Efforts to persuade the UK’s private equity firms to adopt a voluntary code of practice are likely to gather pace over the next few weeks. Sir David Walker, the former regulator who is drawing up the guidelines, set an October 9 deadline for responses to his consultation document. Like the British code of corporate governance drawn up by Sir Derek Higgs, the private equity code would adopt a “comply or explain” approach. But although the governance code has proved largely useful and robust, the parallels are causing some anxiety among the buy-out firms, mainly because we in the media often lambast companies that fail to conform with the Higgs principles. The fear among private equity partners is that they and their portfolio companies will be dragged through the mud for anything less than slavish adoption of the Walker code on transparency.
So they should be, the critics will doubtless respond. But that is a hasty reaction. Little irritates Sir Derek Higgs more than to hear companies accused of being “in breach” of his “rules”. A board has infringed the guidelines only if it fails to explain why it has not followed the principles.
In the private equity field, there may be strong reasons why a portfolio company would want to withhold detailed information — for instance, on grounds of protecting valuable intellectual property. Better that such a company should agree to explain why it has decided not to comply with the code in one area, and follow the guidelines in others, than fall back on the dreaded box-ticking or, worse, reject the code altogether. Reinforcing the guidelines with some form of committee to identify companies that are wilfully flouting the code would help. Whether an explanation prevents a media firestorm about non-compliance is another matter, but the reaction should entirely depend on the quality of the explanation. As buy-out firms surely must have realised by now, there is no longer any defence of secrecy for the sake of secrecy.