From CEO to Chair in Private Equity

The jump from executive to non-executive in any business requires different skills and a more subtle approach. It’s a move that takes one from the operational controls of the business to influencing decision-making in the boardroom. Chairmen of private equity (PE) backed boards, however, are required to be a little more hands-on, balancing as they must the strategic goals of the financial sponsor with those of the CEO and management team.

Certain aspects of the PE environment might actually make the transition from chief executive to chairman easier. David Harding, Chairman of eco-friendly detergent company Aquados, says: “The greater focus at board level on performance [in PE] rather than compliance [in a plc], and the consequent need for the chairman to be more hands-on, can be easier for an ex-CEO.”

Nevertheless, PE is about results and the demands of the financial sponsors will be exacting as stakeholder management skills are challenged rigorously. Kelvin Harrison, Chairman of IT services business Maxima Holdings plc, says: “The danger of the transition in the private equity world is that the chairman is encouraged to have a more active involvement. But, as a representative of shareholders – and often the largest shareholder – they must be conscious and careful of continuing to be the bridge between shareholders and management.”

Steve Richards, Chairman of more2 Ltd, a privately owned B2B data analytics agency, and of health and fitness business The Third Space, says: “The same commercial judgment, strategic focus and mentoring skills are required, but they are applied in an influencing style. The hunger for success is the same [in both roles] – that’s what makes it difficult to develop a hands-off approach.”

Perfect chemistry

A chairman who has experience as a PE CEO should be able to understand the agendas of both the management team and the PE firm. Hazel Cameron, Chairman Network Director at PE house LDC, says: “The CEO experience is a huge asset for those that step up into a chairman role. The experience of working with both a bad, and hopefully a good, chairman is a great benchmark. It allows individuals to step back and think about what worked and what didn’t for them and why.”

Robert Drummond, Chairman of renewable energy business Acta SpA, adds: “It’s unlikely that NEDs will be successful unless they have the experience of being a CEO in the past. After all, they will be working closely with and assessing the decisions made by that CEO, so it is important to have had appropriate experience.”

If the transitioning chairman has experienced a range of commercial challenges, he/she will be better prepared for the broad requirements of the role. Kelvin says: “Actually, I think the private equity world can be a better environment for the chairman of a smaller business, as long as the CEO isn’t inhibited by the chairman’s presence. If the relationship between the two is strong, it can actually multiply the effectiveness of their output for the business.”

The relationship between CEO and chairman may not always be smooth, but both parties will need to be focused on the same goals. Mike McTighe, Chairman of high street retailer JJB Sports and cable manufacturer Volex Group plc, says: “You must put a lot of time and effort into the due diligence of the relationship with your chief executive. But you also must spend a lot of time understanding who the key stakeholders are in the boardroom. Typically, you’ve got all your shareholders around the table, so your freedom of action is directly proportionate to the degree of mutual trust you have with them.”

Track record

Trust will need to be established fairly quickly too. PE firms and even management teams may harbour doubts or concerns about the individual’s ability to take a hands-off approach, especially if the new chair has a big reputation based on a track record of big exits as an executive.

Paul Brennan, former CEO and Chairman of PE-backed IT services business Zeus, explains: “Often, any preconceived ideas about an incoming chairman will have been instructed by the way they have behaved as an executive… Private equity is no different. If they are now moving from CEO to chair within the private equity environment they will need to have demonstrated as a CEO that they don’t always have to show their ‘superman’ emblem.”

Steve agrees: “The excessive PE CEO ego comes from experiencing the phenomenal personal success possible [in the role] and is sustainable only so far as 100 per cent success is maintained in the NED [non-executive director] world. Eventually, all PE chairmen will be involved in a difficult investment at some point… there’s no room for egos then.”

Those successful in a transition of this kind must enhance their abilities not only to balance the requisite demands from investors and management, but also in influencing their CEO without stepping on his/her toes… not too hard, at least.

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

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