Developing Future Leaders

It’s the responsibility of the Human Resources Director to push a CEO into thinking about leadership capability within an organisation. While there may be operational fires to fight and short-term targets to hit, a chief executive must set aside time to reflect on whether the mix of skills in a business is right for the strategy.

Attendees at Criticaleye’s fourth Human Resources Director Retreat, held in association with Legal & General Investment Management (LGIM), agreed that if a CEO is genuine about achieving long-term success, they must identify and develop leaders as a priority.

Andy Clarke, former CEO at Asda, told the audience that when he first stepped into the hot seat he prioritised staff development. “We needed new thinking and diversity, yet still had to develop a strong core of talent from within,” he said.

“I was also extremely mindful of the lack of diversity, so I managed to build a leadership team that was 50 per cent female. The level of debate differed – and I’m not just saying that.”

However, when two of those females were promoted, Andy realised there wasn’t a strong enough pipeline to continue that diversity. As a result, he spent a fifth of his time identifying and developing individuals both internally and externally.

“I did that in conjunction with the HR Director and it was impactful; we were a combined team,” he continued. “At the end of my tenure there was a much greater number of people coming up from within the company.”

Devyani Vaishampayan, Group HR Director at BSI, described how she is concentrating on the talent agenda as the assurance and compliance solutions company looks to double in size over the next two to three years: “The focus of the past was on operational execution – it’s why the leadership team has been successful – but we know we need more strategic skills within the business.”

She then advised: “You need to drive through a message to focus on the gaps that you see in regards to the forward strategy.”

The knock-on effect

As HR Director at Equiniti, Nicky Pattimore is also engaged in developing internal talent within the technology and investment services company. It floated in 2015 and the current leadership team are locked in with equity until October 2018.

“The board are now looking at future succession and we recognise that they can’t all be external appointments,” Nicky explains, noting that several people within the organisation have been identified as possessing senior leadership potential.

This ‘leadership group’ is expected to spend a quarter to a fifth of their time on some of Equiniti’s biggest projects, collaborating with those on the graduate and ‘rising stars’ programmes. “While this group work on these challenges, they must also look at their teams and use them to fill the gaps created when they step out of the day job,” she added.

During the course of the discussions, Charlie Wagstaff, Managing Director at Criticaleye, emphasised the importance of alignment between the CEO and HRD on this issue. “The HR director needs a comprehensive view of the capability within the organisation and how individuals can be upskilled for the future. To think only about the here and now, rather than the next phase of a business, is a mistake,” he said.

CEOs and senior executives have a responsibility to constantly improve their skills and knowledge, while also empowering and developing those around them. Benny Higgins, CEO at Tesco Bank. He noted: “The beating heart of any business is its people; they are the responsibility of everyone, not just the HR director.”

Matthew Dearden, former President for Europe at Clear Channel, built on this point and said: “Unleashing human potential is an inherent leadership responsibility. You can’t delegate or outsource that – although, you should look to the HR director for support.”

Problems occur when executives are overly egotistical, or become complacent because of success. “If you think you’re perfect, you’re done, because you’re doomed to never be better than you are today,” Matthew commented. “You need to embrace being imperfect and be honest with your colleagues, so you can support each other.”

Although it may take time, you should build people up to follow your lead and, eventually, take the baton from you. “You need to cherish, rather than worry about the fact that people are fine without you – that’s a sign that you’re building a good team and organisation,” Matthew concluded.

These views were shared at Criticaleye’s fourth Human Resources Director Retreat, in association with Legal & General Investment Management (LGIM).

By Dawn Murden, Editor, Advisory

Planning for the Best Exit

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The expected frenzy of private-equity deals in 2014 hasn’t quite come to pass. For CEOs with an eye on the exit, a secondary buy-out remains the likeliest route, with many opting to roll with a deal so they can keep building the business. While the opening up of the public markets is certainly another welcome option, trade buyers are continuing to show caution due to perceived overpricing.

Indeed, with the availability of debt back at levels seen in 2006 and 2007, valuations have been the sticking point for a number of transactions. “Pricing expectations are high,” says Stuart Coventry, Partner at corporate finance firm Jamieson. “Bids often come in below where the sale-side expectations were set, and those expectations have probably been built on the back of a very bubbly IPO market earlier in the year.”

To maximise the value of a sale, the CEO and management team need to stay focused on the fundamentals. Rob Crossland, Chief Executive of employment services company Optionis, which completed a secondary buy-out through MML Capital earlier this year, says that “in any kind of exit you need to demonstrate how the business has grown under your tenure but, equally, why there is more growth to come”.

The potential for scale is what drives value, often through global expansion. Simon Tilley, Managing Director at corporate finance firm DC Advisory, says: “[PE investors] are getting much more excited about opportunities where there’s either a UK business that operates overseas already, or there’s an opportunity to take it overseas and get more international exposure.”

Grant Berry, Managing Partner at private equity firm NorthEdge Capital LLP, comments: “Nobody wants to buy a business at the top of the market, so it’s important that when someone is coming in on the buy side they are confident about the business being able to grow in the medium to long term.”

Fit for the Future

From the outset, the management team should be assessing the market and deciding upon who the potential buyers might be. Catherine Wall, Non-executive Director at investment management firm Mobeus Income and Growth VCT, says: “What is the totally compelling story for their business? Does this acquisition give [a buyer] entry to innovative or fast growing markets, products or customers? Does it give them new skills or capabilities?”

Ian Edmondson, Chairman and Managing Director of Dunlop Aircraft Tyres, says: “Understanding the likely interest of different potential owners will help to define the exit. This needs to be done by exploring, networking and developing a range of relationships…

“In some cases there may be equally interested future owners from different backgrounds, meaning a possible secondary buy-out might be just as likely as a trade sale. If the current owner wants a complete 100 per cent exit at a point in time, then an IPO is not usually the favoured option.”

Douglas Quinn, Chairman of homecare provider Baywater Healthcare, comments: “You want to end up with a strategy that is very portable. Thinking through all the options and having a range of scenarios depending on the circumstances is very helpful.”

The chairman, usually appointed by the sponsor, certainly has a role to play here in ensuring there is alignment on the exit strategy. Ian Stuart, Chairman of four mid-market PE-backed companies, including manufacturing concern Aspen Pumps, says: “It’s about getting people around the table to talk together and be honest about what they want, and achieve a compromise.

“Specifically, if private equity wants to exit later and the management want to go earlier, you will generally arrive at some sort of incentive arrangement for management to stay longer.”

Of course, preferred exit routes won’t count for much unless the management can demonstrate strong performance, good governance and show there are no nasty surprises for buyers, such as big ticket customer contracts coming up for renewal, leasing issues or weak intellectual property. “You can’t dream those up at the last minute,” says Gerry Brown, Criticaleye Board Mentor and Chairman of logistics concern NFT.

The importance of succession cannot be underestimated. “We worked on the buy side of a deal that fell through over the summer, where the owner CEO wanted to exit but there was no work put into succession planning – it’s just awful when you see that happen,” says Simon. “It’s partly down to the value, because you won’t get the same price as if you’ve got a strong management team solution in place, but it also comes down to deliverability and, in this case, they couldn’t get the deal [finalised].”

It comes back to having a long-term approach so that the business is an attractive proposition. Tania Howarth, Chief Operating Officer of frozen food company Iglo, says: “Any PE-backed CEO has to balance exit considerations with the need to focus on building a strong, sustainable business…

“From the beginning, a CEO needs a strategy to build a better business and then understand where on that journey his or her current investor will exit, so that the business evolution can be tied into the investor goals.”

Every step must be taken to eradicate easily avoidable mistakes that either damage a valuation or scupper a deal. After all, the exit process will be demanding enough for a management team, without them having to address deep-rooted issues in the business at the last minute. Ian Stuart says: “Don’t get so distracted by the exit that the company goes haywire in the meantime. You’ll then almost certainly have a bad exit if results fall away.”

According to Rob, it’s important to keep having conversations around the exit. “Having done it twice now, [I know] you need to be discussing it sooner rather than later. It should definitely be on the strategic schedule for review at regular points as, if this isn’t the case, there’s the danger of becoming misaligned and unclear about the future.

“Private equity, I think, has a bit of a challenge, because initially they don’t want people talking about exit… They want them focused on the day job. If they let that continue, I think that can create some difficulties down the line.”

Timing has a part to play in any sale and that’s not necessarily something that can be controlled. Pardip Khroud, Investment Manager at private equity firm LDC, comments that political and economic uncertainty can suddenly have a significant impact on the behaviour of buyers. “It makes businesses far more difficult to value and deters potential buyers from committing,” she says.

The nightmares of private equity occur when communication breaks down between sponsor and management team, resulting in misguided assumptions. It largely falls on the CEO to ensure this doesn’t happen, so there is a healthy focus on performance – short and long term – which is what will matter the most when a potential buyer does come along.

As ever, a little luck always comes in handy too.

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

Creating a Culture of Succession

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Egos, personal agendas and the demands of the day job frequently undermine good succession planning. It’s up to the CEO to establish the agenda and set the tone by giving full support to programmes which identify future stars and nurture those who may one day occupy important management positions. Indeed, the whole board needs to be pushing and probing to find out where the talent lies in an organisation.

Tim Eggar, Criticaleye Board Mentor and Chairman of Cape, which provides services to the resources sector, suggests that risk, strategy and succession should be seen as priorities for discussion in the boardroom. In terms of the talent agenda, he says “it’s probably the area where the board can both protect and create the most shareholder value”.

It’s about identifying potential leaders who can fill the top roles and getting a picture of the strength of the management within an organisation. “The board has a clear obligation to form a view on the quality of people at the ‘ex-co’ level,” he comments. “In my view, it should actually be taking an interest in… one layer below the ex-co [too], and also all management development plans by the ex-co.”

Big picture

Beyond asking the standard question about what to do if a CEO falls under the proverbial bus, there needs to be other conversations taking place, such as whether graduate recruitment is taken seriously or whether there is a junior management development plan. Ian Ryder, Chairman of information services provider DatacenterDynamics, says: “Its leadership skills for all levels, not just board level. If you don’t have an embedded process… within the organisation for developing and growing talent, then you’ve got a problem.”

Kai Peters, Criticaleye Thought Leader and CEO of Ashridge Business School, says: “What you’re trying to do with leadership development is fast-forward people’s experiences… If you want someone to get up-to-speed faster you have to present them with all kinds of different contexts to make sense of.

“What then happens, psychologically and neurologically, is they start absorbing these different experiences. People begin to understand how to behave in many more situations than they otherwise would have known, not only on the basis of different projects but also with different nationalities for organisations that work with or have sites in other countries.”

For Hayley Tatum, Senior VP for People at retailer Asda, it’s important to take into consideration what’s happening in people’s lives when looking to develop them and take them to the next level. She explains: “You’ve got to balance what people are doing, the ages of their children and the likelihood of them being as mobile as you need them to be.

“You’ve got to be very personal about this and not too process-minded so that you don’t forget that these are people’s lives. That’s a big point. Secondly, it is about giving people breadth of experience, so you are building capability to deal with the unknown.”

Being part of Walmart, says Hayley, provides Asda with plenty of scope to move people into both start-up businesses and mature operations of immense scale across a range of locations. “This is very testing and challenging,” she comments. “You know that it’s providing a good grounding for leaders of the future to have those experiences.”

It’s about taking people out of their comfort zones. Howard Kerr, Chief Executive of business standards company BSI Group, recalls that he was working for private trading group SHV Holdings when, at the age of thirty-six, he was made Managing Director of a joint venture in Thailand. “When you promote people early you find out quickly whether they really have the capacity. Not everybody succeeds. You’ve got to take risks.”

The difficulty lies in judging which people not only have the talent but are serious about fully committing. Hayley comments: “It goes wrong when there isn’t enough transparency. Individuals worry about telling the truth. They’ll tell you they are fully mobile and will go anywhere, but the reality is they can’t, not all of the time.”

First-class leaders

It’s easy to think of companies which have made the headlines when a CEO departs and there’s no replacement in the wings. The fact is many companies are flying blind about talent and fall woefully short when it comes to creating a plan that caters for the short, medium and long-term needs of the business.

According to KPMG Partner Robert Bolton, who leads the Big Four firm’s Global HR Transformation Centre of Excellence, it’s appropriate to have a next-in-line approach to succession for the executive team, but more imagination is often required when it comes to identifying and developing the tier of leaders who are coming through below.

He says: “A lot of what is done for leadership and management development is a waste of time and money. It’s effectively an exercise in junkets. There’s a lot of delusion about people going on these events and they say, ‘Oh, it was fantastic and wonderful, it’s transformed my life,’ and it makes not one jot of difference to organisational performance.”

The underlying issue is the structure of the organisation they’re working within. Robert says: “Some of the best leadership development is opening up the eyes of potential leaders to the organisation system: to be able to stand back and understand the influence it has on them and other employees as well as how they, as leaders, can shape it to drive behaviours and… performance. It’s absolutely fundamental.”

This is where it can get difficult as, in the short term at least, it may not be in everyone’s best interests to think differently and challenge the status quo. It’s one of the reasons why a CEO has to show courage so that the mentoring and coaching programmes, combined with projects and secondments, are creating people who are capable of getting the best out of themselves. Moreover, it requires a CEO to realise that good leadership goes way beyond their own character, personality and desire to ‘lead from the front’. 

David Dumeresque, Partner at executive search firm Tyzack Partners, says: “It should be driven by the board and the chief executive should be putting pressure on all of his direct reports to develop their subordinates for leadership roles. How they drive it may well be through the HR departments, but HR won’t succeed without engagement from the line leadership.”

In many ways, good succession planning should form part of the cultural fabric of a business. Ian says: “Frankly, the quality and approach to talent development in an organisation is almost wholly, in my 35-40 years’ experience, linked to the values, ethics and behaviour of the chief executive.”

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk