Succeeding in the first 100 days: it's really all about the people
As early as possible after closing an investment deal, PE firms must use every tool available to determine who the A, B, and C players are in their new asset. And they must swiftly define expectations and priorities for key roles, ensuring that those roles indeed create value and have measurable KPIs.
Top priorities for CEOs in the first 100 days
When asked what they thought a portco CEO’s top two priorities should be in the first 100 days post-deal, 74% of our PE and 76% of our portco respondents alike listed “Establish/ensure senior team alignment” as the number-one priority (figure 1). As their number-two priority, 76% of portco respondents cited “Assess the management team,” while 72% of the PE respondents chose “Validation of the investment thesis and delivery of quick wins.”
For PEs, assessing the management team was far down on their list—number six—while validating the investment thesis and delivering quick wins came in fifth place among portco executives. Interestingly, both groups rated “Reporting interface with PE sponsor (such as cash flow, financial reports, and KPIs)" as their number-three priority. These numbers illuminate a major disconnect between the two groups—and between their beliefs and behaviors—regarding what top priorities should be in that crucial time period after a deal closes. For instance, while PE responses to other questions in the survey indicate that they view human capital as key to investment success, the fact that assessing a portco’s management team came in sixth place in their list of priorities suggests that they may be devoting insufficient attention to human capital needs in their portcos.
And while “Analyze the company culture” was closer to the bottom of the list, 50% of the portco respondents prioritized it, versus only 19% of the PE firms. This 31% delta dovetails with comments in Part 1 of this report about misaligned views regarding the importance of organizational culture assessment.
Further echoing the theme of human capital and talent needs, when we asked both CEOs and CFOs what they saw as their top three priorities during the first 100 days, their answers centered on three themes.
However, we saw nuances in their responses, depending on the role. CEOs’ three top stated priorities (as noted above) suggest that they focus on establishing the infrastructure for success in the post-deal period.
For the CFOs, the top three priorities were:
- Establish effective management reporting and KPIs (76%)
- Develop relationship with CEO (76%)
- Assess the finance team (69%)
These CFO responses indicated a possible focus on reporting, relationships and the finance function specifically.
HOW PE FIRMS CAN BEST SUPPORT PORTCO CEOs and CFOs
Responses also differed regarding the types of support that portco CEOs and CFOs wanted from their PE investors during the first 100 days post-deal. Clearly, many portco executives are eager to ensure they possess the talent needed to execute on their PE firm’s investment thesis.
But while only 27% of the CEOs wanted assessments of their own strengths and challenges, 52% of the CFOs said they desired this form of support. The delta may indicate that CFOs are seeking clarity about accountability and expectations for their role.
Operating partner support:
In addition, significantly more of the CEOs than the CFOs (53% versus 38%) said they’d like to be assigned an operating partner or team from their PE firm. Roughly 65% of the portco executives acknowledged that their main point of contact at their PE firm is an operating partner—down from 75% last year. But those who responded as such described that partner as a generalist, versus an industry specialist or functional expert.
When we compared this year’s results with last year’s, it appears that PE firms and portcos are paying greater attention to the impact of effective human-capital management during the first 100 days. After all, the 2018 results highlighted the importance of individual portco CEOs’ ability to focus simultaneously on a wide range of challenges, including defining a vision and executing on strategy. But the 2019 findings point to sharper awareness that success in the first 100 days isn’t just about the CEO—it’s about everyone around him or her as well.
AFTER THE DEAL: MANAGING PERFORMANCE EVALUATION, TURNOVER, AND REPLACEMENT OF PORTCO EXECUTIVES
Survey results related to post-deal performance evaluation, turnover and replacement of portfolio-company executives provide additional signs of a shift in emphasis toward human capital and talent needs that we saw in other findings from this year's study.
CEO and CFO performance evaluation: different roles, different criteria
When we asked the portco executives “What mechanisms are in place to review and assess your performance?” we saw that, as in last year’s survey, PE investors rely heavily on traditional approaches to evaluate CEOs’ performance:
- 70% Using business reviews
- 52% Using real-time metrics (such as number of customers, delivery backlog, product forecasting, stock performance, systems downtime, and cash flow)
- 52% Using insights gleaned from PE investors’ conversations with CEO's direct reports
However, use of feedback from CEOs’ direct reports has decreased in the past year (52% for 2019 versus 74% for 2018). Overall, these findings suggest that CEOs’ performance is judged mostly by their leadership capabilities. What’s more, only 24% of the CEOs cited individual performance reviews as an assessment mechanism. In our view, this suggests that investors are missing an opportunity to deepen their understanding of how well portco CEOs are supporting the company’s growth and profitability goals. To be sure, if a portco is successful, that suggests effective leadership on the CEO’s part. Yet individual performance reviews provide more nuanced details about how a CEO is executing on more specific accountabilities beyond broad running of the business.
Interestingly, 69% of the PE respondents in our study said that, in cases where a portco CEO’s performance is deemed inadequate, they seek a solution other than replacing him or her. As much as 52% said they craft a remediation plan, with termination as the consequence of continued underperformance. And 17% said they look to executive coaching.
The desire to give underperforming CEOs a chance to improve is understandable, given the disruption and costs that turnover in this role can inflict on a portfolio company. For example, sources estimate that total costs of replacing an executive can amount to as much as 12-15 times his or her salary.¹ However, this choice also comes with risks: If it drags out what ultimately becomes an unavoidable firing of the CEO, the portfolio company is forced to operate for that much longer without an able leader at the helm. In contrast to CEO performance evaluation, CFOs’ performance is being assessed primarily through individual performance reviews (73%) and business reviews (70%), with use of real-time metrics coming in at a distant 33%. These findings suggest that, unlike with CEOs, CFOs’ performance is judged on their functional or operational expertise rather than on their organizational leadership prowess. This may reflect PE firms’ belief that the main driver behind CFO turnover is the lack of sufficient technical and financial capability.
Causes of CEO and CFO turnover? That depends on who you ask...
Responses more specifically related to CEO and CFO turnover (voluntary or involuntary) illuminate misalignment in perceptions and a lack of upfront expectation-setting. Together, these signify that a talent need is not being met.
For instance, when asked, “What do you believe drives CEO turnover?” 93% of the PE investors in our respondent pool cited “lack of capability” as the biggest driver (versus just 57% of the portco CEOs), followed by “lack of urgency” (69%) (see figure 2 at right).
Meanwhile, 72% of the portco respondents named “a clash of working styles with the PE firm” as the top driver of CEO turnover. When asked “What do you believe drives CFO turnover?”, “lack of technical and financial capabilities” topped the list for PE firms. And again, “clash of working styles with the PE firm” came out on top for portco CFOs, though their second-most often cited driver was “clash of working styles with the CEO.”
The good news is that the relationship between a portco’s CEO and CFO can—and should—be assessed by sponsors, as we discussed in Part 1 of this report. If the working relationship between these two key leaders is a productive and strong one, then the decision to let a CFO go may indeed hinge more on his or her lack of technical or financial capabilities—as cited by our PE respondents.
Executive replacement: no B players allowed
In acquiring new assets for their portfolio, 70% of the PE investors in this year’s survey say they prioritize retaining of a portco’s existing management team, while 19% seek to install a new team or upgrade the existing one.
Among PE firms whose investment thesis includes retaining the existing management team, 95% say they "always or often" include keeping the current CEO in that thesis - while only 47% include retention of the current CFO.
What explains this difference? PE sponsors may view the roles differently in terms of how much impact each has on driving and executing strategy. The lesser focus on CFO retention may indicate that investors view the role as less strategic compared to the CEO role. Yet CFOs want to be recognized for their strategic and business building capabilities—the very talents that enable them to create value for the organization. Sponsors that view these executives as merely glorified comptrollers are missing an important opportunity to leverage those capabilities. Of course, in some situations, replacing a portco executive becomes necessary. In last year’s survey, an overall majority of our PE respondents reported replacing underperforming portco CEOs over one year into the investment. This year, 63% of the PE respondents said that their timing for installing a new portco CEO is six months—or less. Clearly, many investors are tightening up their timeline for replacing problematic portco CEOs—almost certainly in response to the increased velocity of change afflicting the business world.
Sponsors simply don’t have the luxury of time when it comes to executing on such judgment calls. While many investors previously adopted a “get out of the way” attitude after closing a deal, our survey results suggest that they’re growing more decisive—and playing an increasingly active role in management of their portcos. Sponsors understand that in today’s world, it’s no longer good enough to have merely acceptable talent at the helm of a portfolio company. Allowing B players to remain in key value-creating roles has become increasingly unacceptable to sponsors—further affirming their sharpened focus on human capital.
Replacing portco executives: a double-edged sword?
Greater decisiveness in replacing underperforming portco executives has its pros and cons. On the plus side, it activates the machinery for moving mediocre leaders out of a portco. On the minus side, finding replacements who will excel in the role—and recruiting them—can prove decidedly difficult. Sponsors who cut underperformers loose sooner and then have trouble finding replacements risk having key roles sit vacant for a lengthier period of time—as long as 1.5 to 2 years, we’ve calculated.
The fact that investors are moving much more quickly than last year to replace underperforming portco leaders sends a powerful message.
Sponsors are clearly willing to risk having key roles sit empty longer—and to endure the angst involved in seeking replacements—if that means they stand a greater chance of putting a truly exceptional leader at the helm of a portco. Sponsors are even willing to destabilize an asset by removing a senior executive, as well as risk creating unfavorable “optics” for the market, by taking such action quickly.
It’s no surprise that some PE firms take too long to replace underperforming portco CEOs. But many (78%) of this year’s PE respondents believe that their portco CEOs are dragging their feet in executing the management-team changes that the sponsor and portco previously agreed on—including replacing direct reports of the CEO who aren’t getting the job done. Given PE firms’ recognition that having the right talent in place is vital to fueling growth in their portcos, investors would do well to closely monitor and manage CEOs’ commitment to making such agreed-upon changes.