RSS feedsThere are two sides to the question of corporate governance and private equity. If you are involved in the private equity world, corporate governance is not something you want to impact much on your activities. If you are outside the private equity world, you probably would like to see it subject to the same rules and governance culture that works elsewhere.
At the heart of this is a cultural assumption that less regulation makes something fleeter of foot. And no-one in business would argue against that objective. Regulations, as we all know from ordinary life, tend to turn simple issues into nonsense. People arriving by Tube on the second day of the Oval Test match this August would have found a company dispensing free promotional cans of fizzy drink as spectators exited the station.
Two hundred yards on, as these spectators tried to get through the ground entrance, they were relieved of the free can of drink by security guards. The regulations that allowed the giving away of the drink met the regulations that said, that within a cricket ground, a can of drink was deemed an offensive weapon and must be confiscated.
Enterprise hits regulation. The result is that an innocent and potentially enjoyable freebie goes suddenly flat.
There has to be a balance in regulations, of course. In the 1970s, public disapproval of what was seen as asset-stripping by a host of high-profile and freewheeling entrepreneurial personalities was strong. Even the Conservative prime minister of the day, Edward Heath, was moved to talk about “the unpleasant and unacceptable face of capitalism”.
As a result, Mrs Thatcher’s government brought in legislation to marshal it at the beginning of the 1980s. In part, this meant that directors of one entity buying another had to sign a statement saying that, to the best of their knowledge, the acquired entity was not going to be put into insolvency within the next year. It was deemed a personal and criminal offence. And it knocked that part of a potential scam on the head so effectively that nobody was ever prosecuted. The connection of the personal, the criminal and the risk of buccaneering behaviour following a buyout had concentrated many people’s minds over the years.
This was eminently sensible. If a company borrows to undertake a buyout, it needs to take a charge on the assets of the company it is buying. But that is illegal under the legislation to curb asset-stripping; hence the requirement for a personal statement to provide assurance. The people involved in the transaction could see exactly where the real and personal risk lay, could make a judgment and were more likely to err on the sensible side as a result. It was a precise piece of practical corporate governance.
This piece of legislation, in place since 1981, which over the years has worked well enough and in an unobtrusive fashion, vanished on 1 October of this year. Somehow, an unlikely alliance of the Treasury and private equity lobby groups was able to get rid of it.
From the lobbyists’ point of view it was something they, of course, wanted to get rid of as it curbed possible excesses that, frankly, they wouldn’t mind perpetrating at times.
Whitehall has been convinced that here was an arcane bit of legislation under which not a soul had ever been prosecuted and so they could trumpet its repeal as another dead branch flung on a large bonfire of regulations. It was an action both private equity and politicians could cheer.
The restriction doesn’t disappear entirely. It will still be in place for public companies. But for any other ordinary limited company and their directors, it is gone. And this sector is precisely where the more, shall we say, complex deals occur.
It would have been more useful for these regulations to have been refined instead of rubbished. Perhaps it could have been amended so that directors themselves didn’t have to sign personal declarations, but, instead, the private equity firm itself and all its partners could have signed, spreading that risk among more people and therefore bringing it into sharper relief as a real, tangible risk, rather than just a set of amiable guidelines. The risk would remain stark for the firm while taking away the element of the personal.
But no-one really thought through the implications. Politicians, invariably inept at dealing with business, always want to be seen to be doing something that businesses seem to want. The private equity players can have a good laugh at politicians making a complete hash of it again; both sides win.
But, where no one wins is in this argument over corporate governance and private equity. These are difficult times for the former and, recently, the latter has fallen on hard times, too. Should collapses occur and scandals ensue, is it not better to have rules already in place that all agree are strong, that protect companies, individuals and the integrity of business? Otherwise, perhaps, the consequences of doing away with rules such as this one could be unhelpful at best, not to mention draconian and, at worst, will erode yet more freedoms.
