CEOs vs. Private Equity Boards (Part II – Risk Taking vs. Risk Mitigation)


In a recent post, we dug into the differing priorities of Boards and CEOs cited in the Boston Consulting Group’s “Private Equity and the CEO, Partners in the Quest for Value”.  Following is a more focused analysis of that report’s findings on risk.  When BCG asked investors and CEOs about risk, more private equity investors responded that CEOs should primarily focus on risk-taking while more CEOs responded that risk mitigation was the priority.

The Private Equity Risk Perspective

CEOs must understand that financial sponsors are risk-takers by definition.  Consider that many Investment Partners are entrepreneurs who started their own firms.  Moreover, most private equity funds employ less than 50 personnel so, in spite of their portfolio size, they are risk-tolerant, small companies in their own right.

Further, private equity firms are in the business of taking risk on behalf of their LPs. Private equity is a top performing asset class, in part, because its risk appetite.  Additionally, private equity firms only own their portfolio companies for a finite period putting a premium on moving the ball down the field quickly…moving fast means incurring risk.

Finally, private equity firms realize that they must drive meaningful change in their portfolio companies if those businesses are to grow even faster and/or turn around even more quickly.  Driving change is hard, and, represents risk.

The CEO Perspective

Unless they have been true entrepreneurs, most private equity CEOs have advanced in their careers, in part, by properly managing risks for themselves and their businesses.  If not properly balanced, this otherwise responsible perspective may be at odds with the private equity’s ambition.

When running a private equity-backed company, many CEOs are conflicted by what they perceive to be competing forces — driving a winning equity outcome and protecting their positions/careers.  Ironically, a conservative leadership approach usually leads to a derailment.

The Psychology of Risk for Many CEOs

As human beings, many CEOs fear failure and therefore can sometimes postpone important initiatives.  They also operate under the scrutiny of high-horsepower Boards and do not wish to fall out of favor with their private equity sponsors. Some CEOs can lack the confidence and self-assuredness required to accept failures as part of a winning formula.

The Winning Approach for CEOs

In my experience, one trait required of all great private equity CEOs is an intense bias for action.   The best CEOs are always moving forward and taking high-velocity, focused action at all times.  With these ideal leaders, risk is mitigated one of two ways: a.) they fail fast on incremental steps and recover quickly; and/or b.) they rely upon the wisdom of their Boards to help make strategically decisions that can benefit from the wisdom of the team.  Private equity Boards appreciate this action-oriented, risk-tolerant approach from CEOs and will be more forgiving when setbacks do occur.

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