Leadership is a key value creation lever. It is the primary control mechanism that owners, investors and the board possess to effectively execute their value creation plans.
For a proof of concept, we put this to the test last year when we compared the senior leadership changes made at private equity-backed companies across different performance quartiles. We found that the best performing businesses are more likely to: make leadership change; make more change; and make change sooner.
On average, the upper performance quartile businesses made changes to increase the situational experience of the role significantly. These changes resulted in a slight decrease in domain experience. Only the lower performance quartile companies made domain-enhancing changes.
This shows that a great business isn’t just about visionary leaders. It’s about the team they build around them.
Complementarity in the leadership group, therefore, is a critical ingredient. Via our Leadership Dynamics offer, we help businesses build the right level of functional diversity and situational complementarity so that within a framework of unpredictable internal and external factors, the leadership team still has the flexibility to execute.
It’s a dynamic that’s particularly useful within private equity where there is a desire to drive diverse teams. At KKR, for instance, business leaders are tasked each year with building a diversity and inclusion strategy, which they must present to the Inclusion and Diversity Council. Carlyle require that 30% of its portfolio companies’ boards are ethnically diverse while, in the mid-market, ECI Partners now has an employee-driven DEI strategy.
A magnifying glass on DEI
Leadership Dynamics maps to this direction of travel but we go deeper than race and gender. We put a magnifying glass on diversity. We evaluate diversity plus balance and there is a growing body of public work in support. Matthew Syed, a researcher in the field of high performance, has captured the balance + diversity equation persuasively.
He stresses in Rebel Ideas that when it comes to problem solving, generating creative ideas or establishing new products, the power of cognitive diversity is profound. Engineering this into a leadership team “can deliver a massive uplift in collective intelligence,” he writes, and by natural extension, an uplift in performance.
The Leadership Dynamics suite of products – more on PACE shortly – allows us to focus on the impact that cognitive diversity is able to have within the boardroom and further allows us to conduct ‘blind’ leadership tests. By removing bias and prejudice from the hiring process, we serve as an agent of change for positive social and governance outcomes.
Blind tests also help manage the risks associated with groupthink where overly similar leadership teams will struggle to resiliently deal with new experiences.
In the majority of cases, our clients are looking for individuals with proven experience in private equity, and with the right behaviours. This is what our PACE product does. It’s a specialist behavioural framework evaluation which allows high-performing leadership teams to build their own customised profile, predominantly via an assessment of their strengths and weaknesses.
Not only does a greater focus on balance + diversity add to the bottom line, it enriches the wider company culture, helps break up existing assumptions and beliefs, and improves communication throughout the firm. It will be a key feature of competitive advantage for the next fifty years.
Samuel Robberts
Chief Product Officer, Leadership Dynamics
sr@draxexecutive.com
