PE-backed businesses are intensely focused on value creation against a set timeline with high investor involvement; the board plays a critical role in balancing investor expectations with the daily realities of running the business.

Marcus Shah, Partner, Head of Private Equity and Member of the Board Practice, gathered insights from Chairs, CEOs, and investors in mid-market PE-backed businesses to discover what it takes to create a truly high-performing board.

Marcus spoke to: Paul Howarth (Chair); Elizabetta Camilleri (Chair); Paul White (Chair); Emma Lancaster (CEO); Jo Cox (CEO); Ben Cole, (Investor); Kishan Chotai, (Investor); Thomas Maizels (Investor).

What does a highly effective mid-cap PE board look like?

‘A high-performing board fosters an environment that is both challenging and constructive,’ says Thomas. Three significant traits of quality in mid-cap PE boards came up time and again in our conversations:

• Complete transparency
• Mutual trust
• Open communication

These qualities must be deeply embedded across all cogs of the PE model – investors, CEO and Chair. Engagement and availability from both investors and management are crucial to fostering a ‘single team’ approach says Paul White. Regular, informal collaboration is needed alongside board meetings that Kishan notes must be ‘forward-looking and strategic, not bogged down in problem-solving.’ Ensuring the value creation plan is meshed with the business plan, maintaining a proactive risk register and effective use of NEDs are also key attributes of successful boards. The CEO/ Chair relationship is critical with Jo describing the Chair as, ‘the bridge between the PE and the business,’ finding common ground between investor and executive team priorities. Getting the chemistry right between these two is fundamental to the board’s effectiveness.

The role of the Chair: coaching, challenge and diplomacy

The Chair leads the board and ensures the value creation plan is delivered. In practice, this is a complex, relationship-driven role that requires a relentless focus on adding value without overstepping the executive team. Elizabetta says the Chair must assume an ‘independent role in aligning investor and executive priorities.’  A sentiment echoed by Ben who recommends establishing credibility as an independent voice and avoiding siding with either investors or management. The Chair acts as confidant for the CEO but must also address underperformance when needed. Equally, the Chair may need to challenge investors if unrealistic attitudes need recalibrating notes Paul White. The Chair can also educate the exec team on PE reporting requirements, offer expertise in areas such as M&A or going to market and advise on hiring. Essential personal skills for Chairs include high EQ, humility, intellectual rigour and decisiveness.

Tips for first time Private Equity Chairs:

• Develop an independent role – don’t be seen as a ‘PE insider’
• Communicate – talk to investors and the CEO before and after every board meeting
• Be humble – remember that it is the CEO who is doing the ‘real job’
• Engage stakeholders outside formal board meetings to understand perspectives
• Make an early impact in areas like hiring or M&A to build credibility with the executive team and investors

The role of the CEO: avoid surprises, present solutions

Having a 100-day plan, assessing senior leadership and engaging with customers can help build credibility with a new PE sponsor advises Paul Howarth. The key takeaway from all of our interviewees is that the CEO must take any potential issues to investors early. Investors expect there to be challenges but they don’t like to be surprised by them. Paul Howarth says it should always be the CEO who delivers bad news, rather than the Chair. The CEO can use the Chair as a sounding board for bad news, potentially role playing how to deliver the news constructively. Where there are problems, the CEO must see them as solvable; ‘the CEO needs to present solutions to problems, not just problems’ says Jo. They need clear strategic vision and drive to maintain commercial momentum with limited time to achieve results. Emma flags the ‘thousand days’ cycle in PE meaning there are only 700 effective days for value creation. Ben also highlighted the need to make decisions at pace with only ‘16 to 20 quarters to make a difference.’

Tips for first time Private Equity CEOs:

• Don’t be afraid to ask for help from the board
• Stay open, share ideas
• Understand investor expectations and communication style
• Don’t see challenge as a lack of support
• Make decisions quickly
• Embrace the board’s role in creating value and achieving the best outcome for the next exit

Sources of potential tension and how to handle them

Issues can arise when there is a mismatch between what the management want for the business and what the exit plan demands. Founder CEOs in particular may find it hard to remove emotion from the equation but ultimately our interviewees said the executive team must remember that the investor provides the funding so decisions should have economic rationale with  ‘data-based discussion rather than one based on emotions,’ says Emma. ‘The best management team see the opportunity and are looking for PE to provide the capital and strategic focus to accelerate growth,’ notes Thomas. When diffusing tension, candid communication is crucial. If investors feel blindsided into making decisions, they can feel as if they ‘have a gun to their head’ says Ben. The CEO will be expected to find a strategic solution – blaming ‘soft markets’ is likely to be challenged. The management team will need to outline a plan with the CEO/ Chair and investors in almost daily collaboration. It helps if the board is open to options beyond cost-cutting and able to grasp the nuances of the industry, although this can be more challenging with generalist investors. Longer holds are increasingly accepted and Kishan notes they can, ‘help achieve the long-term investment in people and processes; assets performing well in years 6-7 are no longer seen as inherently problematic.’

Debunking PE investor myths

Myths around how PE investors operate can perpetuate distrust so with the help of our contributors, we set the record straight.

Myth 1: PE investors want to fire you and take control.
Wrong says Ben. In fact, this would be a worst-case scenario for the PE investor as they prefer to back good people and achieve mutual success.

Myth 2: PE always expects continuously increasing numbers from day one.
Wrong says Kishan. PE often invests heavily in people in the early stages, recognising that initial profit growth might be flat or slightly negative due to these investments.

Myth 3: PE investors all operate from the same playbook
Wrong says Thomas. PE investors do not all operate in the same way; management teams should carefully consider which PE investor’s focus and style aligns with their outlook and ambition for the business.”

Mutual trust and increased communication have become increasingly important as PE investors have taken on a more operational role amid tougher market conditions. More than ever, the PE-backed board must reflect the highest calibre of expertise with investors and the executive team collaborating around a shared gameplan.

Marcus delivers interim management solutions for Private Equity clients. He has significant experience in advising boards in mid-cap and high growth Private Equity-backed businesses across the full investment lifecycle. Get in touch.