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shadowy private equity threatens accountability

October 2006

Private consortia takeovers of public companies pose a threat to corporate responsibility, argues Roger Cowe

FTSE4Good is in danger of becoming FTSE4Gone as leading companies such as BAA, Peacock Group and (especially significant for me) Manchester United disappear from the Stock Exchange. Many more are under threat, such as Rank and ITV. Some of the bidders are foreign public companies, so their British victims do not disappear entirely from view, although there is likely to be less transparency in the UK once they are part of a bigger group that is not quoted on the London stock exchange. But public companies are also being bought by hedge funds and private equity consortia, which means they largely escape public scrutiny.

These shadowy investment firms last year spent more than £7billion ($13bn) in the UK snapping up 20 public companies, according to the Centre for Management Buyout Research at Nottingham University. Private equity is now so big that it is responsible for the majority of takeover spending. There has been a dip this year, but not for long - there is simply too much money in private equity funds and it has to be spent.

The private equity boom is relevant to corporate social responsibility for two reasons. Private equity is often short-term and largely unaccountable. Yet accountability is important for CSR, which is essentially long-term. Major companies are publicly accountable through reporting and corporate governance requirements, including the annual shareholder meeting. Take the company private and you take away this accountability.

You also lose the opportunity for shareholders to raise issues of CSR risk, which have been powerful in persuading business leaders to take corporate responsibility seriously. Public company status has enabled socially responsible investors to become one of the main forces in raising companies' social and environmental performance. For all the fuss NGOs and consumers can make, most companies are susceptible to engagement from SRI teams because however small their share stakes may be, public companies take investors seriously.

The business risk arguments are less powerful for private equity owners. The rationale rests largely on long-term impacts, especially on reputation. But private equity is for the most part short-term, with firms typically expecting to sell within three years.

Of course the private equity firms have their own shareholders - the investors who have put up the billions of pounds and dollars which drive the acquisition spree. Some of those are major banks and fund managers that have their own CSR criteria, and possibly SRI teams. They need to examine how to translate the policies they apply to public companies to the private equity arena. That might be the only hope for CSR salvation as the private equity takeover boom continues.

Roger Cowe is a director of the CSR communications consultancy Context





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