Do the planning
- Agree on the desirable Board culture – how do we want the Board to function, and how can we fail to achieve that? Managers should know that a culture of engagement and direct, robust debate is the norm for private equity boards. Be explicit about the purpose of Board oversight and questions. Also, articulate the scope of Board input – which matters does it DECIDE and on which matters does it ADVISE?
- Identify the deliverables from the CEO to the Board. The CEO is responsible for executing initiatives for the year that emerge from the investment thesis. The CEO needs to provide the Board critical information about problems and new opportunities – and how he is addressing them. He should identify where he could use outside assistance (e.g., restructuring, hiring senior management) – and how he is seeking it and what role he would like the Board to play.
- Identify the deliverables from the Board to the CEO (e.g., clear guidelines on what is expected, performance review, introductions, perspectives and guidance on strategic, operational, and financial management issues).
- Discuss guidelines for interactions – and adapt them to changing circumstances as time goes on. What will Board meetings look like (agenda, decision-making rules). What conversations between the CEO and Board members outside of formal Board meetings are expected? What other ways can or will Board members see what is happening in the business or market (e.g., talking with employees, talking with customers, talking with distributors, talking with customers’ customers)?
- Clarify ahead of time the process of identifying when performance is an issue. Clarity of process is important. You need a plan to address problems that arise at the Board level, just as you have a plan in place if a factory burns down. You’ll handle problems much better if you’ve been clear ahead of time about how you are going to work together and about how you’ll handle the kinds of problems that could crop up while being aware that each circumstance is unique.A Lead Director working for a private equity firm that has a majority interest could say to a CEO, “Here’s the process that works for me. I set the agenda in Board meetings. I serve as a liaison between the CEO and the Board. I’ll coach and advise. But if something becomes a serious problem, the timeline for intervention will be short.”
Your planning should include from the start a backup leadership plan (or succession plan).
- Clarify skills. When a Board member offers a perspective or a directive on a business issue, CEOs may feel that an industry novice is trying to tell them how to do their jobs. It’s advisable to spend some time at the beginning having each party describe their perceptions of their own strengths and the strengths of the others. Generally, the CEO brings operating knowledge and valuable relationships with key employees and customers. Private equity directors bring insight from other settings and the ability to see the business from the outside.
Having a discussion about roles, process, and skills creates a more efficient investment. It is worth clarifying for managers what dealing with a board when a private equity firm has control means. Even if you’re recruiting a CEO, it may “go without saying” but it’s still worthwhile saying. “This is what we bring to the party, this is what we do to make it work, if you want a Board that won’t challenge you, don’t do a deal with us. You as CEO aren’t in charge to the degree you were in the past. You may have opinions and we want to know what they are but it’s our call if we disagree.”
Only one side of the Board member-CEO interaction needs to be “mature” to make the process work – so make sure that the Lead Director is mature. A CEO who is mature and self-aware can live with Board members who aren’t perfect, and Board members who are mature and self-aware and other aware can live with an immature CEO. The problem is when nobody is self-aware and mature. It’s easiest if lead directors grow themselves, as opposed to fixing the CEOs.
Build the skills
- Talk to someone who is a master at being a lead director. What does he do that helps him get the most out of CEOs and minimizes the risks? What methods work for him for delivering tough messages without making management teams defensive?
- Learn from others’ experiences – talk to other investors at your firm about their successes and failures in guiding portfolio companies.
Get the information
- Assess senior management. Does the company have the right CEO to execute on the strategic plan? Insight into the management team before doing the deal is important. Learning by trial and error or after the house is on fire is expensive. Wouldn’t you like to know before the person lights the match and take the matches away from him? What are the CEO’s development needs? What interaction style would work best with him?Assessments can help clarify any concerns you have. One firm entered alongside an entrepreneur who insisted he remain the majority investor. They wanted to understand why the entrepreneur was so careful to retain control and where he’d view them as crossing the line. They used the assessment to learn how to build the best possible working relationship with him.
Also consider sharing the findings of the CEO’s assessment with the CEO – doing so conveys respect, builds trust, and sends the message that you expect management to be fully committed to the future success of the business.
- Assess yourself – and share the findings with the CEO. What are your development needs? What is your interaction style? Share what you know in a way that can help your relationship work better. An investor who knows that sometimes he is too challenging could say to a CEO, “There’s something I’m working on and it’s a hyper-challenging style, so if you’re hearing hyper-challenging from me, let me know. I want to have a conversation about it. I’ll consider what you say, and decide if your concern in valid. But in any case, I welcome hearing it.”
What you can do
Working well with your CEO partner is vital to creating operational value, a major key to PE success in today’s environment. Consciously thinking about and discussing how you are going to work as a Board member with your CEO will make your success larger and much more likely.
Think about the boards you’re on. How many of these conversations have you had and would it be good to have one? Think about what, if anything, you contribute to the challenges on your most difficult board.
Leslie Pratch's Blog 