Improving board performance at private equity-backed firms.

• Author: Adams, Dorothy D.
• Position: PrivateCOMPANIES

Governance and board performance at private equity-backed companies represent uncharted territory. A recent Capital Value survey of companies that are funded by various investors--buy-out, venture capital and angel investors--found that 80 percent of the boards do not evaluate their own activities. Formal investor groups emphasize deal screening and proprietary deal flow to distinguish themselves, and are often unaware of board dynamics that can turn a deal into a success or dismal failure.

While many individual directors from private equity (PE) firms are top-caliber, all PE firms should have policies directing steady attention to board performance. This change could be stimulated by funds' limited partners. Following are additional suggestions distilled from the survey and the author's board experience that can help improve board performance.

* Manage the valuation debate. Unlike public boards, private board-investor disagreements often flare into raging battles, with the company suffering the consequences. One of the key issues fueling this fire is valuation of the company, either for a follow-on investment or deciding on a sale or other exit. Seventy-five percent of the survey respondents knew of one or more companies that were significantly harmed by investor disagreement over valuation and other issues. The variety of classes of shares, as well as differences among the funds, produce very different agendas for investor board members.

Management and former management shareholders, who have less experience in the art of valuation, are also in the fray fighting for financial and emotional returns. Investors and board members need to openly discuss this volatile subject before an investment closes.

* Distinguish clearly between management and board. The board can only do its job in assessing management if it is not part of management. Board accountability deteriorates when directors perform management roles. If a board member must temporarily take a management post, the board should decide that this director is now an executive director, plan the management replacement process and review the board's overall balance.

* Create advisory councils for more industry knowledge. Often, investors will recruit someone from industry to serve on a board to provide valuable industry knowledge and contacts. Advisory councils, as a complement to the formal board, are a better way to involve key people from industry, given their limited time...