Private equity may become a friend, not a bogeymanFebruary 2008
It’s right to be suspicious of buy-out firms, but we should give them a chance, urges Danielle Cohen
If the term business ethics is, as some believe, an oxymoron, then ethics and private equity are perhaps even less likely bedfellows. Many reports in the media would have us believe so, citing the buy-out houses’ fondness for cutting jobs and exploiting tax loopholes as evidence of their lack of integrity. With the cornerstone of ethics – accountability – also considered to be conspicuously absent from the industry’s dealings, does the private equity boom herald a return to corporate opacity?
No one seems sure what to expect from the big-name companies that have been acquired by private equity and whose operations have consequently become veiled from scrutiny through a reduction in public reporting. And considering private equity’s reputation for making cutbacks to increase short-term profitability, there are concerns that its increased influence could undermine ethical improvements.
There is undeniably less transparency in the private equity industry than there is among public limited companies (plcs) and arguably less public empowerment given the lack of shareholder voting rights. But private equity firms do understand that their acquisitions’ brand values must be enhanced or at least maintained for them to return decent profits. And the risk that a company’s CSR policy will change is surely inherent to any type of buy-out – remember the panic when L’Oréal announced that it would be acquiring the Body Shop? Also, while private equity firms have been accused of short-termism, plcs are notoriously held to ransom by the City’s demand for quarterly results.
All this is not to say that the recent furore about private equity’s dealings has been a bad thing. While the buy-out houses themselves may be feeling rather hard done by, it could be that all the scrutiny will result in valuable lessons for publicly and privately owned companies alike. In fact, lessons have already been learned – as has been shown by The British Venture Capital Association’s new voluntary code to improve transparency in the private equity industry (EP9, issue 8, p3). The European Venture Capital Association has also reacted, restructuring itself in an effort to engage more effectively with European Union policy makers.
These may only be first steps, but they are at least a clear sign that private equity firms are starting to recognize that transparency, accountability and engagement will be essential if their industry is to prove it’s prepared to meet the ethical challenges inherent in its new position of global influence.
Danielle Cohen is ethics manager at the Chartered Institute of Management Accountants
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