Governance: How Private Equity Firms Can Drive an ESG Focus from the Boardroom

May 17, 2022

At a glance

  • Main Takeaway: In the final part of our series on ESG investing in private markets, we discuss how private equity firms can reduce turnover, ensure data is protected and allocate capital with a governance-driven boardroom approach.
  • Invest with confidence: As more private equity firms take an active ESG-role in the boardroom; they are discovering how governance-specific initiatives can create lasting benefits.
  • Next Steps: Charting new territory can be a little overwhelming at times. Aprio’s ESG team is happy to have a conversation with you and identify opportunities for your company.

Are you ready to build your social balance sheet? Contact our team for a free consultation.

The full story:

When a private equity (PE) firm closes an investment and assumes control over the company’s board, as the new owner, it can establish the rules for how the company is run. With that, the main objective for a PE firm is to build value for its investors, which often can be achieved through the implementation of environmental, social and governance (ESG) initiatives to mitigate risk. The last few years we’ve seen a rise in ESG, especially on the environmental and social side, however, when it comes to PE, governance can have the greatest impact.

PE firms are uniquely positioned in that they can drive a governance focus within the boardroom and create lasting value.

A diverse workplace increases innovation by engaging employees and developing deeper customer bonds to reduce turnover

When you think about governance from a hiring perspective, a PE firm has the responsibility to ensure there are hiring policies in place to create an ethnically diverse board and company from the C-suite and senior executive level to the associate level and beyond to suppliers. Why is this so important? Well, the true value of a diverse company is not just offering a seat at the table but listening to voices that challenge the status quo to open the door for new opportunities.

Advancing board diversity and inclusion can lead to better decision making, generate higher returns and ultimately reduce employee turnover. Just ask the Carlyle Group. Carlyle noted that portfolio company boards that had two or more diverse members grew earnings 12% faster than those that lacked diversity. Cultivating a truly diverse and inclusive board doesn’t happen overnight, yet serves to make employees across the organization feel like they have a purpose and customers grow a sense of connection and loyalty because of the breadth of perspectives represented.

Companies in highly regulated industries can mitigate risk around protecting customer data

No company or industry is immune to the risks of a cybersecurity breach. It doesn’t matter the size of your company or whether it’s private or public, a data breach can do significant and lasting damage to your brand and your business. Healthcare is an industry that has attracted significant private equity interest and investment. With an excessive amount of valuable patient data – we’re not talking just about phone and social security numbers, but actual sensitive healthcare data – establishing a strong governance around cybersecurity initiatives and having a risk management process in place can create digital trust not only with employees, but customers as well.

Overseeing how capital is allocated and how growth initiatives are prioritized can have a greater impact on company performance

As discussed above, PE firms set the rules and have control on where the company should spend their time and money. Since PE firms want to make a big impact that will yield big returns, they can instruct a CEO to allocate capital on implementing ESG-related programming systems. However, it’s a little bit of a dance because the PE firm doesn’t want to disempower the CEO. In actuality, they create compensation plans to align incentives while holding the CEO accountable for the decisions he or she made. While this provides the CEO the autonomy to run the company, the PE firm will have processes in place where any spending over certain limits requires board approval. PE firms also introduce a scorecard to measure CEO results on a variety of strategic priorities, including an ESG scorecard, that can be tied to compensation. 

The bottom line

PE firms are well-positioned in the boardroom to focus on and drive governance-specific goals throughout a company. It’s easy to feel overwhelmed if you’re new to ESG because it is reshaping the investment world and showing no signs of slowing down. If you need help in understanding ESG, contact Aprio’s ESG team to have a conversation and identify opportunities for your company.

If you haven’t already, be sure to read Part I and Part II of our ESG investing in private markets series.

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About the Author

Simeon Wallis

Simeon is the Chief Investment Officer of Aprio Wealth Management and the Director of Aprio Family Office. Simeon brings two decades of professional investing experience in publicly traded and privately held companies, as well as senior-level operating and strategy consulting experiences.