Governance codes and ‘best practice’ overshadows private companies’ need to enforce a value-enhancing strategy (E+/Getty Images)
Governance codes and ‘best practice’ overshadows private companies’ need to enforce a value-enhancing strategy (E+/Getty Images)

For such an anodyne phrase, “corporate purpose” has more than its fair share of believers, promoters, detractors and cynics but the current debate has made one thing clear: investors’ views differ on what a company’s purpose should be and how it ought to be defined.

Many people, myself included, sympathise with the belief that purpose is intrinsic to a company’s ability to create value for its stakeholders and, therefore, to its long-term success.

However, with businesses under pressure to take on greater social responsibility and accountability, it is not just chief executives that must be responsible for effecting change — we must look at governance frameworks too.

Given the role they play in capital markets, public-markets investors should be required to change the philosophy behind their shareholder engagement.

In my experience, most public-market shareholder engagement, even on topics such as environmental, social and governance criteria, boils down to a “one-size-fits-all” checklist applied across a portfolio of disparate shareholdings.

This engagement is well-intentioned but there is little regard for nuance and limited appetite for discussion when opinions differ.

As long as this situation persists, traditional asset managers will find it hard to become credible advocates for meaningful change. Their efforts will continue to be thwarted by both the mundane reality of engagement with investee companies and the governance regimes with which public companies must comply. Proxy advisers have added to the pressure with a tick-box approach to shareholder recommendations.

The trend in parts of the public markets is worrying: the requirement to adhere to governance codes and “best practice” increasingly overshadows the need to enforce a value-enhancing and purposeful strategy.

Public company boards are too often neutral agents sitting between management and shareholders, hamstrung by their inability to lead and execute strategy because of the obsession with board independence, process and controls, as well as short-termism. The result is that board meetings can be filled with discussion of checks and balances, while business strategy is relegated to “any other business”.

Purposeful companies cannot aim for board neutrality and independence at the expense of leadership. To be effective, a hands-on, directional board is required, working in an environment where the focus is long-term corporate strategy and sustainable growth.

The key issue should be the long-term sustainable growth of the company and not the return profile of investors whose interests are usually more immediate.

This approach is most often found in companies that are free to find the appropriate, entrepreneurial governance structure rather than slavishly follow arbitrary codes.

The role of the board at a private company is critical in devising strategy and pacing its execution over the medium to long term. In this context, successful boards require knowledgeable, qualified directors that can drive change and who are aligned with the company via longer-term incentives.

Private company board directors usually become deeply involved in a business, devising and implementing bespoke value-creation strategies that benefit everyone — owners and managers, customers and employees, as well as broader stakeholders.

However, this approach to board set-up, pay and goal-setting is rare in public markets, where it can conflict with the priorities of proxy advisers and large shareholders.

Partners Group, a listed company, benefits from having a large number of employee-shareholders that supports our approach to long-term, entrepreneurial governance. We also observe the “private company” approach being successfully applied in other companies that have kept large family or founder shareholdings after going public.

The constraints of life as a listed company have driven more entrepreneurs and management teams to seek an alternative to an initial public offering. The result is that many stay private for longer and some see that status as indefinite.

I believe this trend will continue and I foresee a time when private equity groups could own a decent proportion of public companies; they would be significant, long-term and influential shareholders, bringing a focused and entrepreneurial approach to governance, one that enables a business to find and live its sense of purpose.

Only through committed, hands-on and collaborative ownership of the kind seen at many private companies can a shareholder hope to effect the corporate change that will benefit broader society.

Steffen Meister is executive chairman of Partners Group, the Swiss private equity company

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