What public company directors might learn from the PE playbook.

• Author: Grafman, Allan
• Position: PRIVATE EQUITY BOARDS

Once occupying a quiet corner of the financial world, private equity firms have taken on a greater prominence in the global economy, controlling in excess of a trillion dollars and owning the likes of Hilton Hotels (which did an IPO in late 2013), The Weather Channel, and J. Crew.

As private equity grows, it is an intriguing exercise to look at the PE board of directors' playbook and see what we might learn. In this article, we examine some processes that may be considered by public company boards to enhance their positive impact as directors. (We don't address controversial policies such as excessive leverage, job cuts and dividend recapitalizations.)

Here are four topics for consideration:

1. Preparation and commitment before joining a board. Private equity firms perform extensive due diligence ahead of any transaction, sometimes studying an industry or individual company for years before making an offer. Once a deal is agreed upon, a PE firm will typically engage a team dedicated to executing the plan agreed upon with management. The team often comprises the financial specialists responsible for the transaction, as well as operational executives.

   Preparation allows the new owner and board to start making decisions almost immediately, putting theory into practice. PE firms rarely, if ever, start figuring out what to do once the transaction closes.

   Possible board takeaway: Consider a longer "runway" during which prospective director candidates are provided data on the company and its challenges, as well as opportunities to meet, and form relationships with, key company executives. A more prepared and committed director may emerge. No board wishes to have a candidate join the board and subsequently learn it's a bad fit.

2. Well-defined time frame. While private equity managers often present a buyout as an escape from the scrutiny of quarterly earnings reports, the clock ticks loudly for a private equity-owned company. Managers invest from a fund with set time parameters. Investors commit money with an expectation of marketbeating profits by the end of their investment period. During the fund life, PE firms spend the first half buying companies and the second half "harvesting," or finding ways to exit investments and reap profits. With limited time, private equity managers can't be married to ideas that aren't working or management teams who aren't executing. That sense of urgency filters through nearly every discussion.

   Possible takeaway...