Turnover and Executive Uncertainty
In recent times, with the disturbing increase of CEO and C-Suite executive turnover, more emphasis is given to effective “on-boarding” to diminish lost productivity around executive turnover.  It is much the same with PE transactions, where there is a two-way “on-boarding” process, as both executives and PE owners size up new expectations and roles for each other.

Typically PE investors are buying leadership talent as part of the deal, but who that covers is often not apparent to those who are not directly involved in making the deal.  PE firms and the top leadership team must be very sensitive to the impact that the change of ownership will have on the senior team.  Is everyone staying?  For how long?  Is there uncertainty about who is in and who is not?  Executives who do not know their fate are likely to be seeking other opportunities, and may leave just when you need them most.

Stay-On Incentives
When properly designed, executive incentives can create laser focus for the senior team, but we have also seen it create dissident fractures.  In one client organization, the executive packages intended to incent the senior team to stay on inadvertently created counter-productive motivations.  A very small subset of executives agreed to continue on short term more because of the highly attractive stay-on bonus than because of an all-out commitment to the new long term company direction.  Consequently, there was not clear alignment between individual, team and company exit strategies, which impacted decision making criteria and time horizons.  While it should not have been a surprise, cohesiveness around company goals, confidence, transparency within the team, and trust all diminished accordingly.  To make matters worse, the lack of cohesiveness at the senior team level inevitably trickles down to create confusion in much of the rest of the organization.

PE Owner Involvement
Another area to clarify is just how involved PE owners expect to be.  Dealing with PE owners is different from dealing with boards of directors in publicly held companies, and the leadership team needs to manage this difference.  On the one hand, CEOs are sometimes surprised at how active PE owners are, and how deeply into the business details they wish to get, sometimes reaching far down into the organization.  The typical protocol of respecting lines of reporting relationships in publicly-held corporations may be ignored by PE owners who will seek answers from whomever they please.  Employees feel obligated to respond but can be confused about how to do so.

On the other hand, lack of sufficient involvement from PE firms at the higher, strategic level can be equally confusing.  Trying to open up a more direct and candid communication around possible strategic initiatives, one CEO actively engaged those PE investors with relevant industry knowledge by including them early on in strategic planning sessions for two-way dialogue.  His purpose was to benefit from their broader industry experience but also to gauge their appetite for expansion into new ventures.  Afterwards, it proved difficult to  interpret their lack of follow up and engagement in the process going forward, threatening the ability of the senior management team to move decisively.

Most PE owners are expecting to buy an intact, high performing senior team, and are not looking to be experts at organizational and infrastructure issues, or leadership team talent development.  In fact, they are often impatient with any such issues.  The CEO and the senior team must find ways to work through organizational challenges, with or without PE owners involvement or support.

There is an important lesson to be learned here:  PE investment firms do not always seem to realize the impact of their ownership status on their companies’ leadership teams, and they need to manage themselves more effectively to make their investments more successful.  But who is going to deliver that message?  Typically the burden of figuring out owner-executive working relationships is entirely one way: left up to the CEO and the top management team.  Again, managing an equity owner is different from managing a board member.  Plan to devote time and effort to this task.

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