I wrote this article for the Tenzing website where I work as Entrepreneur in Residence.
Partnering with a private equity firm change how you operate and your staff will notice. In this article, I discuss the cultural pitfalls of blaming the investor for decisions and explain how senior leaders can manage change more effectively.
While the path to exponential growth varies from business to business, two things remain consistent across all PE-backed firms – the need for effective change management and clear communication. However, under pressure, it can be tempting to blame the investor for the modifications you’re making. I’m here to tell you why this is a real no-no and what you should do instead.
Don’t bring the investor into the room
Work with private equity investors and you’ll agree to grow your business to around three times its original size. To achieve this, your business might move from short-term planning to delivering against steep three to five-year growth plans.
A good CEO continuously communicates with their employees, shares what they’re doing and what’s coming up next. But, when the words are flowing, it’s easy to accidentally cross the line into oversharing. Which can make you look like you’re not the one in charge.
This happened recently with a company we’re currently working with. I had a call with two senior employees from the business. At the last board meeting, the CEO let slip that Tenzing wanted to see a product roadmap. Both of the people I spoke to said: “We need to provide Tenzing with a product roadmap because the investor wants to know what we’re developing.”
So, what’s the problem with this?
Before an investor joined the business, you as the CEO and your executive team were visible to and known by your staff. Your employees saw you in meetings or around the business and they’d worked with you for a long time. As a result, you were a known quantity that people could trust, albeit one that could play God with their lives and careers.
However, as soon as you talk about ‘the board’ – or the mysterious “investor” – your employees aren’t sure who you mean. By introducing an unknown quantity into the equation, there’s an awful realisation that there’s a new God in town. In your employees’ minds it feels like a greater authority is pulling the strings. One that they don’t understand. And this can feel really frightening for your staff.
What’s more, it erodes trust and confidence in you as the CEO, which is never good for business.
How CEOs can hit rock bottom
That’s not the worst of it as the situation can deteriorate further. In a rock-bottom scenario, CEOs continually go with the investor’s suggestions rather than discussing, debating and pushing back on ideas that don’t fit with the business’ strategic goals. Not only does this weaken the CEO in the eyes of employees, but it can look bad to the investor too.
What PE firms really want is a fantastic company that’s built a great growth story and is worth more this year than it was last. One that’s headed by a leader who’s in control, not someone who leaps in different directions doing whatever the investor has most recently suggested.”
If your investor gives you an idea that you believe is good, then do it. But don’t do things you don’t believe in because you think the investor wants it.
Strong leadership is also important because employees perform best when their leaders act in a predictable way. Which means, at times of change, when the business needs to step up and deliver brilliant performance, CEOs must be at their most trustworthy and inspiring. And to do this, leaders need to be perceived to be in control at all times.
Business transformation through effective leadership
Remember the two employees who thought their company needed to provide a roadmap because Tenzing wanted one? This gave the impression that the investor was in charge, not the CEO.
A better alternative was to tell a different story, actually the truth, and so I asked the employees whether they thought other people in the organisation wanted to see a product roadmap. Did their sales team want to know what they needed to sell next quarter? Would a product roadmap help their engineering team understand what they were building next and why?
Of course, the answer to all these questions was: “yes, everyone wants that visibility.” Which reveals a common truth – that companies shouldn’t provide anything to the investor, or at least not very much, that they don’t already use in the business.
In this case, the message the CEO needed to communicate was that the business, not Tenzing, wants more visibility.
This is a far more inspiring message and it boosts employees’ view of their CEO as the person in control. Of course, the investor might have ideas that influence the direction of travel, which is absolutely fine. But the CEO still needs to lead employees through change. To do this there are two main tactics I recommend leaders follow:
1. Present changes in direction as your own
When I ran a business, I never mentioned the investor. The goals I agreed with the PE firm became our goals as an executive team. It’s not that you pretend the investor isn’t there but it’s about saying: “We’re now a private equity business so for the next five years this is what we need to achieve together as a team.
2. Explain the why, not just the what
As CEO you need to get really good at explaining your purpose and your strategy. Not just what you’re doing but why: “Remember, we’re building long-term value in this business over five years. This is the plan, this is why we’re doing it and this is why it’s good for customers, stakeholders and employees.” Show your teams how the whole thing stacks up.
Taking your business on a steep growth trajectory takes courage, ambition and strong leadership skills. And a big part of being a great leader is inspiring confidence and trust through the right kinds of communication.
You’ll be surprised how much change and uncertainty your teams will tolerate if they know you’re telling them the truth. So own your decisions and communicate change in a way that inspires confidence. Do this, and your business will have the leader it needs to deliver against its most challenging objectives yet.