The Talent Advantage

At the most recent Accordion Private Equity Roundtable, our attendees shared best practices, red flags and the keys to their success when it comes to ensuring management team success at their portfolio companies.

One of the most important responsibilities a private equity portfolio manager has is to ensure the success of the overall management team at a portfolio company, which means assessing fit, creating alignment on key priorities, providing support where needed and, as a last resort, finding new positions or replacing executives who cannot succeed in their designated roles.

ASSESSING THE TALENT

Although private equity investors generally look not just for a well-positioned company but a high performing management team, the reality is that in many situations, management teams will require adjustment to one degree or another to hit peak performance. Typically, in a six-to-eight person management team, there are one or two who are less than perfect fits for their role, given the new environment with multiple stake-holders mandates for transparency, and expectations of growth. So how can you tell who the high-performers are, and how you can ensure success in the positions that lack them?

“The real question is how to frame an assessment in a systematic way that both accomplishes your goals while keeping management aligned, especially in a minority ownership investment.”

Go beyond the typical due diligence, and make a strong management assessment part of your acquisition framework. Wrap the assessment in with the often onerous closing phase, rather than introducing a deep dive once the team has settled into a post-acquisition groove. Make sure that management teams understand that assessments are a normal part of your due diligence process. If it is part of every deal, an executive is less likely to take the assessment personally. During the assessment, give your management team grades for skillsets or characteristics. Be transparent and clear when discussing the post assessment SWOT and what the next steps are to meet expectations.

Getting from ‘B’ to ‘A’

Following the assessment, you need a game plan for getting your ‘good’ performers to ‘great.’ Many participants discussed using an executive coach to support executives in meeting expectations of a new sponsor. The number one coachable trait is team dynamics. Executive coaching is focused on improving management style, fostering an understanding of every-one’s specific role, increasing team moral, and productivity, and getting everyone on Board with a shared goal direction.

“We brought in an outside coach to work with the son of a founder and the results were great. He was able to work through personal and professional issues, and now works as an executive coach himself.”

When approaching portfolio management with the topic of executive coaching, there are a few key points to keep in mind:

• If at first they don’t succeed—offer to help: The environment for management teams under institutional ownership is different, new, and challenging. By bringing in a coach, you demonstrate you want them to bring their best selves to the business. It builds loyalty and encourages people to be active participants in the company’s success.
• Frame Coaching Appropriately: This is an opportunity to broaden skill sets, tackle the challenge of transitioning to a new environment, and get the most out of this phase of a career. Frame the coaching from a presumption it will succeed so executives don’t feel threatened. They often will succeed and in the event they don’t, the broader team will appreciate the supportiveness of the sponsor toward a colleague.
• Involve the whole team: While one-on-one coaching with the CEO is most common, think more broadly. By having a coach work with the whole management team, or board, you’re instilling practices and habits that will spread throughout the company and ensure accountability at the highest levels. This also avoids having executives feel singled out and consequently threatened.
• Know when to hold ‘em: Capable executives are always in the mix. Ensure seasoned executives, often from other areas of the portfolio, are paired as mentors with those going through PE ownership for the first time. It builds comradery and trust.

Know when to fold ‘em

There comes a time when it is clear that an executive is not a fit for their role and is not going to be able to succeed in it regardless of the amount of support.  When that consensus forms, or even as events seem to be trending in that direction, a transition plan must be put in place, including (i) an assessment of specific shortcomings in the current team, (ii) a detailed description of the role and the key skills and personal traits required to succeed in it, (iii) a communication strategy for all concerned; and (iv) a timeline. It is also important to recognize that just because someone was successful within a certain role at one portfolio company, it doesn’t mean that they are the right fit for a similar role at another company.

“The old saw often holds: ‘I hired your resume, but unfortunately I got you’.”

The first step in every transition plan should be to have an honest and candid discussion with the management team. Be fact-based and transparent with your discussions from the onset of the relationship—being open will promote transparency and trust throughout the partnership. When it comes to the transition plan, strategy depends on which member of the executive team is up for replacement.

“Replacing an exec is more ‘chess’ than ‘checkers.’ You can’t just install another team member—you have to pay attention to team dynamics and strategic alignment of goals, solicit feedback and input into transition timing, and show the team what could be possible with an upgrade.”

For non-CEO replacements—CFOs, Head of Sales, Head of HR, or other—it’s important to get alignment from the CEO. One way to do this is by getting buy-in from the Board. As a new financial sponsor, your voice carries—fairly or not—the weight of having just subjected the management team to the acquisition process and post- close assessment period. By discussing best steps forward with the board and appealing to the CEO from multiple trusted sources, the team is better aligned, the management knows the board and sponsor are on the same page, and the transition goes more smoothly. Other ways that sponsors can help get the CEO aligned with a replacement on the executive team are to:

• Bring in ‘A’-level executives from other companies in the sponsor’s portfolio to speak with the CEO, acquainting the CEO with what a range of best-in-class executives are capable of in a given function. By seeing what a world-class executive in the specific role actually looks like, the CEO will often recognize both the need for a change and the benefits to the company of a better fit.
• Develop a Board that consists of trusted C-level executives (similar industries / backgrounds) and leverage them to provide a voice to the CEO.For CEO replacements, things are trickier. When dealing with a Founder-CEO, transparency is key. While they may have done a good job of running their company to this point, the company may need to be professionalized. Treat them and their teams fairly, keep things professional, and you will have a much easier time of it.  Raise the idea of succession planning as a matter of course during the deal phase to understand the depth of the bench, the CEO’s thoughts about retaining the role and for what duration, and what might emerge as the key sensitivities in eventual transition discussions.When transitioning the CEO, two options stood out:
  • Gradual Release: Many sponsors will transition the CEO or Founder out of a management role over 12 or 18 months, giving them a long lead time to pass the baton over to the next in charge. This gives management time to adapt to the coming change and set a smooth shift so balls are not dropped when the time comes.
  • CEO to Chairman: Moving a CEO and/or Founder to a non-executive role as Chairman, with the same economics they are currently accustomed to, allows that person to stay on in a figurehead and business development role. They become an ambassador for the company, there is less shake-up at the management level, and you can bring in a replacement to move the company forward.

When replacing management executives, it’s vital to have a replacement already in mind who will make the company stronger and more capable following the change than it was before. It’s not enough to just have a negative view of an incumbent—you should also have consensus around what a positive replacement will look like.

“We had a situation where we moved a CEO to Chairman and he was actually relieved; he knew he wasn’t doing a good enough job, and he appreciated that we brought up the idea to give him a role more focused on business development.”

Take your own advice: When asked what advice they would give their younger selves, the participants offered thoughts and tips on topics from management restructuring, trusting your gut, and finding value in unexpected forms:

The downside of not doing anything: Of all the things we fear, only 10 percent of them actually happen, and of those that happen, they’re only 10 percent as bad as we thought it was going to be. Upheaval from changing an executive is never as bad as you expect it to be—often when thinking about removing a Head of Sales, for example, companies will hold on to them because they fear the customer and book of business will leave too, but that rarely happens. Don’t shy away from making a change in management when your gut tells you it’s the right thing to do. Speaking of which…

Trust your gut, but don’t forget about data: Trust your gut when it comes to assessing a management team, but combine that instinct with data to back up your decision-making. Often if you have a negative feeling about a portfolio executive, they will end up having to be replaced sooner or later. When it comes to hiring for key roles, don’t get “starry-eyed” by someone’s resume or background; rather, stay objective and focused on the skillsets you are looking for.

Top candidates can come from unlikely places: For example, one attendee hires former athletes for HR roles in their middle-market companies.  This type of person is used to process, organization, teamwork and are also results-driven and goal-oriented.