According to M&A magazine , more than half the CEO turnover in private equity owned businesses is unplanned, leading to longer hold times (82% of the time), and lower returns (46% of the time). Even so, 63% of respondents admitted to having no plan to improve the odds of CEO success.
How can CEOs and their private equity owners work together to reduce the risk of disruption and underperformance caused by CEO failure? And, in the process, optimize their returns? It’s all about helping the CEO successfully integrate into and lead in an unfamiliar environment with a new set of challenges.
Private equity CEOs fall into 2 broad groups. Both are confronted with the need to adjust their leadership approaches in order to succeed:
- The first group are CEOs recruited in from medium-large sized corporations, presumably having skills and experience relevant to the task at hand. Changes in approach are driven by the shift from leading in a familiar environment and pace with strong talent, to an unfamiliar business and culture, higher expectations for performance and speed, and fewer resources. In these situations, per my recent article, three areas of focus are determining your leadership approach, getting aligned with your board, and preparing to lead your team differently.
- The second group are sitting CEOs whose business was just acquired by a private equity firm. At the outset, it may appear there will be minimal change, since the management team is intact, they are not facing an integration exercise, and they are running a familiar business in a familiar culture. However, change will come and will need to be led by the CEO, with Board support, in three areas:
- Culture: Adapt to cultural changes triggered by new ownership
- Delivery: Evolve delivery capacity to address new challenges and meet new goals
- Adjustment: Make adjustments based on shared understanding of business drivers
CULTURE: Adapt to cultural changes triggered by new ownership
Make no mistake. New owners means new culture. The degree of cultural change will depend on the degree of change in the direction and trajectory of the business, as implied in the new owners’ investment thesis. At the very least, new owners = new board = new decision-making processes, especially where goals, strategies and financial performance are concerned. What are the new owners’ communication preferences and what are the new decision rights?
To help bring clarity to the situation, consider a new owner assimilation session with three parts. In part one, the new owners share their personal backgrounds, communication preferences, and expectations for the business. During part two, the CEO and management team educate the new owners on the why, what and how of core functional, communications and decision-making processes – level-setting the current culture. For part three, the new owners define their perspective on the “3 R’s”, decision-making roles and responsibilitiesas well as any new reporting lines between the operating company and the board. These are discussed and adjusted as needed.
Now, the question is, can the CEO lead effectively in this new paradigm?
As CEO, over-communicate with your team to set expectations, explaining the Why, What and How of the decision-making and reporting changes. It’s fine to acknowledge your own discomfort with the change, while leading by example to make it work from your end.
As PE owner, have your hands out to provide transition support and resources, demonstrating patience and encouragement. And, keep your eyes open for repetitive failures that may require more dramatic intervention.
DELIVERY: Evolve delivery capacity to address new challenges and meet new goals
New private equity owners invest for step-change growth. Business as usual will not apply.
First, as CEO, get your management team on the same page as the new owners with regard to goals and strategies. Within 30 days of new ownership, gather the team to align on a “bottoms-up” set of strategies and plans that connect to the “top down” goals and hypotheses in the owners’ investment thesis. Invariably, new strategies and / or accelerated implementation of existing strategies will be called for.
Next, jumpstart operational and organizational processes to define and build what you need to deliver, knowing that existing processes and capacity won’t cut it. Organizationally, start by ensuring you have the right roles and right players at your leadership team level. You probably will not achieve the next wave of transformation and growth with the same team that got you to this point. Operationally, a disciplined approach to managing milestones and delivering early wins will accelerate the change.
As PE owner, be supportive by providing your CEO with the time and resources to set new direction and establish new processes. Make sure that operating partners, consultants and others “dropped in” are truly working on behalf of the CEO to smooth out and accelerate change. Don’t let the CEO off the hook on making the key people decisions necessary to accelerate cultural and business change.
ADJUSTMENT: Make adjustments based on shared understanding of business drivers
Even with perfect cultural and decision-making alignment and a robust delivery capacity to meet more aggressive goals, there will be bumps in the road. Key customers will switch. Key talent will depart. New competitors will emerge.
When things go wrong, the key is making the right adjustments. Over-react to a key client switching without knowing the cause, and you may cut foundational capabilities (in the interest of short term profitability) that won’t be there to support the next customer you acquire. Conversely, under-react to the client switch and you may be missing a trend that could have been avoided with sharper insight.
As CEO, take the lead in educating the PE owners on the fundamentals, key metrics, and leading indicators of the business as well as key customer and competitive win/loss trends in the trenches.
As PE owner, invest in understanding the drivers, to get on the same page with the CEO regarding root cause … and presumably response. Challenge and help the CEO define new metrics that provide better insight on actual and predicted performance. Taking these steps will reduce CEO / owner disconnects and enable the right course corrections.
CEOs and owners play different and equally important roles in managing the acquired business through the transition to new private equity ownership. Acknowledging and proactively managing the changes needed in Culture, Delivery Capacity and Adjustment is a starting point for success.