ACSI Research into Private Equity

ACSI Public companies being taken private: a research report into private equity

In 2008 ACFS was commissioned by The Australian Council of Superannuation Investors (ACSI) to conduct a study into the key governance issues arising from recent private equity activity.During 2006 and 2007, large debt-funded bids to privatize a number of major public companies (such as Qantas, Coles and Alinta) prompted shareholders to question the governance arrangements for such bids. Areas of concern were scope for “owner-agent” conflicts of interest and the possibility that private equity bidders were being advantaged over the company’s existing owners in their access to information.

The Australian Council of Super Investors (ACSI) members manage $250 billion on behalf of 5 million superannuation fund members. ACSI provides independent research and advice to its member funds on environmental, social and corporate governance investment risk.

In late 2007, ACSI sought expressions of interest to conduct a study into the key governance issues arising from recent private equity activity. In particular they wished to improve board practice and ensure that existing shareholders did not unnecessarily surrender value to PE bidders. Key issues were information asymmetries between bidder and existing shareholders, the role of executive and non-executive directors in companies subject to the bids, director and manager remuneration pre and post bid, and the identification and mitigation of conflicts of interest for these two groups.

Lead investigator for the project was Dr Chander Shekhar, Senior Lecturer, Department of Finance at University of Melbourne who has published widely in corporate governance field. His co-author was David Michell of ACFS, who has previously worked as a portfolio manager and company secretary. Research assistance was provided by Ewa Krawiec of ACFS and University of Melbourne post-graduates.

The ACFS research report “Public companies being taken private” reviews academic literature, analyses Australian and international case studies, and applies finance theory to the specific questions raised when public companies are subject to bids intended to take them into private ownership.

It is another good example of public good-private benefit type project on which ACFS is well placed to work. It is expected to provide a basis for future academic publications but in the shorter term has already lead to useful industry outcomes.

Key outcomes of the research are a set of Guidelines and a Code of Conduct which have been adopted by ACSI.

Guidelines for Company Boards subject to PE bids may be summarised as:

• Target shareholders must be given a reasonable opportunity to consider and decide on any bid that involves a change of corporate control.
• The target board must ensure that the bidder does not have any advantage in information quality and quantity over target shareholders.
• An independent board committee, led by non-executive directors and excluding any participating insiders, must control all aspects of the takeover including setting limits on insider participation, disclosing identity of insiders, and incentives offered to them.
• Additional guidelines were developed for participating insiders, investors and non-executive directors.

For a copy of the Report including Guidelines and Code of Conduct.

Wish to have commissioned research conducted, please contact either Prof Deborah Ralston, Director or Prof Kevin Davis, Research Director on (+61 3 9666 1050)