Stuart Layzell is Chief Executive Officer of Ocorian, the corporate and fiduciary services provider. Prior to this, Stuart was CFO of Tilney Bestinvest, as well as a NED for Reef Television.
What value does the board bring to a PE-backed business?
A Private Equity board is a slightly unusual creature. PE board members are non-executives, but are usually more engaged than a traditional non-executive and have a more singular focus on shareholder value creation.
Board meetings should be a chance to take stock and look at the bigger picture. Yet, as a management team member, you have to have an eye on the governance piece — and, when the balance tilts too much towards reporting, management board members often dive into too much operational detail, talking about things they already know and are comfortable with.
The value, then, lies in getting the balance right between reporting — the governance angle — and forward looking — the value creation angle.
How can this be achieved?
Even though there’s a desire to think about value creation, you can’t hide from the fact that most PE houses want data and to talk through that detail. In many cases, there might be a level of analysis that’s new to the management team, especially if it’s their first experience of working with Private Equity investors.
As the majority of investors spent their early career within accounting or corporate finance firms, the comfort zone is often the numbers and the spreadsheets. If everyone reverts to type, board meetings and packs become data-heavy, which can be helpful but crowds out other forms of conversation and isn’t always a good use of the board’s time.
At Ocorian we introduced a financially focused call, prior to the board meeting, where the PE investor can go into much greater detail than might be practical otherwise. That’s not to say we don’t talk about numbers at board meetings, but it’s not the right forum to allocate 90 minutes to discuss the CFO report!
It’s incumbent on the management team and CEO to make sure they use the board meeting as an opportunity where you can step away from the hubbub and noise of day-to-day operations, look ahead, and take advantage of the diversity and intellectual horsepower of the board members.
Many management teams that are new to board reporting struggle to see the value in it. Whose responsibility is it to create, develop, and maintain an effective portfolio company board?
If you end up in the situation where the management team feels a board meeting is just something to get through, that’s a real shame. And everyone should be accountable for that failure — including the investors. You have to create the right environment. As a good board, discussing the right matters should be invaluable to the management team.
It starts with the Chair, who has a critical role in being both a person investors would say is an “investor-friendly Chair” and management would say is a “management-friendly Chair”. That’s a Chair who’s found the right balance.
Meanwhile, the management team takes their cue from the Chief Executive. So, if the CEO is not committed to the effectiveness of the board and the value of the discussion, this can set the tone with others.
Finally, as the investor, you’ve got to engage in the right way and help foster that environment. For me, it’s making sure there’s a frequent and open dialogue with the Chair around what you’re trying to achieve — outlining the objectives, and where their help and support is needed to achieve them.
Do you see similarities with the role that Corporate Service Providers can play in the governance of their own clients?
In a developing economy or emerging market, you’ll have highly entrepreneurial clients less experienced in corporate governance who’ll presume it’s just admin. Ocorian helps them understand governance can drive value creation and prove you’re an investable entity. For example, if a bank is going to lend to you, they’ll ask governance-focused questions as part of their due diligence. The easier you make it for them, the easier time they’ll have in providing what you need — in this case, funding.
Meanwhile, in a mature and established market, the governance processes can improve decision making. They not only assist with regulatory or financial controls, but better business decisions are often made when you can evidence that ‘someone with this level of experience is doing this activity and has made the decision’.
Good corporate governance goes beyond the mechanics and records. Just because the delegation of authority says you can make a decision, yes you can sign it, but is it a good call? Is it the right call? It’s about more than just the authority involved in taking an action.
How do investors with large portfolios consistently influence and drive the right outcomes across all of their portfolio companies?
There are several challenges.
First, approaches often reflect the personalities of the individuals rather than a ‘house’ style. You’re going to get significant variations depending on their degree of autonomy, their experience level, and their force of character. Another key point is whether the investment house has a history of minority or majority positions — are they more comfortable as control investors and how do they handle that?
Secondly, there’s the construct of the board itself — which sometimes reflects how the business is run rather than who are the right people within management to have in the room. You need to think about who’s on the board, and be able to articulate to someone why they’re important but don't need to sit on the board. The nature of the debate can be less effective if there are too many people around the table.
Finally, PE investors often understand the dynamics of the sector but may not perceive all of the nuances of the business itself. The management team needs to consider this when preparing papers for a board meeting. What information is going to enable management to tap into the experience and knowledge of the investors more readily? The agenda and the board pack play a huge role in helping you extract that value from the right people.
This interview is part of a series researching the Board’s value in Private Equity. To get a copy of the full report, click here.