There 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