Successful PE-Backed Executives Adopt a Certain Mindset to Collaborate Effectively with Private Equity Board Members

On June 9th, 2023, The Operators and the LinkedIn Group, PE-Backed Executives, hosted a discussion of highly experienced Operators talking openly about private equity culture shock and a mindset, a style of communications, an attitude with the Board that helps ensure successful partnership. Below are some of the takeaways from that discussion.

Three Syndromes of PE-Backed Leadership

We have probably all experienced “It’s Lonely at the Top” syndrome, but things can become overwhelming quickly for those new to the private equity backed role. PE Culture Shock occurs for one of two reasons.

  1. Incumbent members of the management team, who had been reporting to a Founder/ Owner-Operator and are now reporting to a PE Board are often confused by the vernacular, the pace of change and concepts such as value creation, the governance, capital structure and even new dynamics such as incentive aspects of compensation.
  2. Recruited members of the management team often leave their roles with large multinational corporations to take on the challenge of growing a relatively small business.  They may quickly become overwhelmed by the lack of sophisticated systems, processes, technology, and even human capital. Those recruited to create value in private equity portfolio companies often have a reaction akin to “what have I committed to here? How am I going to have an impact with so much that seems broken at the start?”

In some cases, the reaction might include a third type of shock: Imposter Syndrome comes into play when the executive running the portfolio company begins to doubt his/her ability to have an impact on growth and value creation. The doubt means that the executive starts to wonder if they are able to effectuate change in the relatively small portfolio company.

The PE-Backed Operators who participated in our recent discussion agreed that CEOs must depend on two elements working well in concert: 1. Alignment with the Board and Operating Partners 2. Having an operationally, functionally, effective management team. In other words, at least as important as the management team’s skill in value creation is their ability to forge and maintain alignment with the PE professionals! Effective change rarely happens without the Board’s consent.

Working with a specific Board for the first time is challenging because it may not yet be clear what their priorities, interests and expectations are. You will need to discover, quickly, what they want to receive, when, and how often. Before the first Board meeting, before the first Board deck, before even meeting personally with Board members, focus on gaining a tangible understanding of individual and shared expectations of the Board. A good place to start in terms of gaining perspective and context on Board expectations is the Thesis and the specific situation the Company faces. In other words, the Board of a turnaround company with a timeline of two years will be very different than the expectations of a Board serving a relatively simple growth story in a five-year timeline. 

Ask about their expectations at the outset.

The most common concerns or expectations that are misunderstood involves roles, reporting structure, governance, and the handling of uncertainties, problems and concerns. As you get to know board members individually, you will begin to gain an understanding of their preferences and unique perspectives. Who is most interested in numbers and who is most interested in personal relationships? Who wants specifics, and who is satisfied with the big picture? Learn each board members’ communication preference. How, when, with what level of detail do they prefer to communicate? Seek to understand Board Members’ individual motivations, areas of concern, and personal styles.

Think of board members and Operating Partners as either experts in specific functional or situational roles, or generalists who are a mile wide and an inch deep. They typically are not both. Therefore, you will need to summarize and present the details if asked for them. Be prepared to answer specific questions, but leave the details out until needed. That said, board members sometimes know a lot less than they appear to know. That may become glaringly obvious to management. 

Management may know infinitely more about the business, industry, technology, people issues, processes, systems, customers, etc. than the PE Professionals. They may want to drive change aggressively, make decisions in a vacuum, or pursue objectives they firmly believe to be in the best interests of the Company , but in reality, fly in the face of the Board’s intent or mandate. Your priority as CEO of a PE-Backed business may at times be to rein in an overly eager, confident and capable management team.

It is not enough to simply do the work of value creation.

An appropriate mindset for management teams to adopt with PE professionals is one of partnership and collaboration. Alignment must be established at the outset and maintained or even nourished throughout the hold period. It is important to start with a focus on establishing and maintaining directional agreement because all subsequent efforts to ensure operational improvement without this alignment in place may be for nought.

There are going to be situations, of course, in which an Executive disagrees with a Board Member’s perspective. Some common identified reasons for conflict between Board and management are:

  • Misalignments
  • Misunderstandings
  • Confusing reporting structures
  • Absence of clear roles
  • Lack of transparency
  • Ego battles
  • Past experience, lessons learned from past judgments 
  • Recent discoveries (during diligence)
  • Lack of rules of engagement
  • Lack of defined accountabilities

When this happens, acknowledge their point of view and why it seems sensible or logical. Then explain why you have a different perspective. Respecting, valuing, appreciating Board input goes a long way toward creating an atmosphere of mutual respect and appreciation – and not hostility or competition. 

Focus on the desired end point and allow room for change, improvement, back pedaling.

While the Path must be navigable, it may be more useful to think about a mutually-agreed-upon definition of the End Point, the Exit Strategy, and make course corrections along the way, with the end point clearly in mind. Such a shared Vision of the future is useful to bear in mind as common ground.

Conclusion

In conclusion, the role of the CEO facing an unfamiliar Board, or balancing Board interests and ideas with management’s intent, is to be an Ambassador of goodwill and understanding. Strive to develop agreement, alignment, small victories and rapport before all else. When management and the Board disagree over substantive matters, the Board rarely loses.

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