David Hall is Managing Director of YFM Equity Partners and Chair of its Investment Committee. YFM is an independent private equity firm investing up to £10 million of equity in small, growth businesses through offices in Leeds, London, Manchester, Birmingham and Sheffield. Before joining YFM in 2000, David was a Director at Enterprise Ventures, the investment arm of Enterprise plc.
What is the purpose of the board in a PE-backed company?
A good board makes you a better all-round business. It can be tricky to convey that to management teams when it may not have a direct impact on margins and customers today — but in the end, a good board will make a business a better one, a more attractive investment proposition, and will help with employee retention.
What is your role in the boardroom?
We invest in small businesses and we are usually the first external investors, so regular board meetings with external shareholders are new to a lot of the companies we work with.
However, we do not generally take board seats ourselves — if we did so, we would acquire a fiduciary duty to all investors, which may not be in the interests of our own investors. Instead we tend to appoint a non-executive chairman, and sometimes a second non-executive director, and will attend board meetings as observers.
Part of our role is educating the management team around what is expected of them, and why. My wife once referred to non-executive directors as the “bidet of the board” — many people have one, but they don’t know how to use it!
Apart from the skills and experience of the board members, what is the key to an effective board meeting?
A lot depends on the chairman. The chairman should make sure you get the right balance between looking at strategy and performance — which can vary from meeting to meeting. The chairman also needs to manage the different personalities and interests around the table, particularly when there are multiple investors sitting on the board: they can often end up confusing the board meeting with a shareholder meeting.
Management gets a lot out of a well-run board with a good chairman. With the best chairs, you come out of the meeting feeling positive… a lesson from one of my own chairmen was only realising on the way out of the meeting you’ve been told off, but you still feel you’ve learned something!
Do you have any particular bugbears concerning board information?
Not being able to see the wood for the trees — people tend to think more is good, but more is often less.
There can also be a tendency to stick to an absolute list of agenda items, so writing board packs can become a formulaic process rather than something that’s thought through. In such cases, it can be hard to draw out the key messages. For example, you can end up with a paragraph of operational detail that someone has written in the same way they’ve always written it, but somewhere on the page there’ll be a comment that says a competitor has just opened 400 yards away and had a storming month. That should be on the front page, not hidden in the weeds.
Timeliness is another big concern. Even if the board pack is clear and focused — and they are not always — you still need time to prepare. In situations where we have just invested, the majority of businesses produce board packs later than is acceptable. If you’re doing well, you will get two-thirds of the papers two days in advance; otherwise, it is the night before the meeting. We often have to encourage management teams to get the information out earlier.
Private equity firms often talk about adding value to help companies they invest in. How do you define ‘value’?
We are at the beginning of a journey with this in PE, but the definition of value is starting to change. When we discuss a company’s value proposition, it is increasingly about impact and how you do business. We want the organisations we invest in to be better businesses at the end of the process — better in the broadest sense and not just bigger and more profitable. You could put it like this: do you want to be Richard Gere at the beginning of Pretty Woman, or Richard Gere at the end? It is going to take a couple of generations for this to come through fully.