The unintended consequences of corporate governance changes

Sam Gilpin

Sam Gilpin

We are in the midst of an unprecedented boom in private equity investment in companies, and one consequence of tightened regulation could be that there is a further decrease in the number of publicly listed businesses (whether through public-to-private deals, or a fall-off in IPOs).

Leaders may prefer to operate away from the perceived glare of public scrutiny.

This is of course not necessarily a bad thing.

A recent piece of academic research looking at nearly 10,000 US Private Equity buyouts found that productivity rose by an average of 8 per cent relative to a control group.

And in my experience the best PE firms bring rigour and oversight when it comes to the corporate governance of investee companies.

(In the interest of disclosure, I am a member of the management team of a leadership consultancy that is backed by a PE firm and I work extensively with executives in both listed and private companies.)

Thoughts on the way forward

One of the major insights from the Global Financial Crisis was that it was first and foremost driven by failures of leadership and culture.

Rules are important, and a proportionate tightening of them is to be welcomed, but it is the role of those in leadership positions to ensure that they are operating in line with the spirit rather than just the letter: executives need to focus on reducing fear among their people while at the same time being willing to act courageously; PE investors need to ensure that the corporate governance of their portfolio companies is fit for purpose.

Responsibility needs to be shared by all market participants. The best way to avoid unintended consequences is to engage with them.

Sam Gilpin is managing director and head of Europe at YSC Consulting