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Private Equity ESG – Spotlight On Governance: How Do I Become A Successful Portfolio Company Board Member? – Corporate Governance


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Being asked to join the board of a portfolio company may
initially seem an honor, but PE investment professionals and
operating partners need to go into the role with their eyes open.
Regulatory scrutiny of PE-backed firms is increasing at the same
time as LPs are demanding greater transparency on non-financial
matters as well as more participation in governance matters at the
portfolio level.

In this note, we get the perspectives of Charlie Chipchase, Head of Petra’s Private
Equity ESG Advisory Services Group, Nate Lankford, Head of Miller &
Chevalier’s Business & Human Rights Practice, and Sandra Hanna, Head of Miller &
Chevalier’s Securities Enforcement Practice, who set out what
they see as some of the key practical pointers PE executives should
keep in mind as they take up board positions on their firm’s
portfolio companies.

  1. Know your duties. Understand and fulfill your
    legal and fiduciary duties. This includes making decisions based on
    careful analysis and considering long-term value creation. The
    approach may differ depending on geography, and whether your
    company is public or private, but any new board member should see
    this as an absolute must. Also, appreciate that laws and
    regulations change, and what may have been the norm the last time
    you sat on a board may no longer be valid. Read the company’s
    by-laws and any other relevant document (e.g., shareholder
    agreement) and appreciate how they work in practice. Get a lawyer
    or current board member to walk you through key points of the legal
    plumbing so you understand, for example, what constitutes a
    shareholder or board decision and where conflicts of interest are
    likely to arise (more on conflicts below).

  2. Understand the macro…but dominate the micro.
    Be attuned to the macro/market risks and opportunities your company
    faces but look to take ownership (often by committee participation
    or otherwise) on a certain governance aspect and work with the
    management team to ensure you know what they know. For example, you
    should have a 360° understanding of the company’s financial
    health, tax strategy, and management’s roles/compensation, be
    apprised of upcoming governmental/regulator interactions, debt
    capacity, and threatened or actual litigation. Don’t blame your
    lack of understanding in some of these areas on your other
    responsibilities at GP level. Make the time.

  3. Turn up and engage. Turn up to each board
    meeting on time and be prepared. Spend time with management and key
    employees. Don’t take on more board portfolio seats than you
    can realistically handle. Don’t be the silent board member
    – challenge where necessary. An effective board will have
    open and respectful conversations to get the best results. The
    boards that develop a culture of healthy challenge among board
    members and the senior management team make much better decisions
    as they test assumptions and the information presented to

  4. Prudent conflict management. As a board member
    your PE firm has nominated, your role is critical in providing
    oversight, strategic guidance, and risk management and contributing
    to the success of the company and, hopefully, better returns for
    LPs. It can, however, be difficult to compartmentalize your role as
    a representative of your firm (acting as a steward for your
    LP’s capital) and your role as a board director (who may owe
    duties to more than just the company’s ultimate shareholders).
    Issues start to arise when the interests of the fund and portfolio
    company diverge (e.g., on material M&A, insolvencies, or
    litigation). Risks are mitigated here not simply by calling the
    lawyer but also by a board member understanding how and when
    conflicts may arise and putting in place systems or personnel to
    address them early (e.g., independent board members, special
    committees to evaluate potential transactions, independent
    valuations, etc.).

  5. Risk management and compliance. In
    understanding your duties, it is most important from an ESG
    perspective to recognize that you are personally responsible for
    ensuring that the company has an effective compliance program to
    address applicable laws, regulations, and industry standards. In
    practical terms, this means you must understand your company’s
    risk profile – for example, whether you face significant
    risks of bribery, money laundering, or adverse impacts on human
    rights – and the key “hallmarks” of an effective
    compliance program, such as an appropriate management
    culture/’tone from the top’, written policies and
    procedures, periodic assessment of risks, training, among other
    tried and true best practices. To achieve this understanding, you
    should require company management to regularly report on processes
    to address key risks and related metrics, and ‘pressure
    test’ management’s implementation of the compliance
    program. For example, you may ask how root causes of specific
    issues are being addressed, how the effectiveness of program
    components is measured, and whether resources are sufficient to
    support compliance program components. You may also test crisis
    management systems – for example, how would the company deal
    with an environmental issue or a cyber/data leak? Most importantly,
    however, make sure that you challenge management on its ESG
    assertions, and that you have a reasonable basis to believe that
    disclosures to stakeholders about ESG matters are as accurate as
    the financial statements.

  6. Understand and communicate with key
    Pay careful attention to the “S”
    in “ESG.” Make sure management is committed to a culture
    of integrity and responds promptly and appropriately to violations
    of the code of conduct. Consider requesting time with HR
    professionals and learning more about the trends they are seeing in
    worker morale and the kinds of complaints they are receiving to
    better understand ‘the buzz’ at all levels of the

  7. Don’t neglect the power of ESG as a potential value
    creation tool.
    Consider and ensure ESG considerations are
    integrated into the company’s strategy, risk management, and
    decision-making processes. Depending on your company’s
    industry, strategy, fund, location and size, orient yourself of the
    ESG risks and opportunities, appreciate what’s material to the
    company, and ensure the company’s policies and initiatives are
    in step with your firm’s ESG objectives/KPIs. Look for those
    “quick [ESG] wins” that can be achieved in the first 100
    days of ownership as well as the more medium/long-term goals.
    Ensure that external reporting is handled diligently and is
    defensible and accurate.

  8. Board reviews. Well managed boards carry out a
    self-assessment at least annually and have it externally
    facilitated every three years. It’s a great way of reminding
    everyone of their roles, reflecting on what’s going well and
    what’s not, and agreeing on the actions needed for further
    board improvement.

  9. Be proactive on succession. Having fixed terms
    of office and regular board turnover aids better decision-making,
    avoids groupthink, and introduces fresh thinking and new opinions.
    Include deal team VPs and associates (and GCs/CCOs when necessary)
    in all board meetings so they are ready to step up as they make
    their way through the firm.

  10. Personal liability. Finally, understand your
    personal liabilities and when the board may need a separate legal
    advisor (e.g., in a restructuring scenario or for investigations
    involving senior management) and, as obvious as this may sound,
    lock in D&O cover from day one with appropriate run-off

Regulatory bodies, industry initiatives, and investor pressure
have played a significant role in driving the adoption of strong
governance practices within ESG frameworks. Laws requiring due
diligence and public reporting on ESG topics are proliferating
globally, and many stock exchanges and financial institutions have
also introduced ESG reporting requirements and guidelines to
encourage companies to disclose relevant information and improve
governance standards.

Overall, governance in ESG focuses on ensuring responsible,
ethical, and sustainable practices within organizations,
integrating environmental and social considerations into
decision-making processes, and fostering transparency and
accountability to stakeholders through accurate disclosures.

You will find no statues of boards in any city, but on the
premise that effective boards are often greater than the sum of
their parts, some basic tenets can help you be a very effective
board member and help drive better decisions and ultimately better
risk-adjusted returns.

Originally Published by PETRA FUNDS GROUP INSIGHTS

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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