This week, the PRI (Principles for Responsible Investment – an international network of investors supported by the United Nations) published a set of recommendations focused on the responsibility of boards of directors in private equity-backed companies. The PRI's recommendations were based on a legal memorandum prepared for the PRI by Debevoise & Plimpton, which was published at the same time. The Debevoise note considers the duties of the directors of UK private companies to consider relevant long-term environmental, social and governance (ESG) issues when making decisions, and it is available for download here.

UK company law gives directors a pretty clear steer on how – and in whose interests – decisions have to be made. Since 2006, company law has expressly adopted an "enlightened shareholder value" approach to directors' responsibilities, meaning that directors of UK companies have to make decisions based on what each of them honestly believes is most likely to make the company successful, in the long term and for the ultimate benefit of the company's shareholders. It is for directors to define how to achieve that success, and the law gives them considerable latitude in defining the factors that must be taken into account before reaching a decision. However, there is a clear recognition that "stakeholder" factors – the interests of customers, employees, suppliers, the community and the environment, for example – are generally important in the generation of long-term shareholder value, and should, therefore, generally be taken into account.

This "duty of loyalty" to the company adopts a subjective standard, meaning that what is important is whether a particular director actually believes that the action taken (or not taken) supports – or at least does not damage – the company's long-term success. However, directors are also subject to a duty to exercise "skill, care and diligence", and therefore need to give due consideration to decisions. This duty is an objective one, and means that company directors should ensure that important decisions are made after careful consideration with the benefit of available evidence. In selecting the factors that are relevant to any particular decision, directors are subject to this duty of care and any relevant and material ESG considerations – together with evidence relating to their potential impact on the company's future success – should be considered along with other (perhaps shorter-term and more tangible) factors.

The PRI hopes that these publications will help private equity firms to ensure that material ESG risks and opportunities are being properly considered by portfolio company boards, as firms seek to integrate ESG throughout the investment process. The board of directors, which often has a relatively high level of engagement with key portfolio company decisions, is an important mechanism that private equity fund managers have to influence the way in which their portfolio companies behave, and the PRI suggests that its remit should specifically include all material and relevant risks and opportunities, including those related to ESG factors.

This is, of course, already standard operating procedure for very many firms, who understand that the portfolio company board has an important role, and that the directors they nominate to sit on the board have meaningful responsibilities. Active ownership, often exercised in part through board representation, is central to the private equity model. Companies that want to deliver value in the medium term have to understand long-term trends and the impact of stakeholder interests on the company's revenue and profit. None of this is revolutionary or new, but increasing disclosure requirements, changing governmental and societal attitudes, and the high profile of issues such as climate change, mean that the PRI paper is a timely reminder, and will encourage some firms to re-examine portfolio company governance.

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