The "Soft Issues" Can Destroy Value Creation
For all of their financial acumen, private equity professionals often underestimate the impact that so-called "soft issues" (e.g., leadership, culture, governance, etc.) can have on the businesses they steward — and their company CEO's are generally complicit in this failure.
What is Leadership Risk?
In fairness to private equity professionals, much as doctors make the worst patients, senior executives are notoriously challenging to manage. The mindsets and behaviors of the men and women who have risen to C-level responsibility are constantly in flux (e.g., senior team dynamics shift over time, workplace behavior changes under personal stress, the Emotional Intelligence of leaders evolves/devolves, etc.). And. since these mindsets and behaviors can directly impact portfolio value, these "soft" variables introduce an unknown level of nonfinancial uncertainty into the risk assessments that guide most private equity decisions.
These uncertainties may constitute a significant "leadership risk" if they go unaddressed and unmitigated (i.e., they remain un-"hedged").
Identifying and Hedging Leadership Risk: Practical Guidelines
The good news is that the various elements of leadership risk are readily identifiable. The bad news, however, is that few investment teams make mitigating these "soft" risks a priority.
Those charged with post-acquisition governance of portfolio companies should first diagnose the degree of leadership risk exposure at each portfolio business — and then move to hedge this risk, using an assortment of intervention strategies.
Several years ago, Catalyst's co-founder Glen Waisner identified ten distinct elements of leadership risk, which are listed below. These elements represent factors that have been shown to contribute to portfolio company underperformance. Glen also developed practical strategies, interventions and guidelines for constructively dealing with each of these ten elements. To learn more, please contact us for details regarding how Catalyst can help you improve the performance of the leadership teams at your portfolio companies.