What’s the Point of These “Guidelines” Anyway?

Last week, the Private Equity Council released a list of United Nations Principles for Responsible Investment that is specific to private equity. It’s a smattering of carefully worded suggestions that PEC members have pledged to follow when investing. Don’t pollute. Prohibit bribery. Communicate with your LPs. You get the idea, and they’re posted in full below.

Simple enough. I’ve got four questions:

1. Shouldn’t buyout firms have been doing this all along? I realize this questions is slightly unfair, like GM’s refusal to make electric cars because it would imply that there was something wrong with the rest of their gas-powered auto empire. We should be happy they are striving to institutionalize positive change regardless of past behavior. But this gesture seems empty. Mostly because…

2. Aren’t these unspecific, unquantifiable “guidelines?” How would they be enforced, and by whom? If they’re not enforced, what is the point of them?

3. Does the entire remaining universe of 1730* U.S. buyout firms not care about the environment, labor laws or public safety? Now I doubt anyone would answer “yes” to that, so why don’t these guidelines extend beyond the PEC members? Remember, the PEC only includes 13 of the largest private equity firms.

4. Should there be more of a push toward transparency? It seems that other countries, with efforts such as the Walker Report in Europe, have tried to make more measurable efforts to be transparent. However, one can note that not as many firms have complied with the report as expected since it’s introduction.

I posed these questions to Robert Stewart, VP of Public Affairs for the PEC. His answers are below:

1. Shouldn’t they have already been doing this?

Many of them have. This is an opportunity to make these commitments and the discussion explicit and the discussion and initiate a dialogue with the LPs, not only at PRI (the UN Principals for Responsible Investing) but investors in the fund. The PRI has its own guidelines, but it made sense to make a set specific to private equity.

2. How will they be enforced?

The most effective way to measure how well firms are implementing the guidelines is through discussions with their own LPs and the PRI organization. There will be twice a year discussions. More important are the discussions that PEC member firms will have with LPs every time they raise a fund about how these guidelines are being implemented. LPs have been the driving force behind these guidelines. The comprise the PRI organization, and these guidelines were developed in consultation and working with the entire PRI group.

3. Why don’t these guidelines extend beyond the PEC members?

We created these for the members of the Private Eequity Council. That’s all we can speak for.

4. Should there be more of a push toward transparency?

One great myth of private equity is that it is an opaque industry. Number one, LPs are probably privy to more information about investments than any other member of the investment community. Number two, any transaction in which a portfolio company takes on publicly traded debt is subject to same disclosure requirements as a public company.

And there you have it.

The guidelines call for PEC member firms to:

  1. Consider environmental, public health, safety, and social issues associated with target companies when evaluating whether to invest in a particular company or entity, as well as during the period of ownership.
  2. Seek to be accessible to, and engage with, relevant stakeholders either directly or through representatives of portfolio companies, as appropriate.
  3. Seek to grow and improve the companies in which they invest for long-term sustainability and to benefit multiple stakeholders, including on environmental, social and governance issues. To that end, Private Equity Council members will work through appropriate governance structures (e.g. board of directors) with portfolio companies with respect to environmental, public health, safety, and social issues, with the goal of improving performance and minimizing adverse impacts in these areas.
  4. Seek to use governance structures that provide appropriate levels of oversight in the areas of audit, risk management and potential conflicts of interest and to implement compensation and other policies that align the interests of owners and management.
  5. Remain committed to compliance with applicable national, state, and local labor laws in the countries in which they invest; support the payment of competitive wages and benefits to employees; provide a safe and healthy workplace in conformance with national and local law; and, consistent with applicable law, will respect the rights of employees to decide whether or not to join a union and engage in collective bargaining.
  6. Maintain strict policies that prohibit bribery and other improper payments to public officials consistent with the U.S. Foreign Corrupt Practices Act, similar laws in other countries, and the OECD Anti-Bribery Convention.
  7. Respect the human rights of those affected by their investment activities and seek to confirm that their investments do not flow to companies that utilize child or forced labor or maintain discriminatory policies.
  8. Provide timely information to their limited partners on the matters addressed herein, and work to foster transparency about their activities.
  9. Encourage their portfolio companies to advance these same principles in a way which is consistent with their fiduciary duties.

*Figure courtesy of Pitchbook Data.