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COMMUNITY UPDATE

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The way a Chief Executive approaches strategy can vary depending on whether they are in a private equity-backed or publicly-listed entity. In PE, the exit gives a natural focus towards driving operational performance, while in a Plc it’s often necessary to construct a narrative which appeals to different shareholders about the long-term prospects of a business.
 
It’s not always the case, as each business will have its own pressure points and priorities. The danger, as Criticaleye’s latest Private Equity & AIM 2019 research shows, is that CEOs and leadership teams become so fixated on hitting numbers and performance that they allow strategy to drift off the agenda.
 
Martin Balaam, CEO of Pimberly, understands how easily this can happen. “A lot of your time is taken up by running a business and your specific department or function,” he explains. “When you’re starting to talk about and debate strategy, that’s longer-term and then, by definition, less immediate."  
 
The research supports these views, with 43 percent of respondents admitting that they need to improve the quality of the leadership team’s debate on strategy. Mark Silver, Chair of Cordic and a Criticaleye Board Mentor, comments: “Sometimes you’re going hell for leather trying to get the results, or you may be in acquisition mode, and there’s really just no time to think about and re-evaluate the strategy. So, I think it’s partly the nature of the private equity beast. 
 
“In the public environment, where you’re talking to a number of investors – and that is a much bigger part of your role as CEO – they’ll lead you somewhat towards thinking more holistically about the organisation.” 
 
Mark Whitby, Non-executive Chair of Codeplay and a Criticaleye Board Mentor, notes: “There’s an element of people continuing to pay a lot of attention to execution against the plan, the forensics of that, and so not coming up for air and taking a longer-term, more strategic perspective.”
 
At the Retreat, it was agreed that strategic priorities do differ between PE-backed and publicly-listed businesses. According to Martin, divergent agendas between the management team and PE-backers will occur as a business moves into sale mode. For example, there may be a reluctance to make major investments as it creates a negative impact on short-term earnings and any future growth will be for the next owner. 
 
“In PE-Land, that’s what I see,” he says. “In the early stage of your investment you are totally aligned, and then less aligned, and then at the end you can become completely misaligned because you’ve got a shareholder that has a totally different agenda to the business.” 
 
Mark makes a similar point. “When you start off in PE, you and the owners are completely aligned because you’ve gone through a journey of diligence together, whereby you’ve structured a business plan and a strategy to take the organisation forward. As you proceed, clearly that alignment is going to fall away somewhat.  
 
“My experience is that it really depends on the situation and the PE house – if you have a very open relationship with the PE house then you remain aligned pretty much throughout the time of the investment. If the relationship is much more distant, or the results are not going in the right direction, that’s when you tend to get misalignment.” 
 
 
Stakeholder Management 
 
In the public environment, the shareholder mix is frequently more complex. Martin says: “In a Plc, you might have dozens of institutional shareholders, and what I found when I talked to them is that they all have different strategies. Some have invested in you for capital growth and want to know what’s happening on a quarterly basis, and then others are income shareholders, so they are happy with modest growth and want you to look 10-20 years out.  
 
“If you’ve got a mixed bag of shareholders, with different views of what good looks like, it can be difficult. At the end of the day, they own the company and you have to set a strategy with one eye on what they want, because ultimately they’ll be the ones deciding if you’re any good or not.”  
 
Mark acknowledges that the situation in public companies is very different. “The strategy is set by the Board, and the CEO needs to ‘sell’ their vision to the shareholders. So, there you need to be much more focused on what you think is right and keep pushing the issue.
 
“Some minority shareholders won’t necessarily agree, and some major shareholders will come up with ideas that will influence the strategy – it's not entirely one way – but there’s a definite pull towards the CEO in a public company environment. This is less so in the PE-type world, where everyone needs to agree, and ultimately the strategy is owned by the investor.” 
 
Whether PE or Plc, the Board has an obligation to discuss and reflect on what’s in the best interest of the business. Fundamentally, the Chair must ensure decisions are not overly tactical and short-term. Kim Horsburgh, Relationship Manager at Criticaleye, says: “The Board will understand what the short-term pressures on the leadership team are, their severity and whether they need to be addressed.  
 
“High-performing non-executive directors appreciate that successful businesses must have one eye on the present and the other fixed on the future.” 
 
Mark comments that the Chair really helps in guiding strategic debate, but it’s also valuable for the entire Board to go away for a period every 6-9 months and revisit what’s going on. “Typically, it’s a good thing to do just before the budgeting process, so maybe 2-3 months before the end of the year, get everyone together.  
 
“You can review where the strategy needs to be refreshed, because of changes in the market, an acquisition or other particular circumstances. Then you can create or reaffirm alignment throughout the Board.” 
 
Mark Whitby also finds that you need to make a conscious effort to carve out time, once or twice a year, to focus purely on the strategic challenges. “We did this with one of our businesses recently, when we held a one-day strategy review session before the Board meeting.

"It was set up to be a discussion around the long-term strategic vision of the company, rather than operational performance,” he says.  
 
As Kim puts it: “Irrespective of the ownership structure, an effective Board takes responsibility for striking the right balance between strategy, performance and governance.” 
 
 
Findings from Criticaleye’s Private Equity and AIM Retreat Research:
  • 74 percent of leaders say they are facing business model disruption
  • Mentoring is the most effective leadership development tool for PE-backed and AIM-listed executives
  • 73 percent admit to being too inward-looking and focused on the day to day
  • 54 percent of leaders are keeping their options open when it comes to exit routes

To read the full PE & AIM Research report 2019, click here.