With energy giant TXU yesterday approving the largest ever private equity buy out and UK trade unionists expected to protest today against the growing role of venture capitalists in the UK economy the current debate over the merits and pitfalls of private equity groups is showing few signs of fading away.
On one side of the divide many trade unionists argue that the recent upturn in the number of private equity owned companies is economically damaging for the country, leading to job losses, increased job insecurity, a lack of accountability and transparency at many of our biggest firms, a widening of the gap between management and the shop floor, and in some cases good old fashioned Gordon Gekko-style asset stripping. They are expected to make all these points, pretty loudly, at the Super Return conference in Franfurt, where several trade unions have vowed to protest.
On the other side sit the private equity groups and many laissez faire economists, who argue that the shock treatment offered by the management teams found at these companies are often the best way of stimulating under performing firms, making them competitive again and in the long term saving jobs and delivering growth. Furthermore, they argue, the presence of private equity keeps public firms on their toes - often more effectively than distant shareholders - while the absence of stringent reporting rules and regulations frees firms up to invest in innovation.
But amidst all the talk about the different levels of job security, innovation and growth provided by opposing ownership structure little attention has been paid to which model is most likely to deliver environmental sustainability.
Advocates of public ownership argue that being listed on the stock exchange with its quarterly reports and numerous regulations encourages environmentally responsible behaviour. Moreover, the recent increase in shareholder activism – as evidenced by organisations such as Ceres – has introduced another layer of environmental accountability for many firms.
However, these benefits have to be offset against the short termism and obsession with quarterly figures that critics claim define many listed firms. The need to constantly answer to Wall Street analysts and meet their expectations is often seen as an anathema to good long term management and makes it harder to justify investments that will take time to deliver a return. This problem is particularly acute for green investments, such as building insulation or solar panels, as they tend to be expensive up front and can take years or even decades to pay for themselves.
Equally the soft benefits associated with green business models such as staff retention or brand image may provide a valuable return, but are often hard to quantify and are unlikely to be forefront in a CEO's mind when he knows he's got a month to hit this quarters' sales target or else see the share price plummet.
Private equity backed companies, in contrast, do not face these problems – or at least not to the same extent. While still evident the pressure to deliver quarter-on-quarter is less apparent, arguably making private firms a better place to develop and execute long term plans.
Such a climate is likely to favour environmental investments, and it could be argued that the $44bn buy out of TXU provides ample evidence of this, with the private equity groups behind the bid Kohlberg Kravis Roberts and Texas Pacific Group pledging to slash carbon emissions at the company and scale back plans to build more coal-fired power stations.
The bidders have said that they would scrap seven of the 11 power stations TXU was planning, and while cynics would argue it is a political move designed to get TXU's environmental critics onside it could also be argued that the new owners are in a better position to appreciate the long term benefits of a greener strategy.
However, these potential benefits have to be balanced against the lack of corporate transparency that private ownership delivers for a firm. If private equity owners decide that green initiatives are not in their interest then it is far harder for stakeholders in the company to bring pressure to bear to change their minds.
Equally, the environmental benefits that come with private ownership depend entirely upon the exit strategy chosen by the owners. While some private equity groups may buy a company in the hope that better management and further investment in innovation will increase its value ahead of returning it to the stock exchange for a tidy profit, others are still guilty of buying an undervalued firm, slashing costs by any means necessary, sweating the assets and then breaking up the company as a means of selling the different units at a profit.
The first of these models is understandably a great environment for green business initiatives that can lower the long term cost base and increase its attractiveness to the market. The second is arguably the worse possible ownership structure for anyone trying to develop a green business strategy – management obsessed with chasing a quick buck just aren't going to be interested in solar panels on the roof.
So with neither structure ideal for green business models is there a better way of doing things?
Well, a group of the world's biggest auditing firms think there might be and last year they released a paper outlining how the quarterly reporting system should be scrapped in favour of real time performance reporting.
The vision paper from the International Audit Networks – which includes Deloitte, KPMG, PwC and Ernst & Young – argued that the emergence of the internet and increasingly sophisticated reporting tools meant that "the current systems of reporting and auditing company information will need to change — toward the public release of more non-financial information… customised to the user, and accessed far more frequently than is currently done".
The report argued that such real time reporting was needed to help restore investor confidence and prevent fraud by giving shareholders far greater visibility over every aspect of a firm's operations.
Such reporting rules would require a massive overhaul of the reporting systems of all listed firms and as such is unlikely to emerge within the next decade. However, alongside increasing the amount of environmental information firms have to disclose it would have another major green business benefit in that it would free firms from the investment strait jacket imposed by quarterly and annual reporting deadlines.
By giving shareholders access to financial and corporate information on a day by day, or even hour by hour, basis firms would be under constant pressure to maximise returns, but with no arbitrary deadlines at which they would be measured they could also plan strategies and investments for the longer term without having to constantly fit in with quarterly cycles and external targets. The large investments many firms would love to make in order to enhance efficiencies - be they energy efficiencies or process efficiencies - would be far easier to justify when they no longer have to think about how the cost is going to look in the annual report.
Such a system would cost billions to instigate and with so many vested interests in the current stock market system it may never appear. But on paper it has the ability to combine the best of public and private ownership, ensuring firms are accountable to all stakeholders while giving them greater freedom to develop the long term strategies required to achieve environmental and corporate sustainability.
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