The Global Economic Impact of Private Equity Report 2008 - World ...

the most difficult cases. This story is about the costs andbenefits of the monitoring and advisory roles of the board. Itis always good to have one more experienced LBO sponsoron the board. However, these individuals are very busy (andcostly, since they could instead be used on another board)and therefore adding one more on the board is costly andit will be done only if the marginal benefit of having anadditional person is higher than the cost (which is likely tohappen in the more difficult deals). This is also consistentwith the fact that the proportion of outsiders sitting onthe board before the LBO has a positive and significantcoefficient. A large proportion of outsiders on the boardbefore the LBO could signal that the company is morecomplex to monitor. This could be because the type ofbusiness is more complex, or it is easier to extract benefitsfrom control. Boone, Casares Field, Karpoff et al (2007)find that measures of the scope and complexity of thefirm’s operations are positively related to the proportionof independent outsiders on the board. Therefore, theproportion of outsiders sitting on the board before theLBO should indicate its complexity. If that is correct, onemay imagine that after the LBOs, the private equity firmswill have the same increase in the need to monitor andtherefore they will put more individuals on the board.Finally, if we look at the type of private equity sponsors,note that the 3i dummy has, as expected, a negative andsignificant coefficient: 3i is less likely to have a hands‐onapproach. The coefficient of bank‐affiliated sponsors isnegative (so they tend to sit less on the board) butnon‐significant. Surprisingly, experienced sponsors donot seem to behave any differently from less experiencedones. As an alternative criterion, in regression 2 we dropthe dummies for experienced and bank‐affiliated sponsorsand introduce instead the dummy for active sponsors. Thecoefficient of this dummy is positive and significant: theclaims by some private equity funds to be more hands‐onand actively involved seem to be confirmed in practice.The other results do not change. In regressions 3 and4 we run the same regression, but use as a dependentvariable the average size of the board over the yearsfollowing the LBO. In this way we correct for the possibilitythat the board following the LBO was still in a transitionphase. The results do not vary and are a little stronger.Note that in these four regressions the adjusted R‐squareis between 22% and 34%, thus these variables explain aconsiderable part of the variation.In regressions 5 and 6 we conduct the same analysis for theproportion of insiders. Not surprisingly, the results tend to bethe reverse of the ones in regressions 1 to 4 (since there isa certain degree of substitution between the number ofboard seats for the management and the one for the LBOsponsors). However, this was not necessarily true, since alarge number of LBO sponsors could imply a larger board,not necessarily a smaller proportion of insiders. 23 We find thatwhen there are more private equity funds sponsoring the dealthe proportion of insiders on the board is reduced. Thereforethe request of the funds to have one of their representativessitting on the board comes at the expense of the numberof the seats left to the management team, which is notnecessarily an efficient decision. Companies that had moreoutsiders sitting on the board prior to the LBO transactionwill have fewer insiders (possibly because there is a largerneed for monitoring). If the CEO were changed during thetransition from public to private the company has a smallerproportion of insiders afterwards. Note that this result isstronger than the one for the proportion of LBO sponsorson the board, suggesting that probably when the CEO waschanged, several other members of the management teamalso left and were never completely replaced in the board.Exited deals, which should be on average less challengingdeals, also have a smaller proportion of insiders.Finally, in regression 7 we look at the percentage of outsiders.Note that when running this regression in our outsiderscategory, we included all the people we could not identifywith certainty, as outsiders are usually the hardest to find inthe various datasets (or from various press coverages). Thisis probably adding noise to our measure of outsiders. Wefind only two variables which have a significant coefficient:the 3i dummy, and the dummy for a bank‐affiliated sponsor.This suggests that private equity firms that do not get directlyinvolved will rely more on very experienced outsiders tomonitor management and to advise them.4. Evolution of the board following an LBOIn this section we look at the evolution of the board after thecompany is taken private. In Figure 5, we look at how theaverage board size changes over time for LBOs, MBOsand other transactions. For all three cases, there is a largedecrease in size when the company is taken private.However, boards of companies that undergo MBOs andother transactions decrease in size much more than LBOboards. Moreover, immediately following the LBO, the boardsize seems to increase slightly, possibly with LBO sponsorsand outsiders (as will be shown in Figure 6). As the numberof years after the LBO increases, the board size slightlydecreases. One may imagine that as the firm progressestowards its strategy implementation and the accomplishmentof the restructuring, there will be less need of private equitysponsors’ involvement and the board might be shrinking insize. Beyond year 7 of the PE transaction, the board sizeincreases. However, when one looks at the board size inyear 7, all the firms exited in less than seven years are notthere anymore. The increase in board size in later years istherefore probably due to the fact that these are cases thatturned out to be particularly difficult and in which the privateequity firm had to become very involved, trying to solveparticularly difficult cases.23When discussing the evolution of the board after the LBO, we show in Figure 6 that over time the proportion of management is relatively constantover time, while the proportion of LBO sponsors changes more.The Global Economic Impact of Private Equity Report 2008 Large-sample studies: Corporate governance 73