It has been 18
years since the lessons about corporate leadership in a recession were
learnt. Unfortunately, many of these have been forgotten by both
investors and managements of portfolio companies.
Principal among these is the failure to
understand that the corporate management mode required in the bleak
economic midwinter cannot always be delivered by those who you backed
in times of economic buoyancy.
Proactive
private equity investors are starting to appreciate that while
financial restructuring is necessary and will be expensive, on its own
it is insufficient to meet the challenges of the situation. The right
type of management is the other necessary ingredient.
The
concept of a CEO for all seasons is illogical. Those who realise this
and take early steps to modify management in a struggling business will
be better able to take advantage of the upturn when it arises.
In
these unpredictable times, maximising operational flexibility is vital,
leadership with ingenuity is a prerequisite and unshakeable commitment
to an inflexible plan is unwise. The conventional response of imposing
more stringent controls creates only greater rigidity at a time when
adaptability is required, and that means being open to the
counter-intuitive path.
Managing through turbulent times often
requires the abandonment of cherished projects, programmes and assets,
writing off sunk costs and changing the recent business model. These
are tasks that the emotionally committed incumbent management always
finds difficult and undertakes only with reluctance and delay.
Different
leadership skills are required and acquiring these should not be left
until investee companies are in financial distress. Hoping for a
manager of last resort to rescue the business is to neglect a crucial
issue.
There is an urgent need to reassess not just what is
achievable but who is able to deliver the revised out-turn. Dismantling
the scaffolding like this may not produce the business structure that
was originally intended, but times have changed. Ideally, the
management plan should now be programmed into two phases: the period
until the outcome of economic turbulence is clear and the period
following the out-turn.
Specific skills and a different leadership team are required in the first stage.
What
kinds of people are appropriate to the first phase? They should be
experienced in leading large businesses successfully during turbulent
times. There are very few around and fewer still who have done so on
more than one occasion. They need not and will not be industry-specific
in their experience, as the attributes they possess are applicable to
managing turbulence. They will have broad operational vision resulting
from being multi-functional. They must have the ability to motivate
managers to accomplish things they have probably come to believe are
not possible.
Their background will probably be
unconventional. They aren’t long-term hires for portfolio companies but
executives recruited to lead a business through the turbulent period
and hand onto to more conventional management a stable, restructured,
minimally damaged operation capable of taking advantage of the
opportunities available when the economic spring returns.
The
replacement of an incumbent CEO or chairman with a
industry-non-specific specialist remedial manager for a limited period
may be contrary to the accepted practice of most private equity
managers, but these are unprecedented times and this is only
controversial relative to practices established in very different
conditions. Twenty years ago, the concept of private equity was
unconventional. Now is not the time for private equity to abandon its
reputation for leading-edge solutions.