http://www.blog.kpmgafrica.com/wp-content/uploads/2014/09/2014-CFO-Survey-Report.compressed-1.pdf

The role of the chairman in private equity-backed companies

… continued from When the going gets tough: Managing underperforming investments

The survey research suggests the appointment of an effective chairman can make a significant contribution to the business through, among other things, ensuring the relationship between private equity and management remains collaborative.

The research revealed that 78% of respondents felt that the aim of private equity backers and management was well aligned at the start, but for close to one-third of our sample, the relationship worsened over time. Reasons given were usually related to private equity backers being unclear or changing their minds about the strategy for the business.

Conflicts over the timing and type of exit were also not uncommon and often arose through lack of understanding by private equity backers that management’s motivations may not be solely financial. Respondents of all types – both executive and non-executive directors – said that an independent chairman has a vital role to play as an interface between management and its backers.

An effective non-executive chairman can:

  • Translate and navigate the unfamiliar world of private equity for management.
  • Filter the private equity firm’s demands which may be unnecessary and a distraction to management.
  • Advise management on exit options, apart from outright sale, which can meet both parties’ objectives.
  • Ensure there is a good complement of skills on the board.
  • Help renegotiate incentive plans if things work out differently from the original plan.
  • Ensure fair value when the private equity firm is looking to sell on but management is staying in with another backer.
  • Add value through their operational knowledge and industry expertise.

The qualities of an effective chairman

According to Ken Brotherston, Directorbank’s Executive Chairman:

In a recent study conducted by Directorbank, 430 chairmen and NEDs considered the qualities differentiating a good and an outstanding chairman. The key findings highlighted a combination of personality traits and skills that make the difference: they are good listeners, effective communicators, have gravitas and often a degree of charisma. 

The key skill set includes an ability to see the big picture; good at managing meetings; striking the right balance between effective governance and effective outcomes; broad market experience and good business acumen and, most important of all, allowing the CEO and the executive team to run the business.

In short, not necessarily making decisions, but ensuring good decisions get made. The chairman must also, of course, ensure that investors and wider stakeholders have the best possible relationship with the business.

Feedback from survey respondents:

The chairman has a very difficult role to fill in dealing with the egos of private equity executives and management. If there’s conflict the chairman needs to bring it out in the open and broker a compromise between them.” – Chairman, Several sectors

The biggest battle for the chairman is getting management onside. You are often viewed as the private equity firm’s spy on the board and they’re also afraid that you have plans to try to run the company yourself.” – Chairman, CEO, Leisure sector

Private equity backers tend to take a shorter term view of the business than management, so it’s up to the chairman to balance what’s best for the business in the long run and bring all parties together.” – Chairman, Several sectors

Download the full report: [download id=”3″].

David Okwara
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