Private Equity Board Seats

Today there are 3,370 public companies and 4,145 private equity firms with over 89,706 portfolio companies listed in the Private Equity Info Database. There are also over 4,000 hedge funds, 2,000 mutual funds, and 1,000 real estate investments trusts (REITs) in the United States.

These entities are generally private but still generate independent board seats as they are comprised of public money and have fiduciary responsibility to their investors. There are roughly 350 private equity firms owning over 7,879 portfolio companies that are large enough to generate $120K in annual board compensation. There are more than 20,000 board seat openings per year that meet or exceed this amount in board compensation.

Because of the responsibility these companies have to their investors, good board governance is just as important as it is for public companies. The best practices employed by top performing private equity firms include identifying independent directors early, aligning board expertise to the needs of their business, and constructing the appropriate board structure and culture.

Identifying independent directors early is critical in ensuring adequate time to refine the investment thesis and operating agenda for a new deal in a private equity firm. Moreover, the capabilities and experience of these directors need to align with what the firm needs to create value in the first place. This is why boards are trending towards employing more functional experts while still reserving one or more board seats for a CEO or business leader with a broader business perspective.

The success of these boards hinges not only on the directors themselves, but also on the structure and culture of the board. Boards in top performing private equity firms welcome a broader sense of perspective while maintaining the pace of decision making and a healthy, productive dynamic. Moreover, portfolio companies are trending towards appointing an independent chair both for committees and boards themselves in order to protect the company’s CEO.

The boards of alternative funds such as hedge funds, mutual funds, and real estate investment trusts have the primary responsibility to “act in the best interest of the fund and its investors”. Investors are increasingly demanding more and more from the backgrounds of their directors such as legal experience and education in accounting and risk management. In general, alternative fund directors should do a better job of looking after their investors than corporate board directors whose focus is primarily management and self-interest.

Statistics show that the top performing mutual fund boards implement the following best practices to protect their investors. 91% of boards have either an independent chair or an independent lead director and 98% of directors have previously not been employed by the fund complex. These boards meet seven times a year, employ financial experts on auditing committees, and their directors own shares of the fund. These practices eliminate bias among the directors and protect the shareholders’ interests.

In general, private equity firms, hedge funds, mutual funds, and REITs tend to out-perform corporate and public companies in terms of best practices, government, and board sustainability because of their diverse board structure and their commitment to protecting their investors.

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