Partners Group: Don’t overlook the G in ESG

Governance is often overshadowed by the environmental and social components of ESG, but it is one of the most powerful tools for a private markets firm, say Carmela Mondino and Richard Thackray at Partners Group

This article is sponsored by Partners Group.

The focus on ESG has been on the E and more recently on the S. Why does the G get sidelined and why is it so important that it isn’t?

Carmela Mondino

Carmela Mondino: You are right, people do tend to forget about the G, but that is where you need to start, particularly in a private markets context. Getting the governance right is what enables investors to influence the way a company works, to grow that company and add value. It is also, of course, what enables it to influence the S and the E in the first place.

Richard Thackray: Our sector is characterised by a strong focus on entrepreneurialism and value creation and governance is sometimes seen as a constraint on that. However, we do not believe there is any conflict between the two. I sit in the operating directors and entrepreneurial governance team at Partners Group and that phrase, entrepreneurial governance, sums up our approach. We are highly focused on growth and value creation, but we also believe in strong governance to create consistency around those processes. Having invested directly in over 270 companies since inception, we have developed a blueprint and we know that if you put talented people in a room, with that framework and discipline around them, then great things will happen.

What type of governance initiatives do you typically employ in portfolio companies?

RT: We do not have governance initiatives. We have a very considered playbook. We are already thinking about board composition 12 months before we make an investment and by the time we cross the line and complete, we will typically already have a chair – or what we call a lead operating director – in place, and perhaps one or two other board members as well. We believe in task segmentation on the board and work hard to understand a company’s capabilities and growth plan so that we can identify the right executives to support that company on its journey.

We do not rush to implement a 100-day plan. We spend time working with the company in its first year to help shape a transformational strategy. We then turn that strategy into initiatives, each of which will have a board sponsor. We also have a technology platform, PG Alpha, where all this hard work is digitised, so that it is transparent and accessible to everybody. Then, as we roll forward into the second and third years of ownership, we have regular check-ins to ensure boards are operating in a consistent manner. The approach is incredibly systemised and disciplined.

CM: I think discipline is definitely the right word when it comes to governance and that feeds into the ability to be effective on ESG, as well. You need strong governance to help build better businesses, but you also need strong governance to mitigate risk. You need to have a framework around bribery and corruption, for example, or cybersecurity. We are seeing infrastructure companies regularly becoming the targets of cyberattacks today, so this is something that must be tackled proactively. It is far easier to do that if you have a strong governance structure and if someone on the board has ownership of that issue.

Why is it so important to engage with portfolio company employees and what are some of the most effective ways of doing this?

CM: Our job is not only to create value for investors but to create value for society more broadly. That starts with the board, but it should cascade down through the management team to the company as a whole.

Furthermore, as a major employer we have the potential to have a real impact on people’s lives. And, of course, employees that are happier are more productive and that in turn will generate more sustainable returns. The way that you engage with those employees, however, will vary depending on the situation, the geography and the type of company involved.

Richard Thackray

RT: Let me give you an example. I am working with Partners Group portfolio company United States Infrastructure Corporation and its 10,000 field technicians who are responsible for checking locations anytime someone is planning to drill a hole anywhere in the US.

We have undertaken a staff survey to find out what those technicians’ concerns and issues are, and that has led to seven major initiatives, all of which are focused on things like safety and quality. You may question whether those are areas that can impact the performance of a business, but I would argue that they can. You can either view those 10,000 technicians as cost items on your P&L, or you can view them as your sales force – men and women who deliver a quality service to customers. The happier they are, the more effective they are. It all starts with valuing workforces and making sure you understand their concerns.

CM: We prioritise listening to portfolio companies, rather than just coming in and enforcing our will. Part of that is ensuring that our investment teams and the portfolio company management teams become one. We have an initiative called Hub Day, when we invite the management teams to come to our offices to learn about Partners Group’s culture. That helps you connect on a different level and ensures everyone feels they are in the same boat. Those events are now having to take place virtually, of course, which is never quite the same as in-person. But it has proved to be an impactful and successful idea.

Do you see a strong focus on human capital management as a differentiator in terms of fundraising, investment sourcing and performance?

CM: When it comes to fundraising, we are observing a shift where investors want to see their values reflected in their investment decisions. A new generation wants their money to do more than just provide returns. Meanwhile, an entrepreneur who has built a business wants to be sure that their former employees will be retained and treated well when they sell. They look for a partner that shares their values. There are definitely performance benefits, as well. As I mentioned earlier, happier employees are more productive employees, and are less likely to leave.

Has the pandemic shifted understanding around the importance of the human capital component?

RT: I think the pandemic has taught us all a huge amount. Before covid struck, there was a whole generation coming up through the firm that had never experienced a crisis. And, candidly, nobody could ever have contemplated a crisis where entire companies and sectors closed down.

I think the pandemic has, in this way, magnified the human component tremendously. Sorting out a balance sheet is one thing, but covid has reinforced the fact that people are at the heart of everything we do. We exist to serve pensioners and to deliver their dreams. We exist to serve society. Covid has absolutely brought all that home. We already had programmes in place to support companies and their employees, and they have been effective. However, as we come out of this crisis, we are redoubling those efforts.

To what extent do you see diversity, equity and inclusion as an important element of your human capital approach?

CM: It is definitely important and, again, it is something that needs to start with the G, because if you do not lead by example then that is an issue. As part of our ESG survey, I talk to the CEOs and management teams of most of our portfolio companies and the first time we included a DE&I question, a CEO pointed out that his management team was more diverse than our board. I am happy to say that has since changed and we continue to focus strongly on building board diversity.

RT: In the US, we have somewhere between 115,000 and 120,000 portfolio company employees. The reality is that the country we serve is 51 percent female, 14 percent African American and perhaps 10 percent LGBTQ+, and it is important we make strides to ensure our boards reflect that.

Let me give you the example of KinderCare, the largest private provider of early-stage education in North America, with somewhere close to 3,000 nurseries. We recognised that for many of KinderCare’s employees, their work is a vocation. They are not in it for the money. The majority of employees at the company are also women. Our board did not reflect that, so we changed it. We have built a board that is task-orientated with outstanding executives focused on governance and growing the business, all while reflecting the customer base, employees and the society the company serves. Directionally, that is exactly the kind of thing we are looking to do.

Carmela Mondino is head of ESG and sustainability at Partners Group and Richard Thackray is managing director in the firm’s operating directors and entrepreneurial governance business unit