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

This view is confirmed if one looks in Figure 6 at the evolutionof the board composition. When the company is takenprivate, the proportion of outsiders (which includes all theunknown individuals) shrinks from more than 40% to lessthan 20% while LBO sponsors’ participation in the boardincreases. The proportion of insiders does not change much,but it drops dramatically in the very last years, when they arereplaced by LBO sponsors and outsiders: again, these areprobably the problematic cases and the private equity firms’representatives need to be more directly involved.We then look at how often there is a change in the CEO afterthe company is taken private. We compute the CEO turnoverboth before and after the company is taken private for MBOs,LBOs and other transactions. When doing so, we do not takeinto account any change of CEO that takes place during thetransition from public to private: we only want to look atchanges in CEOs while there is no major change of ownership.It has often been argued that private equity firms are able togive their CEO a longer horizon to plan a company growth.Therefore we should observe that following an LBO, CEOturnover decreases. However, this is not what we observe.When we look at pure MBOs, we find that the CEO turnoverdecreases (not surprisingly, since the CEOs often own a largeproportion of the shares). While before the MBO, 17% of thecompanies in our sample experienced a change of CEO,this happens for only 2.4% of the companies afterwards.Companies that were taken private by a private equity firmhad a much higher turnover: 33.3% of the companies in oursample had a change of CEO before being taken private.This suggests that LBOs are more likely to occur in companiesthat have recently under‐performed (and therefore the CEOhas lost his/her job) but also in companies where the founderhas recently retired, and a new external CEO has just beenbrought in (we observe several instances of this type in oursample). One would expect therefore that there would belower CEO turnover following an LBO, but this is not whathappens. The percentage of companies in our sample thatexperience a change in CEO after an LBO is 45%. Thisnumber decreases to 31% if we ignore any change in the CEOfrom the first to the second year after the LBO, on the groundsthat it might still be reflecting the transition from public toprivate. Moreover, one could argue that since we look at onlythree years before the LBOs, while the years following the LBOcould be many more, this is a biased comparison. Therefore,we compute the CEO turnover also in this alternative way:we compute the number of times the CEO was changed in acompany, and divide by the number of years over which thiswas observed. If we compute it in this way, we find that theaverage CEO turnover is 7% both before and after the LBO.If we exclude any change from the first to the second year,the turnover becomes 4%. With this last measurement we finda reduction in the CEO turnover following an LBO, but giventhat there was an unusually large turnover for these companiesbefore the LBO, the result still does not confirm the view thatprivate equity firms give management a longer horizon.In Table 7, we look at the turnover of people on the board.We measure this turnover in two ways. First, in Panels A and Bwe look at the change in the size of the board from one yearto another, measured as the (absolute) change in the totalnumber of people sitting on the board, normalized by theboard size in the previous year. We measure the averagechange in size in the years before the LBO and in the yearsafter the LBO. Of course, any change in size that takes placewhen the company goes from public to private is not included.We compute the average change in size after the LBO, bothincluding the change in size from the first to the second yearafter the LBO, and excluding this transition phase. We thentake the average change for a company before and after theLBO and then the average over all companies. The results arepresented in Panel A of Table 7. One can see that the variationin size before going private was 10% for both MBOs andLBOs . However, LBOs have a significantly larger size variationafterwards: 21% or 16% depending on whether we considerthe first year variation or not.We also measure turnover as the number of people whochanged in a board from one year to the consecutive year,normalized by the size of the board in the previous year. Thismeasure of turnover picks up changes due to variation in theboard size and changes due to turnover of people, even ifthe size of the board has not changed. Again, we find thatLBO boards have a very high turnover. Companies that aretaken private in an LBO already have higher turnover thanMBO companies before going private, but while MBOcompanies’ board turnover does not change afterwards(it either increases slightly or decreases slightly, dependingon whether we include or not the change from the first to thesecond year after the LBO) the turnover of LBOs increases.5. ConclusionsWe have looked at the size, composition and evolution overtime of boards. We find that the role of the board is crucial inprivate equity and that studying the boards is a good way tosee how private equity general partners can be effective inrestructuring a company. Having private equity partners onthe board of a company can be very helpful for achievingsuccess in restructuring a company. However, the opportunitycost of private equity firms being actively involved in the boardof one deal is that they have less time to focus on other deals.We find evidence that they choose to use more of theirresources in the deals they expect to require more time andattention. The successful turnaround of companies is theresult of time and effort that private equity firms put into theprocess. Most of the funds, also, seem to prefer the use oftheir own employees, rather than expert outsiders.At the same time, when looking at the evolution of boardsover time from immediately after the LBO to the exit, wefind a picture of continuous change: there is a large turnoverboth of directors and of CEOs. Further study is needed tounderstand what is driving all these changes. For example,we plan to look at industry‐ or firm‐specific announcements,74 Large-sample studies: Corporate governanceThe Global Economic Impact of Private Equity Report 2008