EVCA Handbook Professional Standards for the Private Equity and ...

More documents

Recommendations

Info

22 EVCA Handbook Professional Standards for the Private Equity and Venture Capital IndustryQuestionWhat are the responsibilities of the GP in relation to performanceinformation of Portfolio Companies?ExplanationMost jurisdictions have legislative obligations regarding informationto be provided to shareholders of Portfolio Companies. However, it iscommon practice for Funds that invest in Portfolio Companies torequire more frequent and detailed information than required bylegislation. In particular, the GP may require more frequent anddetailed information regarding the Portfolio Company in orderto fulfil its contractual obligations to the LPs in the Fund.RecommendationThe GP should agree non-legislative information requirements withthe Portfolio Company’s management that take into account its ownreporting obligations, its ability to perform its responsibilities on behalfof the Fund, as shareholder and the efficient and effective use ofresources within the Portfolio Company. Typically, key performanceindicators (KPIs) are developed that allow Portfolio Companymanagement and the GP to carefully monitor company performance.The GP should treat corporate information which it obtainsconfidentially and with due consideration to commercial sensitivityand the needs of the Portfolio Company’s other stakeholders andshould ensure that its own LPs are bound by similar confidentialityobligations with respect to such information in the Fund documents.3.4.2. Environmental factorsQuestionWhat environmental factors should the GP consider in relation to themanagement of the Fund’s Portfolio Companies?ExplanationGenerally, GPs should support a prudent approach to environmentalchallenges within their Portfolio Companies. These challenges couldconcern a range of factors including resource use, waste productionand disposal; emissions to air, land and water; energy use, cost ofcarbon and climate change; biodiversity and habitat conservation.RecommendationDue diligence into prospective investments should include anevaluation of the likely environmental impact of the conduct of suchbusiness. GPs should recommend to the boards of PortfolioCompanies, pursuant to shareholder documents, to identify and takematerial environmental factors into account in the formulation of thePortfolio Company’s business plan. GPs are generally expected toactively manage environmental risk factors in Portfolio Companies.3.4.3. Social factorsQuestionWhat social factors would be applicable to the conduct of the Fund’sPortfolio Companies?ExplanationGenerally, factors which affect the workforce, customers, suppliers andcommunities of a Portfolio Company should be evaluated at boardlevel. Social factors can include stakeholder dialogue and observanceof core labour standards in areas such as child labour, forced labour,trade union rights and discrimination in the labour market.RecommendationHuman rights are likely to be an integral part of the social factors andboard level discussions may include development of strategies toprevent direct and indirect involvement in human rights violations.Depending on the size and nature of the business, a PortfolioCompany may also consider introducing a corporate socialresponsibility programme and publishing corporate socialresponsibility reports. A GP should ensure that such items are put onthe agenda for board discussion where appropriate.3.4.4. Governance factorsOne of the key areas of due diligence that should be completed by aGP prior to investment is corporate governance at the prospectivePortfolio Company. The corporate governance systems, processes andcontrols applied by the senior management team at the company willreveal much about the effective running of the business to be investedin. A business with effective corporate governance in place will providea strong platform for the rapid implementation of value buildinginitiatives. A business with weak, ineffective corporate governance willmake a higher risk investment but is likely to reap considerable benefitfrom the implementation of robust governance systems andprocesses that are suitable for the business.Effective corporate governance, once installed, should support thedecision-making process and follow-through within the organisationand the alignment of interests across the stakeholders in the businessincluding management, employees and the GP itself.QuestionWhat governance processes are applicable at the Portfolio Companyfor the conduct of a Fund’s business?ExplanationA Portfolio Company is likely to be provided with guidance ongovernance requirements by the GP at initial investment. In somecases, the implementation of specific requirements will be a conditionof closing the transaction. The management of a Portfolio Companycan be strongly influenced by the attitude of the GP to boardeffectiveness, controls, checks and balances. If not already in place, theGP should typically ensure that each Portfolio Company hasappropriate governance structures to safeguard against fraud, briberyand corruption and to ensure internal financial control, qualityassurance, risk and conflict management and transparent reportingand communication. Ensuring these objectives are achieved whilstpreserving the autonomy of the Portfolio Company board to drivebusiness growth and not hamper it with bureaucratic processes andcontrols, is an important balance to achieve and to be able todemonstrate at the point at which the business is sold.RecommendationTo ensure that Portfolio Companies are applying appropriate goodgovernance practices and standards, the GP should ensure it remainsup to date and familiar with good practice and guidance in therespective countries and industries in which its Portfolio Companiesare based. This can be done in a number of ways, for example througha suitable law firm or advisor which can ensure that relevant Codesand standards are understood, particularly by those individuals whowill be representing the GP on the board of the Portfolio Company.Also, by recruiting and installing experienced executives to the boardor respective supervisory committees of the Portfolio Company, whocan demonstrate a good understanding of and track record in applyingthe required governance standards and practices. Finally, it isimportant that the GP also demonstrates to its wider stakeholdercommunity sound environmental, social and governance (ESG)practices and standards that are both appropriate and proportionateto its own business.
23 EVCA Handbook Professional Standards for the Private Equity and Venture Capital IndustryWhere the GP has identified risks and opportunities (including ESGrisks) that are deemed material to the success of the investment, theGP should ensure that practices are developed to mitigate associatedrisks and pursue opportunities. The implementation and effectivenessof these practices should be monitored as appropriate. Noting that themarketplace context could change, the GP should occasionallyundertake to update the responsible investment risk/opportunityanalysis and revise, remove or add policies as appropriate. Where theFund’s LPs have expressed an interest in responsible investmentfactors, the GP should seek to report to these LPs on a suitably regularbasis. The GP may also choose to send unsolicited reports onresponsible investment factors to all LPs.3.4.5. Board participationQuestionHow should the GP act in relation to the board of the PortfolioCompany?ExplanationThe GP will frequently appoint one or more experienced members ofits own staff or representatives to the board of the Portfolio Company.Typically, designees of the GP will have in-depth experience of thesector and will have been involved in the original due diligence andreview of the investment.There are many variations on the overall composition of boards,but in relation to non-executive members of the board, these mayinclude some/all of the following: one or more single directors whoare members/employees/representatives of the GP of the Fund;an independent non-executive chairman; and/or, an independentnon-executive board member. These non-executive members of theboard may be selected as they have specific and appropriate industryknowledge and insight.RecommendationThe GP should ensure that the board is structured and appointmentsare made in the best interests of the Portfolio Company.The relationship between the board and the management of thePortfolio Company should be clear and supported by appropriatedocumentation of roles and responsibilities.QuestionWhose interests do the GP-appointed director look after on a board?ExplanationWhatever the means of appointment, directors do not serve theinterests of one particular shareholder but act in the interests ofthe Portfolio Company. The position of director is a fiduciary one.A director does not act as the representative or advocate of the bodywhich appointed him. Fiduciary duties generally are summarised as aduty of loyalty to the company, a duty to avoid and disclose conflicts,duties of confidentiality, to act in good faith, to exercise care, skill anddiligence and to act with integrity.RecommendationA GP-appointed director should always be aware that he/she mustact in the interests of the Portfolio Company and all its shareholders.Where conflicts arise, the GP may need to excuse the director frommeetings and may need to reach investment related decisions in fulldisclosure of the director’s conflict of interests. The GP should ensurethat its board appointee(s) clearly disclose any conflicts of interestwith respect to their role as members of the board promptly whenthey arise.QuestionWhat does being a board member entail?ExplanationThe overriding principle of fiduciary duty to the company and all itsshareholders apply to the whole board. A director is expected todevote such time and diligence as is reasonably necessary to furtherthe business of the company. Attendance at and being well preparedfor board meetings should be assumed. Directors with particular skillsmay be asked to serve on additional board committees such asdirectors with accountancy training serving on audit committees.RecommendationA director should be prepared to invest time in his role as a directorto understand the needs of the company and to participate in reviewand decision-making affecting the business.The GP should ensure that its appointee(s) to the board fullyunderstand their responsibilities to the GP and their legal dutiesto the Portfolio Company as a member of the board.QuestionWhat skills does the GP-appointed director need to be a boardmember?ExplanationMany skills are applicable to membership of a board of directors.The company may particularly need directors with industryexperience, with legal, corporate finance or accounting experience orwith general management experience. All these skills, plus the abilityto evaluate risk and other skills, are likely to be needed by everycompany over time and are unlikely to be offered by one sole director.Therefore, the ability to work collaboratively and openly with seniormanagement and other directors is also of great importance.RecommendationThe GP should encourage its board appointee(s) to seek appropriatesupport and training to enable them to carry out their duties as boardmembers to the best of their abilities and in accordance with theirlegal duties and contractual commitments. The GP should seek toensure that all appointees to the board are individuals of appropriateauthority, skill and experience who can provide value and insight tothe Portfolio Company.QuestionWhat is the best size for a board?ExplanationThinking has evolved on optimum board size. Factors to bear in mindin considering board composition include the skills required to run thebusiness, the interests of the shareholders and their desire for activeparticipation in decision-making, the governance and logistics andcosts implications of convening a large group of people frequently andthe need for balanced decision-making through diversity of opinion.RecommendationNo number can be stipulated for optimum board size but the boardshould periodically review its composition and its success and adjustits size accordingly.
Page 3 and 4: 1 EVCA Handbook Professional Standa
Page 13 and 14: 11 EVCA Handbook Professional Stand
Page 23: 21 EVCA Handbook Professional Stand
Page 75 and 76:
73 EVCA Handbook Professional Stand
Page 77 and 78:
Page 79 and 80:
Page 81 and 82:
Page 83 and 84:
Page 85 and 86:
Page 87 and 88:
show all

EVCA Handbook Professional Standards for the Private Equity and ...

Create successful ePaper yourself

Delete template?

Save as template?