Walker Report Looks At Private Equity Duties to Stakeholders

Noting that business leadership represents the largest concentration of power that is not derived from or accountable to an elected body, the recent Walker report on private equity transparency discusses the legitimizing of corporate power with regard to stakeholders such as employees and suppliers.. The UK private equity working group, headed by Sir David Walker, has issued a set of guidelines for private equity firms. A previous blog dealt with the proposed disclosure and transparency guidelines. But the report is also concerned about the obligations private equity assumes when it takes a controlling stake in a company.

According to the report, in Europe, the social democratic view has historically been that the authority of business leaders needs to be legitimated politically through regulation and direct state control of the most important business activities. A US perspective tends to adopt what may be characterized as a unilateral concept, whereas the European approach tends to be more sympathetic to the notion that ownership entails obligations as well as rights.

But in either society, the broad question to be considered is how much weight to give to stakeholder interests. In that context, the report emphasizes that the promotion and demonstrable achievement of high standards of behavior in all portfolio companies, extending beyond compliance with the law, should be powerfully supportive of private equity as a whole.

In addition, the report points out that there are important implicit contractual relationships, for example with employees who believe that the company is a good one in which to work, and with suppliers who value the continuity and depth of their relationship with the company. Such contractual relationships are implicit partly because explicit contracts cannot be sufficiently wide-ranging or anticipate every possible relevant contingency, and because the nature of the behavior and relationships expected is often defined by the context rather than by the contract.

The Walker report cautioned that this does not mean that implicit contracts are merely what all stakeholders would like them to be. For example, the existence of implicit contractual commitments does not mean that jobs cannot be cut where this is necessary to the continuing viability of a business. But it does mean that reasonable expectations as to behavior in matters such as appropriate communication, including its style and timeliness, should not be disappointed. Part of the concern that gave rise to this review is a sense, rightly or wrongly, that some private equity portfolio companies may have acted in relation to employees in violation of such implicit contracts which, despite being implicit, are nonetheless regarded as real and substantive, with reliance reasonably placed upon them.