Article summary: Discover insight for portco team management from leaders who lead leaders.
Topic: Private Equity Data Intelligence
Assoc. Keyphrase: Change Management
In all of Roman history, only one emperor was ever captured by an opposing army.
General Valerian came to power in Rome in AD 253, lauded to emperor on the heels of a great military victory. Seven years into his reign, his once-powerful army had been weakened by a trio of disruptive forces: Limited resources; Low morale, and; Contagious disease.
Seeing an opportunity nearby, the Persian monarch, Shapur, launched a takeover attempt. The Roman leader tried to negotiate an exit, but in the end all he could do was surrender to Persia and be taken captive by the larger, more powerful force.
Tradition tells us that Emperor Valerian lived out the rest of his days serving as the human footstool that Shapur used when mounting his horse.
The lesson from this moment in history is not simply that ancient kings were creatively cruel. It’s that many corporate management teams view Private Equity oversight as a symbolic repeat of Valerian’s captivity. Once they were leaders of a proud, thriving, independent business. Now they must submit to any humiliating order their PE overlords pass down. It’s an unfair perception, sure, but it persists nonetheless.
So what’s a Private Equity overlord to do in order to prevent that unhelpful narrative from taking root within a portco management team? The answer isn’t in the “General Partner” title that empowers you to give orders. It’s in becoming a trusted “Leader Who Leads Leaders” for the teams of people that report to you.
Here are three PE leadership principles that can help.
Principle #1: Corporate Culture can make (or break) investment returns
It’s tempting, when sitting in the General Partner (GP) seat, to focus exclusively on bottom-line metrics that result in the highest valuation at exit. After all, goals like maximizing revenue, minimizing risk, optimizing operations, and more, are all very important. But the GP who ignores the impact of corporate culture on the portco bottom line does so to their own peril.
In 2020, Alix Partners in conjunction with Vardis, conducted their fifth annual survey of private equity and sponsored mid-market executives. The key takeaway? “Corporate culture can make—or—break PE investment returns.” As the study revealed, “71% of PE respondents and 81% of portco participants said successful execution of strategy hinges on having a culture that enables and encourages people to help implement the strategy.”
“The right corporate culture at a portco is essential,” they reported, “for generating the business results required by the company’s PE sponsor.” When corporate culture is “vultured” by PE micromanagement, or neglect, or inconsistent values, or even outright dismissal, it can create an emotionally toxic business environment—and become a place where no one likes coming to work anymore. When that happens, core talent flees, systems break down, and profits eventually plummet.
“Businesses that allow a toxic culture to take root can pay a high price—in such forms as:
- “Lower shareholder value
- “Talent turnover [and]
- “Growth slowdown.”
In spite of those crippling possibilities, nearly one-third of portco respondents admitted that “Neither they nor their [PE] investors evaluate their company’s culture.” That should be unacceptable to any general partner interested in business valuation.
At the GP level, mitigating risk of culture decay takes deliberate action and a commitment to transparency. If a positive corporate environment is essential for driving internal rates of return (IRR), then it’s important for PE firms to measure corporate culture as an ongoing business metric. Data visualization tools that publish companywide “culture” KPIs can help, as they reveal indicators of employee satisfaction.
For instance, a sponsored company might track KPIs related to employee turnover, overtime rates, workplace safety incidents, wellness program participation, HR program engagement rates, and so on. Additionally, rather than a lengthy (and often ignored) annual employee satisfaction survey, a PE-led management team can implement short, monthly “pulse” feedback polls instead. These “pulse” polls contribute significantly to culture-building at individual portcos by measuring real-time worker sentiment around topics such as daily job satisfaction, work/life balance, approval of leadership, and ratings of collaboration efficiency. The most progressive firms establish an OKR Dashboard that tracks the progress of the growth plan across all functional areas. An OKR dashboard creates a central narrative, a single scorecard that unites the organization and coordinates the efforts of every employee. The result is greater employee engagement, and a shared accountability that galvanizes teams.
Principle #2: strategic alignment
The story is told of a warship patrolling the Atlantic after the end of World War II. It was nearly midnight when the ship spotted a nautical light in the distance. The captain sent a message into the dark saying, “Alter your course 10 degrees south to avoid collision.” The reply was almost immediate: “Alter your course 10 degrees north.” This was infuriating, so a new message went out: “I am a captain! Alter your course 10 degrees south.” The reply, again, came quickly. “I am a seaman third class. Alter your course 10 degrees north.” Finally, the captain had had enough. “Alter your course 10 degrees south. I am a battleship!” To which the seaman third class responded:
“Alter your course ten degrees north. I am a lighthouse.”
The problem here was not a failure of communication, but a failure of alignment. The captain and the seaman were operating from different sets of metrics, and thus were acting in service to different—and possibly catastrophic—goals.
A similar situation often crops up in private equity. A new GP “captain” comes sailing into a portco’s executives offices, confidently giving orders about departmental initiatives, operational exigencies, and value-creation strategies. Yet those assignments are given before the GP has ensured strategic alignment among the members of their sponsored company’s management team. The results are systemic failures, debilitating degrees of scrutiny, and frequent frustration on both sides of the conference room table.
“One of the biggest time draws for deal and management teams is maintaining alignment on value-creation strategies and prioritization,” says Brick Thompson, author of the business intelligence book, The Dashboard Effect. The research of Tufts University professor, Jeswald Salacuse, echoes Thompson, adding, “Leaders will follow you not because of your title or your commanding presence, but because they consider it in their interest.” The solution, Thompson says, is found in “providing clear visibility for all stakeholders into the most critical performance metrics.”
This principle of business transparency is fairly simple for PE implementation—yet easily neglected in the busyness of mid-market industry.
Still, there are only four key steps:
- Identify root-cause activities that impact business outcomes.
- Organize data assets to measure performance against those root-cause metrics.
- Implement data visualization tools that are easily understood and readily-accessible for ALL stakeholders, GP and management teams alike.
- Communicate to the point of redundancy how every assignment, every task, every strategy aligns intentionally with the shared corporate performance goals that are measured by the visualized data assets.
When this kind of transparency happens with intentionality and consistency, portcos become more productive, GP oversight becomes more strategic and effective, and there’s practically zero chance your battleship will run aground.
Principle #3: Change Leadership Instead of Anger Management
Provoking people to anger is fairly easy.
Prompting productive change within the executive team at a middle-market corporation takes more time and purpose-driven effort. After all, each exec on that team has already been successful in building a multimillion-dollar economic machine. Motivation to change “the way we’ve always done things” can be lacking when it appears that change is required simply to please an unfamiliar investor-owner. Consequently, any random disagreement among executives can thrust GPs into a role of “anger management” counseling and mediation rather than playing to their strengths as strategic advisors.
To avoid getting caught in the anger management trap, many PE partners invest in “change leadership” instead.
It’s important, at this point, to note the difference between “change management” and Change Leadership. Change management is a function of the project management office (PMO). It’s the methodology that a PMO pursues to implement and manage organizational transitions to new systems and/or priorities. It may include things like employee training programs, enhanced communication initiatives, and so on.
Change Leadership, on the other hand, is a function of vision. Corporate dynamics expert and author, Christopher Smith, explains it this way:
Successful change, after all, depends heavily on motivating and engaging employees. The need for employee support should not be understated, since employees can easily become resistant to change if they are not engaged properly. This is one reason why it is important to have change leaders as well as change managers.
Change leaders … are business professionals, often business leaders, who assume the responsibility of developing a vision for change, engaging employees, and driving the change forward.
According to research by Harvard Business Review, this kind of Change Leadership is best facilitated by a “mindset” that empowers leaders to better perform their roles. “Simply put,” HBR reports, “mindsets drive what leaders do and why.
“For example, they explain why two different leaders might encounter the same situation (e.g., a subordinate disagreement) and process and respond to it very differently. One leader might see the situation as a threat that hinders their authority; another as an opportunity to learn and further develop. When leadership development efforts ignore mindsets, they ignore how leaders see and interpret problems and opportunities like this one.”
For a GP tasked with guiding organizational transformation, it’s tempting to get bogged down in the details and disagreements of the PMO function—which in turn becomes a frustrating experience that frequently boils over into anger management. A mindset that’s focused instead on Change Leadership, based in corporate vision and employee engagement, not only has a much higher opportunity to drive success—it’s more likely to prompt productive, lasting change within the executive management team at a sponsored mid-market company.
And so, the final takeaway is this: Private Equity oversight of a corporation doesn’t have to be unfairly defined as symbolic repeat of Emperor Valerian’s captivity in Persia. When GPs purpose to follow the principles for “Leaders Who Lead Leaders”, investments produce higher returns, and everyone wins.
Three Key Thoughts:
“Many corporate management teams view Private Equity oversight as a symbolic repeat of Valerian’s captivity.”
“71% of PE respondents and 81% of portco participants said successful execution of strategy hinges on having a culture that enables and encourages people to help implement the strategy.”
“Change leaders … are business professionals, often business leaders, who assume the responsibility of developing a vision for change, engaging employees, and driving the change forward.”
For Further Reading:
Adam Coffey and The Exit Strategy Playbook
- David Potter, The Emperors of Rome (New York: Metro Books, 2007, 2011) 160-162.
- Alix Partners. 2020. “Corporate Culture Can Make—Or—Break PE Investment Returns.” White Paper. March 2020. https://www.alixpartners.com/media/14381/ap_annual_pe_leadership_survey_2020.pdf
- Jeswald W. Salacuse, “Leading Leaders: How To Manage The Top Talent In Your Organization,” Ivey Business Journal, May/June 2006. https://iveybusinessjournal.com/publication/leading-leaders-how-to-manage-the-top-talent-in-your-organization/
- Christopher Smith, “5 Key Responsibilities of Change Management Leaders,” Change.WalkMe.com, October 27, 2020, https://change.walkme.com/change-management-leaders
- Ryan Gottfredson and Chris Reina, “To Be a Great Leader, You Need the Right Mindset,” Harvard Business Review, January 17, 2020, https://hbr.org/2020/01/to-be-a-great-leader-you-need-the-right-mindset