Control Is Not the Same as Board Leadership: Why Do PE-backed Companies Appoint Outside Chairs?

Private equity (PE) investors are commonly portrayed as highly active owners. They negotiate extensive control rights, appoint directors, approve major strategic decisions and closely monitor performance. Against this background, one governance choice remains surprisingly underexplored: why do some buyouts appoint a new outside chairperson while others do not?

This question matters because a chair is not a mandatory feature of private company boards.  PE sponsors can protect their investment through ownership rights, contractual consent provisions, management incentive alignment, and direct board representation. Concentrated ownership might therefore appear to make a separate external board leader unnecessary. Yet new outside chairs remain common in practice. Our findings suggest that these appointments are not simply a staffing decision. They appear to be a deliberate governance choice in PE-backed buyouts.

Our study examines 1,065 UK PE-backed buyouts completed between 2004 and 2018, sponsored by 331 PE firms and tracked through 2024. The hand-collected dataset comprises 7,627 firm-year observations and detailed information on board composition, chair appointments, operating performance, and add-on acquisitions. Approximately 61 per cent of the sample buyouts had a chair at some point during the holding period, while 39 per cent appointed a new outside chair after the buyout.

We define a new outside chair as an individual appointed as chair after the buyout who had not served as an executive or director of the portfolio company before the transaction and who does not represent the PE sponsor on the board. The term “outside” therefore refers primarily to the individual’s lack of a pre-buyout role in the portfolio company and their non-representation of the PE sponsor on the board; it does not imply complete independence from the PE sponsor. These chairs often bring substantial operational and board experience, and some have prior experience working with PE sponsor.

Our first finding is that new outside chair appointments are selective rather than routine. A new outside chair is less likely to be appointed when directors representing the PE sponsor (PE directors) outnumber insider directors from the portfolio company. This is unsurprising. Where sponsor representatives already have a strong presence on the board, they may be able to provide leadership and oversight directly, leaving less need for an additional external leader.

The more unexpected result is that a new outside chair is also less likely when insider directors outnumber PE directors. Board seats do not capture all the sponsor’s control rights. PE sponsors still retain contractual vetoes, reserved matters and shareholder approval rights even without numerical dominance.But board composition still matters because it shapes how the board is organised and how decisions are developed.

Why are insider-dominated boards less likely to add an outside chair? Our data cannot identify a single underlying mechanism. One possibility is that PE investors have greater confidence in the incumbent management team where insiders hold stronger board representation. They may prefer to preserve established leadership arrangements. Management may also be less receptive to giving a senior outsider a prominent position. What is clear is that outside chair appointments respond to the existing board composition rather than following a standard best practice.

Our second finding focuses on what happens after appointment. Buyouts that appoint a new outside chair are associated with stronger industry-adjusted profitability and organic growth (both sales and employment growth) during the holding period. They are also more likely to complete add-on acquisitions and undertake a greater number of add-ons. The positive association is particularly strong when insider directors outnumber PE directors, especially for profitability and sales growth.  

The chair role also appears to be different from simply adding another outsider to the board. We do not observe similar performance associations when the chair is retained from before buyouts, drawn from the PE sponsor, or filled by an insider. Nor do we find comparable effects for newly appointed outside directors who do not hold the chair position. Taken together, these comparisons suggest that the chair role matters beyond simply adding another outsider to the board.

The findings have several practical implications. 

First, concentrated ownership does not eliminate the need for board leadership. Contractual control rights determine what an investor can ultimately approve or prevent, but they do not by themselves structure board discussions, facilitate engagement with management or support the development of strategic proposals.

Second, board design in buyouts concerns both who sits on the board and who leads it. New outside chairs are less common when either PE directors or insider directors hold a numerical advantage, suggesting that board composition and board leadership are closely connected.

Third, the chair position should not be viewed as a universal governance best practice. In many buyouts, direct PE sponsor leadership or established management leadership may be sufficient. In others, an outside chair may provide a valuable focal point for coordinating board processes and driving post-buyout execution.

The takeaway is straightforward: control does not remove the need to design board leadership. Even in companies where ownership is highly concentrated and investors retain extensive formal rights, who leads the board remains an important governance choice. Understanding when investors appoint an experienced outsider, and when that appointment is associated with better outcomes, offers a fuller picture of governance within PE-backed companies.

_________

Dan Zhou is an Associate Professor of Financial Management, Henley Business School, University of Reading.

Xinyu Yu is a Lecturer in Finance, Surrey Business School, University of Surrey.

Ranko Jelic is a Professor of Finance, Sussex Business School, University of Sussex.

Yuanyuan Huo is a Senior Lecturer in Organisational Behaviour and Management, Surrey Business School, University of Surrey.

This post draws on the authors’ academic article “Unpacking Buyout Board Leadership: The Antecedents and Consequences of Chairperson” (available from the authors).

_________

This blog is based on a paper presented at the 5th conference on The Law and Finance of Private Equity and Venture Capital, held at Goethe University Frankfurt. The conference was convened by Bocconi University, the DFG LawFin Center at Goethe University Frankfurt, LSE Law School, the Faculty of Law of the University of Oxford, and the Institute for Law & Economics at the University of Pennsylvania, together with ECGI., Visit the event page to explore more conference-related blogs.

The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.