Reducing Risks when Working with Virgin CEOs




Diana, Princess of Wales, was a naïve young woman with no practical understanding about day-to-day life as a member of the Royal Family. Her mother-in-law encouraged Diana to consider her a mentor in adjusting to the dynamics of being a Royal. But the Queen could hardly be a dispassionate mentor on how to manage the Queen and the Queen’s son! The Queen also had a busy life being Queen. She expected Diana to reach out to her. But Diana never did.

Everybody had the best of intentions. The execution was flawed.

The result was that Diana stumbled her way through life as a Royal in ways that proved tragic for herself and for her children. (Bedell Smith, 2012).

This vignette serves as a framework for the dysfunction we have observed in private equity dominated Boards of Directors working with Virgin CEOs.

A Virgin CEO is someone who may have been a Founder of a successful company or a CEO/family member of a second generation+ family-dominated business. The leader had a Board that was composed of friends/family. The leader is inexperienced in reporting to a board that engages in audit or oversight.

A Virgin CEO is often someone who is thrilled with the money and independence that comes from running one’s own business. But for the business to reach the next level of growth, greater infusion of capital is required. The Virgin CEO tells the PE partner she understands the tradeoff that must be met: more potential financial gain at the cost of less personal freedom of action.

Intellectual understanding does not always translate into unlearning successful behaviors that have now become a habit.

The Virgin CEO’s struggles to adjust to new power realities creates friction for investors, employees, and customers. Can PE partners help reduce the risks associated with this friction? This article will discuss practical techniques Private Equity partners can take with their Virgin CEOs.

A Board is a Board is a Board

Private Equity Dominated Boards of Directors have their own unique rules of the road. And large cap public companies have their own unique rules of the road. It helps to provide Virgin CEOs with a roadmap for how to work with PE dominated Boards, particularly when such CEOs have little to no experience with such entities.

CEO Guide to Working with PE Dominated Boards

  1. Everybody is responsible to someone else. You have a formal reporting responsibility to the Board of Directors. And the PE partners on this Board have a formal reporting relationship to the institutions or individuals that helped fund our investment in you. You may have loved the life you once had by feeling you had the last word in decisions. Get over it or quietly get out. In our world, everybody is responsible to someone.
  2. “Nose In” / “Fingers In”. A cute phrase in corporate governance literature is “Nose In/Fingers Out.” In other words, let the CEO run the business on a day-to-day basis. The Board should focus on asking questions. Leave the CEO alone to execute the game plan. At private equity dominated boards, this slogan does not apply. Institutional and private investors expect their private equity partners to be deeply involved in the investments. PE fingers are always in operations. It is not a reflection on you if this happens. “ If we trust that the work you are doing is on track, you will find we still have fingers in your operational decision making. And if we don’t trust the work you are doing, two of our hands will quickly be on the steering wheel!”
  3. Rattle Our Cage. Everybody leads busy lives. It is up to you to rattle our cage before the next board meeting. We will get over the interruption. We will not get over being kept in the dark by you.
  4. Bring us negative news as soon as possible. With other types of Boards, there may be enough lag time between meetings to allow you to identify a problem and then declare “problem solved!” We don’t work that way. As much as we hate to hear bad news, hearing about bad news late in the game is even worse for us. Late in the game is defined as more than 24 hours passing between you hearing about the problem and us hearing about it.
  5. Organize the Board agenda by priority. At some large company public boards and at many nonprofits, the Chairman/CEO manipulates Board focus through the use of the agenda setting process: have the start of the Board meeting agenda be dominated by routine/procedural matters; have the middle of the Board meetings be dominated by employee Show & Tell presentations; and leave the most controversial matters to the end when Board members are concerned about catching trains/planes. This tactic will not work with us. If you don’t put the most controversial issue at the top of the Board agenda, the PE partner on the Board will make sure it gets there anyway.
  6. We come across like we expect perfection all the time but we really don’t believe anyone can achieve it. Even us! If you make an error, disclose it as soon as possible and tell us what you have learned from the experience. Tell us what YOU have learned. Don’t blame others. You were the one with ultimate accountability.
  7. If you say “yes” to our suggestions you had better mean it. We don’t deal well with CEOs who tell us “yes” to avoid an argument and then implement “no.” You are a leader. It is OK to push back but have evidence to back it up.
  8. We may act as though we expect you to have all the answers, but we know you do not. We are here to provide audit/oversight. Do not forget we are also here to provide advice/counsel. Call us up. Use us as a sounding board. We will perceive this as a sign of trust and a recognition that you understand that your knowledge has limitations. Ask us to put away our “audit and oversight” hats. Ask us specifically to put on our “advise and counsel” caps. Make this specific suggestion since the default hat we wear is “audit and oversight.” We will try to help, using our experience and our broad network of contacts. Asking us for advice/counsel is not considered a sign of weakness.

Elizabeth the Queen, not Elizabeth the Mentor

Earlier in this article, we mentioned the relationship between Diana and the Queen as an example of good intentions but poor execution. What can PE partners learn from this story:

  1. The Queen cannot provide confidential suggestions regarding how to manage the Queen and her family. There are limits to the degree to which a PE Partner can provide confidential suggestions about how to best manage the PE Partner and fellow Board members.
  2. The best Mentor is someone who is not the PE Partner. It is going to be an outsider who understands the dynamics of PE Boards.
  3. Crisis avoidance is about solving issues before they become acute. The Queen had good intentions. But she lacked the time to proactively reach out to Diana on a regular basis. PE Partners will say, “I’m available to you.” But they are often too busy to reach out proactively. And the CEO will be too proud to bring up matters early on. Bring in a mentor with the mandate and the time to proactively reach out to Virgin CEOs.

Virgin CEOs may be successful or replaced, yet while in place, the stresses need to be managed. Good intentions aren’t good enough.

Reference

Sally Bedell Smith. Elizabeth the Queen: The Life of a Modern Monarch. New York, Random House, 2012

Written by Larry Stybel and Maryanne Peabody, co-founders of Board Options, Inc. providing global retained searches for Board members and leadership consultation producing high potentials. Many thanks for Brett L’Esperance of Sankaty and Mike Ahearn of Greylock for reviewing this paper and making some great suggestions.

 


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