6 When private equity firms are involved in a privatisation process they typically offer incentives to management to maximise the value of the business in the short to medium term. This may create the scope for a successful management team to make returns that are far in excess of the rewards available in the public sector. The interests of the public sector may not be fully aligned with those of the private equity bidders, especially in respect of the potential scale of returns for management. If Departments wish to limit the scope for such returns then they should consider mechanisms such as capping arrangements, taking appropriate professional advice if required. Such mechanisms may diminish the attraction of the deal to potential investors.
7 Departments should protect their interests by not allowing management to discuss incentive schemes with potential partners until the main principles have been agreed and a preferred bidder chosen.
8 Non-executive directors have an important role to play in safeguarding shareholder interests. Their participation in employee share schemes could lead to a perception of a conflict of interest. We recognise, in the case of QinetiQ, that the timing of the offer was after the deal had been substantially agreed. Following the QinetiQ privatisation, however, non-executive directors may anticipate the possibility of making significant financial gains. Any such expectation has the potential to create conflicts of interest. There is no specific guidance to prevent non-executive directors from participating in share ownership schemes put in place as part of a privatisation. To avoid any perception of a conflict of interest, the Government should ensure that they are not offered an opportunity to participate.