Accelerating Private Equity Board and Portfolio CEO Alignment

April 14, 2021

At RHR, we spend a lot of time working pre and post deal with PE firms and their portfolio companies. A critical factor in accelerating value creation is strong, enduring alignment between the PE board and portfolio CEO. We increasingly hear about the elements of surprise from both deal partners and CEOs in the first year of ownership as the board/management-team relationship unfolds.

For example, a deal partner we often support describes how a founder CEO simply doesn’t get it. “I’m surprised. I thought we were aligned on the value-creation plan, but he just can’t seem to prioritize. There’s always one more shiny thing to chase, and that can cause a lot of organizational swirl. We have to keep reining him in, and it can be exhausting.”

On the other side of the partnership, a CEO describes her experience: “I’m not used to being so managed and the board being so involved in the details of the business. I’m surprised they want to get so deeply into the minutiae of the numbers. It creates so much work for us. We just want to get on with managing the business.”

This is especially the case at the lower-middle market space when PE firms invest in founder-entrepreneur-run businesses. Part of the rub is that founder-entrepreneurs are truly working with a proper board for the first time. Many are not used to the level of oversight they encounter. In addition, they are being asked to lead and manage in a very different way than the one that has been key to their success to date. There is a steep learning curve associated with the shift from founder-entrepreneur to a more professionalized CEO of a PE-backed business.

Tensions like these are predictable and have much to do with setting clear expectations at the front end of the relationship. It seems quite obvious that having a conversation about ways of working would be second nature. It is less obvious to have a deeper conversation about personality styles—similarities and differences that if understood could forge a more complementary board/management-team relationship.

Generally, time spent with one another learning differences in thinking and working styles will eventually unveil similarities and contrasts that have to be understood and worked through. The process of learning can be fraught at times. We have witnessed the inherent challenges on both sides of the equation.

We also noticed some striking personality differences that are in play in many instances. We looked at the Hogan personality profiles of 39 CEO founder-entrepreneurs and 45 deal partners across 40 different organizations. The Hogan includes a number of different personality assessments: the Hogan Personality Inventory (HPI) describes how we relate to others when we are at our best; the Hogan Development Survey (HDS) describes qualities that emerge in times of stress that can derail people’s chances of success; and the Hogan Motives, Values, Preferences Inventory (MVPI) describes the core goals, values, drivers, and interests that determine what we desire and strive to attain.

Drivers and Motivators

Both groups are driven to succeed and highly motivated to make money, and they have a high desire for control and to be in a position of authority. In general, they are ambitious, assertive, and clear minded about goals.

If these energies are aligned and focused on the same set of goals, it is easier to get traction earlier. The challenge comes when somewhat hardheaded and confident people are misaligned (cue the sound of butting heads).

Noticeable differences exist between the two groups in their respective risk appetites. On average, CEO founder-entrepreneurs are spontaneous, flexible, and willing to take risks. Deal partners prefer more predictability, order, and structure—they want to reduce and control risk. CEO founder-entrepreneurs are not afraid to try new things and break the mold. They tend to be more agile and more comfortable with ambiguity.

Again, if these differences are appreciated, diverse perspectives can lead to better outcomes—founder-entrepreneurs push boundaries and deal partners reel them in to land in a place of positive compromise. If the contrasts are not understood, and worse, personalized, it’s easy to get stuck with, “He is so impractical and risky,” or “They are so pedestrian and risk averse that they are missing the big-picture upside.”

Leading and Working Styles (HPI)

Both deal partners and CEO-founder-entrepreneurs are highly action oriented, but generally, CEOs want to move faster and are less likely to ask for input and guidance before making a call. They are used to making quick decisions in order to capture opportunities and would rather be wrong and fail fast than overcomplicate issues. CEOs are generally comfortable in the gray areas, asking questions to think through new ideas and insights, whereas deal partners tend to be less contemplative and more practical and to value results over abstraction. Again, the tension between dreaming big, pushing the boundaries of what is possible, and moving quickly to capture opportunities (the founder-entrepreneur mindset) and a more pragmatic, predictable approach that involves structure and focus (the deal-partner mindset) could make for a highly complementary partnership. However, without a full appreciation of these differences, they can be regular sources of tension and frustration.

Overused Strengths and Derailers (HDS)

Under pressure and stress, deal partners and CEO-founder-entrepreneurs show some important differences in their leadership styles. At their best, CEOs can be experienced as charming, creative, and outgoing. At their worst, they can be seen as impractical, limit testing, and impulsive. Left unchecked, they risk launching too many initiatives without adequate follow-up to ensure execution or losing focus on what is important. In moments of stress, they tend to default to their own sense of confidence and risk undercommunicating to their stakeholders.

At their best, deal partners are experienced as having a critical eye and being more keyed into the knock-on effects of certain organizational decisions. They can serve as the side and rearview mirrors for a CEO. Under pressure, these traits can become amplified and then be experienced as cynical and distrusting. Combined with a tendency to control risk and dig into the details when results are not forthcoming, tensions can appear, given each group deals with stress in very different ways. CEOs want to run faster, paint a positive picture, and figure it out themselves. Deal partners want to be more involved and get into the detail and will demand a realistic business picture.

These insights represent themes we see reflected across Hogan profiles. Individuals are higher and lower across the scales we examined and do not all fit nicely into the same box. For example, some founder CEOs are as risk averse as deal partners. Some deal partners can be impulsive decision makers. Taken as a group though, there are enough differences to reassert the need to dig into personality profiles to accelerate alignment.

A Simple Approach to Unearthing Personality Differences

Some of our private equity partners have bought into the notion that a) the Hogan assessments provide valid insights into leadership styles, b) understanding style differences between CEOs and deal partners is a useful exercise, c) having an alignment conversation and developing a plan to manage these differences help build a strong and trusting relationship faster, and d) interpersonal understanding reduces unhealthy conflict.

We use a simple approach of having both the CEO and deal partner(s) complete the Hogan assessments. On some occasions, profiles of other members of the management team are included. The test takes about an hour to complete. Once deal partners have completed their tests, those results can be reused in future comparisons. RHR’s Hogan Center of Excellence conducts a deep data comparison to identify points of similarity and difference and implications for the working relationship. We then facilitate an alignment conversation to work through the insights, develop a plan to manage differences, and ensure diverse ways of thinking and operating are complementary. Interpersonal understanding helps proactively identify rub points and maximize the benefits of difference.

If you are interested in learning more about our ability to accelerate alignment building between CEOs and deal partners, please contact Steven Gilbert, private equity lead at RHR sgilbert@rhrinternational.com To learn more about RHR’s PE solutions, please visit https://www.rhrinternational.com.

Steven Gilbert
Steven Gilbert is a Senior Partner and leads RHR’s private equity business vertical. Leveraging his sharp analytical skills, psychology background, and multinational worldview, he coaches leaders across a variety of industries.
Kristen_Gilson
Kristen Gilson is on RHR International’s data visualization and analytics team. Leveraging both her creative and analytical skills, she provides senior leaders with actionable, data-backed insights to help them to reach their greatest potential.