Expectations of Private Equity Boards

Joann S. Lublin’s Wall Street Journal article  “When the CEO Reports to Private-Equity Bosses” suggests private equity-backed CEOs must be able to handle (among other issues), three key realities:

  1. “strict personal accountability”;
  2. “intense scrutiny”; and
  3. “speedy decisions”.

I’ve made a couple of recent posts on PE speed so I’ll focus my comments on accountability and scrutiny.


Accountability

In my experience, all CEOs believe they are accountable.  However, private equity Boards force complete and unforgiving accountability.  These boards also define success in a narrow, straightforward manner.  Beyond the table stakes of culture, morality and ethics – the performance scoreboard for PE-backed CEOs is always:

  1. Driving the valuation by increasing EBITDA (2-3X or more during a 4-5 year hold-period);
  2. Establishing increasing revenue growth rates in order to get the highest possible multiple at exit.

Portfolio Company CEOs need to hold themselves accountable to these realities or the Board will do it for them.  Other accomplishments such as achievements with culture, employee engagement, market share, etc. matter but only to the extent that they drive EBITDA and growth.

CEOs must take unflinching ownership of EBITDA and revenue results regardless of external factors such as economic pressures or market dynamics.  This ownership must manifest itself it urgently executed plans, tough decision-making, and light-speed responses to challenges and opportunities.  Private equity investors are deadly serious and CEOs need to match this deeply rooted orientation.  Millions of dollars and careers are tied to a CEOs performance…and the buck absolutely stops in the corner office, nowhere else.


Scrutiny

Private equity Boards are populated by highly engaged investment professionals and motivated outside experts.  They are also supported by exceptionally eager support professionals anxious to advance their own careers.  Scrutiny comes in many forms, including but certainly not limited to:

  • Weekly (and sometimes daily) calls with the Board chair.  Some funds appoint Exec Chair which can be even more intense.
  • Monthly operating reviews with a critical analysis of every element of the company
  • Quarterly Board meetings which are at least 4-hours and sometimes as long as 8-hours.  CEOs must have a full command of the business, its numbers and the go-forward plans.
  • Random analyst requests for deeper dive analysis, or explanation of, a particular topic.
  • Banking covenants continually apply pressure to a company’s results.
  • Investment banker analysis of a company’s fitness to enter the market.

Takeaways

Most CEOs believe they are built to win in PE, or in any environment for that matter…and yet nearly half of all PE-backed CEOs still fail. Therefore, CEOs must be intellectually honest about whether or not their abilities are truly suited to meet the accountability, scrutiny and pace of private equity.  CEOs and Boards should spend ample time during the selection process to discuss mutual expectations.  CEOs must avoid a “wanting the job at all costs” frame of mind and, instead, stay in a “wanting the job only if its a hand-in-glove fit for my style and abilities” mindset.  Likewise, Boards must be transparent with candidates and be wiling to frighten them away during the search process.  A great fit an only occur if both sides work together in a transparent, mutual due-diligence approach.


About Rob Huxtable

Rob serves as the Managing Partner of Integis, a retained executive search firm with offices in New York, Cleveland and San Francisco that is exclusively focused on the private equity-backed, middle market.  The firm’s mission is to drive multiples of invested capital (MOIC) for private equity firms by recruiting high-impact portfolio company C-Suite leaders.  The firm has played a key part in helping many of its private equity clients achieve top-quartile and top-decile results.  Under Rob’s leadership, Integis has been recognized as one of America’s fastest growing privately held companies by the Inc. 5000 in 2015 and 2016.

Written by Rob Huxtable

Rob is a recognized expert on the topic of private equity CEO performance and recruitment. He is Founder & Principal of PrivateEquityCEO.com. He is also Managing Partner of Integis which is the nation’s leading search firm focused exclusively on the private equity-backed, middle market.

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