Graybeards: External directors and PE portfolio companies

Having been technically insolvent a few years earlier, the state-owned banks wanted to convey a sense of stability to investors as they prepared to go public. High-profile foreign investors were brought in as a source of expertise and credibility, and the banks met Hong Kong's requirement for at least three independent directors by recruiting various corporate heavyweights.

ICBC got John Thornton, former Goldman Sachs president, and Antony Leung, former Hong Kong financial secretary. BoC appointed Peter Cooke, previously of the Bank of England, and Anthony Neoh, former head of Hong Kong's Securities and Futures Commission, to its board. Ian Wilson, ex-Standard Chartered CEO, and Tom Manning, former CEO of Cap Gemini Asia Pacific, went to CCB.

"Many companies in China are now paying greater heed to the need for good corporate governance and the fact that things like transparency can increase shareholder value," said Manning. He estimated there were still less than 50 Western independent directors with the top 50 or so Chinese firms.

Given that the banks dance to Beijing's tune, it was unclear whether they really believed in the shareholder value angle or were simply paying lip service to it. Independent directors could never hope to have much sway on issues such as appointments, and board meetings were said to be so crowded with members and assistants that opportunities for insightful dialogue were limited.

Independent directors with these and other Chinese companies noted that they could only bring their experience to bear by fully understanding the challenges and opportunities the businesses faced. And this was often best achieved by making visits outside of meetings and building relationships with management on site.

This article was nudged from the depths of my memory at the recent AVCJ Singapore Forum, which featured a panel discussion on private equity value-add. Nick Nash, group president of consumer internet platform Garena - and formerly of General Atlantic, an investor in Garena - suggested that fewer than 50% of the people PE firms appoint to boards are actually people portfolio companies want to hear from.

Aik Meng Eng, CEO of TE Asia Healthcare Partners, added that the last thing competent management teams want is investors who spend board meetings firing off countless questions and telling them why they are doing a bad job. In this sense, investors are best served nominating an operations executive who understands the industry or geography and can forge a constructive relationship with management.

"If the company gets into trouble you want the CEO to reach out to the shareholders or the board. You need board members who are engaged and can be trusted," Eng said.

There is a huge gulf between the average Chinese state-owned bank and the average Asian PE-backed company, particularly when GPs are making minority investments in private enterprises. But in order to perform his role effectively - whether it is representing public shareholders or a single private investor - a director must convince management that he can contribute.

It is not just about being a technical resource; in executing their fiduciary responsibilities, directors may perform the role of traffic cop, diplomat, older sibling, objective arbiter or well-intentioned catechizer. But in order to do this, they must find a way of working with management and other stakeholders, adapting to circumstance and corporate culture as necessary.

In recent months, Japan has also emphasized the link between corporate accountability and performance. Part of this effort involves encouraging listed companies to appoint more independent directors. It remains to be seen how readily such changes are implemented and the extent to which directors are willing and able to prove their value to management.

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