Last week Dan Bailey, expert in Directors & Officers issues at Bailey Cavalieri LLC gave a great presentation here in Connecticut on the special liabilities facing those in the private equity world. In particular he was addressing what happens to employees of private equity or venture capital (PE) firms who also sit on the boards of their portfolio companies. Yes indeed, the claims are increasing, and they are predominantly from other shareholders in the portfolio company. He pointed out that the PE representative, because of their experience and sophistication, is likely to be held to a higher standard and thus more of a target. Indeed, the PE firms with controlling interests (either through shares or loan covenants) are especially liable for claims -- they are viewed as the deep pockets by the dozen or so litigation firms aiming at them.
In particular Dan pointed out that a PE representative, as a member of a portfolio company's board has a different duty and responsibility to the company itself and that that representative needs to keep that duty separate from their allegiance to their employer. Since it is hard to prove that a single person has performed these roles separately, it is best to have two different people fill the two roles -- one person sit on the board who is not an employee of the PE firm, and one at the PE firm who fulfills the shareholder role. He also recommended that the PE firms seek strong independent directors as a means to reducing liabilities.
He is not the only lawyer seeing the need for this. This morning, Holly Gregory of Weil, Gotshal & Manges, a renown governance law firm, also highlighted that an investor's agenda and a board member's agenda are two different things. A board member cannot take direction from an employer, whether a PE firm or a corporation, in regards to how they perform their duties as a director of another company. If they do, that shatters their duty of loyalty to that company and after that large liabilities loom.
