors, demanding strict accountability, transparency, and the adoption of best practices from their portfolio corporations. (Invest Europe, formerly referred to as EVCA, or the European Private Equity and Venture Capital Association, represents the private equity community across Europe.) They are also often industry specialists with staff who bring specific expertise. Most importantly, they negotiate bespoke governance arrangements of their investments.
Tailored contracts in private equity-funded investments allow for a detailed alignment of interests with fewer inherent conflicts of interest, an informed and influential shareholder and significant incentives for effective organization of corporate governance. According to the writer, negotiated contracts are crucial for determining the applicable governance mechanisms in private equity-funded corporations. The important objectives of the contracts are to facilitate effective monitoring of management, improve the standard of decision-making and make sure that investors’ preferences are taken into consideration.
In the context of personal equity’s status, lively governance is important, as some regulators and members of the general public wrongly perceive private equity operators as destroyers of wealth, creators of debt and causes of unemployment. The writer cites the disturbing example of the Toys”R”Us bankruptcy in September 2017. where the press and certain politicians blamed private equity owners for the corporate’s enormous debt and unsustainable interest costsMany politicians voice such criticisms to the detriment of personal equity firms that follow genuinely good business practices and have more in mind than simply high returns on capital and lucrative payouts inside set time periods.
Readers outside the UK and the Eurozone will likely be surprised by the applicability of ‘Corporate Governance Regulation within the United Kingdom and Private Equity’s Response’, essentially the most extensive single section of the book. It focuses on the Companies Act 2006 and pays particular attention to the duty of loyalty, which is described as an obligation to advertise the success of the corporate. A second essential aspect of the duty of loyalty is that directors must exercise ‘independent judgement’. The content of the Companies Act 2006 could be considered standard regulation, even though it is clearly not optimal for a personal equity-backed company that has a contractual arrangement with legal effect. The discussion also covers European competition law, the Alternative Investment Fund Managers Directive (AIFMD), which consists of legislative measures to mitigate systemic risk following the financial crisis of 2007-2008, the Walker Guidelines and the Wates Principles (more on these below).
In 2018, a ‘model of governance and oversight’ was created by the UK government. Sir James Wates CBE was commissioned to develop principles that might be applied to shaping the governance of huge private corporations. For me, these high-level principles sum up the message of the book and might be applied to smaller corporations. These principles include the next:
- An effective board that develops and promotes the corporate’s purpose
- Effective board composition, which requires an efficient chair and a balance of skills, backgrounds, experience and knowledge
- Accountability and responsibility of directors
- Promoting long-term and sustainable corporate success
- The remuneration of the Executive Board is geared towards this success.
- Effective stakeholder relationships
Part IV (the ultimate section of this extensive volume) examines how corporate governance can affect corporate performance. Several academic studies cited by the writer show that portfolio corporations outperform their listed peers in profitability, productivity, employment and dealing capital management. These metrics could provide a solid rationale for investing in private equity-backed vehicles. However, Witney notes that lots of the performance studies need updating, particularly for the present decade.
In summary, readers – particularly regulators, corporate management and investors – will find answers to a lot of their questions on effective governance and responsible private equity investment on this comprehensive text. Most will view the data provided as justifying their confidence in private equity-backed investments.
The larger query, nonetheless, concerns parallel governance and regulation in their very own countries. Are the foundations of a selected country like weak tea, or are they strong, effective, and enforced? How do the Dodd-Frank rules within the United States compare to those presented here? Will the Stop Wall Street Looting Act (a bill introduced within the U.S. Congress in 2019) gain momentum or develop into redundant with the emergence of effective corporate governance and responsible private equity investing?
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