Why Public Boards Should Think Twice Before Copying Private Equity Playbooks

The Latest Insights from McKinsey on Board Governance

The latest guidance from McKinsey consultants Frithjof Lund, John Kelleher, and Nina Spielmann presents a seductive proposition for public company boards: adopt seven practices from private equity (PE) backed companies and watch your effectiveness soar. Their research shows PE backed company boards rate themselves four times more likely to have a very high impact on value creation compared to their public company counterparts. The prescription seems clear and the diagnosis compelling. However, this analysis fundamentally misunderstands the contextual differences that make direct comparisons between PE and public company governance problematic at best and potentially harmful at worst.

The Core Thesis

The core thesis that public company boards have become too administrative and need to focus more on value creation is undeniably correct. Years of regulatory expansion following corporate scandals from Enron to the financial crisis have loaded board agendas with compliance requirements. Directors spend countless hours reviewing risk frameworks, audit results, and ESG reports while strategic discussions get squeezed into remaining time slots. This administrative drift represents a genuine problem that deserves serious attention.

Challenges of Transplanting PE Practices

However, the solution is not simply to transplant PE governance practices into the fundamentally different ecosystem of public companies. The authors acknowledge that PE backed companies face fewer disclosure requirements, have longer time horizons, and can create stronger director alignment through incentive structures. Yet they treat these as minor obstacles rather than fundamental structural differences that shape every aspect of board effectiveness.

PE Board Composition

Consider the nature of PE board composition. The authors celebrate smaller PE boards with a median of seven directors compared to 10.8 for S&P 500 companies, arguing that PE directors are selected for their ability to move the needle rather than for prestige or representation. This analysis ignores several critical realities. First, PE board directors are typically drawn from the deal team that acquired the company. They have spent months in due diligence, analyzing every aspect of the business, building relationships with management, and developing the investment thesis. Their board service represents a continuation of work they have already been deeply engaged in, not a fresh appointment requiring onboarding.

Public Company Director Challenges

Public company directors face an entirely different situation. They join companies as outsiders, often with limited time to get up to speed before participating in consequential decisions. Effective director onboarding takes 12 to 18 months, yet most public company directors report feeling pressure to contribute meaningfully within their first few board meetings. The suggestion that public boards can simply reduce their size and expect better outcomes ignores this expertise gap.

Engagement with Key Stakeholders

The authors' second major recommendation involves spending more time with key stakeholders, noting that PE directors spend 55% more time engaging with shareholders, 41% more time with management, and 19% more time with customers and employees. This sounds admirable until you examine the practical realities. PE directors typically represent the majority shareholder, so engaging with shareholders means internal alignment meetings, not managing relationships with hundreds of institutional investors and thousands of retail shareholders, each with different investment theses and time horizons.

Public company directors who dramatically increase their engagement with management and employees must navigate thorny issues of information asymmetry. Securities regulations exist precisely because material nonpublic information creates opportunities for insider trading and unfair advantages. A PE director who learns about an emerging problem during a facility visit can immediately incorporate that information into board discussions. A public company director with the same information must carefully manage what they know and when they can act on it to avoid regulatory violations and shareholder lawsuits.

The Gaps in the McKinsey Analysis

The value creation bridge concept represents perhaps the most exportable idea from PE to public company governance. However, the McKinsey analysis misses the major differences in public company contexts. PE value creation bridges typically focus on a three to seven-year hold period with a clear exit strategy. Public companies, existing in perpetuity, must balance short term and long term strategies to maintain optionality for future strategic pivots.

Public companies with longer investment horizons actually outperform those focused heavily on quarterly results. A value creation bridge borrowed from PE risks recreating the short termism problem in a different form. Instead of optimizing for next quarter's earnings, boards might over-optimize for hitting specific value milestones without adequately considering what happens after those milestones are reached.

Adapting PE Practices Thoughtfully

Public company boards certainly need to improve. They should develop clearer value creation frameworks that balance more variables over longer time horizons than PE equivalents and ruthlessly eliminate administrative bloat from board agendas. Directors need to engage more deeply while maintaining governance boundaries, learning selectively and contextually from PE practices.

The most valuable lesson from PE governance is the fundamental orientation toward value creation as the organizing principle for board work. Public company boards can adopt this mindset while adapting the specific practices to their different contexts.

For further insights, consider exploring more about this topic at the McKinsey website.