Private equity – Agents or destroyers of responsible business?
Article by Mallen Baker
It has entered the popular consciousness in some areas of debate around
corporate responsibility that there is a new breed of powerful
barbarian at the gates. Good, socially responsible companies are being
taken over by private equity vultures and stripped of assets and any
semblance of values for short term gain. But the debate is now being
joined with some vigour in defence of private equity actors.
The charge made by trade unions recently in the UK that private equity
firms destroy jobs and wealth has been contradicted by a recent survey
published in the Financial Times showing that, for instance, the 30
largest private equity deals made between 2003-4 have created 36,000
new jobs in the UK. Yes, badly run companies that have too many
unproductive people may see jobs shed. But if this makes the company
more financially sustainable, it means that the company is in a better
position to grow in sustainable ways. As a result, private sector job
growth in the UK has seen 9 percent growth in private equity owned
companies, compared to just 2 percent in plcs.
This is important. The version of corporate responsibility that most
businesses would recognise and aspire to comes first of all from a
business case – and the realisation that so-called social
responsibility that serves to make a business unprofitable is no such
thing, since it destroys value and jobs. That is not the end of the
argument, of course.
So where are the real pressure points? It is true to say that there is
nothing inherent to the private equity model that should mean that
privately owned businesses must be inherently less sustainable or less
responsible than plcs. If we believe our business case for corporate
social responsibility, it is about building and retaining trust with
customers, attracting and retaining talented staff, and establishing a
good corporate reputation that supports positive relationships with
suppliers, government and regulators. None of these business case
arguments inherently apply more to the public or private model of
In some cases, one can see that the model can be very positive. For
instance, the TXU deal that saw private equity firms make their $32
billion deal dependent on the firm cancelling 8 out of 11 coal fired
power stations on environmental grounds.
There is no doubt that there are plenty of examples when it has gone
wrong. Private equity firms have destroyed value, have strangled
companies, have laid waste to external relationships. Making poor
decisions and suffering the consequences is not a phenomenon unique to
the private equity world, however.
Private equity firms buy companies in order to turn them around and
then sell them back into public ownership. It is not in their interest
to destroy value or corporate reputations in doing it.
What is true, however, is that – out of the glare of public scrutiny –
the very smart people that have made a success out of the private
equity game have not had such an early opportunity to understand which
of the elements of this arcane CSR agenda are really about the ability
to generate long term cash flows, and which therefore count when
valuing the business. They are sceptical, because flawed arguments
based on wishful thinking are the sorts of things they pride themselves
on being able to see through – precisely why they get to pick up
businesses that the market has undervalued.
But the growth in public scrutiny is already leading this to change.
And – as ever – those businesses that succeed in what they do by being
fast and operationally efficient have the potential to surprise the
critics with the speed they can move once they understand what needs to
What needs to improve is the understanding by the private equity stars
of the role of healthy relationships between business and key
stakeholders, and the value of values – even in a business that you’re
going to own for a few years. Nothing fluffy. Nothing philanthropic.
But something to do with sustainable and responsible wealth creation.
What we don’t need is government intervention to restrain a model that
genuinely creates wealth in a world that needs wealth creation. What we
will, and should, see is a greater requirement for transparency and
accountability in how the sector goes about its business. This will
follow whether the sector likes it or not, because its increasing size
and reach into very well known public branded companies will increase
its profile and demands.
And let’s not be distracted by elements of the debate which really are not to do with what the businesses do.
In amongst all the logical argument, swapping of fact and inference,
one shouldn’t ignore one other factor that is frankly also part of the
dynamic here. The senior partners in the best private equity firms make
a LOT of money. The sort of money that if plc executives were given
there would be universal uproar and votes against at AGMs, regardless
of success or prosperity. Is it right for individuals to make so much
money? Warren Buffett may choose to become a leading global
philanthropist, but when so few follow in his footsteps isn’t it just
an obscene concentration of wealth in the hands of a few? A number of
people think so, and some of the vociferous nature of the debate is
fuelled by envy.
This is a perfectly valid question to debate – the limits of personal
wealth in a moral society – but it is a different debate. The two
should not be confused.
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