The Critical Link to Value Creation
DHR holds a distinction in the search industry, relevant to executing CHRO searches for PE Funded companies. Two members of the North America HR Practice are former CHRO’s of PE portfolio companies – Ed Flowers in Atlanta and Christopher Knipp in Dallas.
In the current and increasingly competitive business climate, with dynamic and shifting markets and associated customer requirements, the CHRO is one of the essential links to the successful growth and profitability of PE sponsored companies. The top HR officer is at the vortex, with the CEO, in defining and cultivating the culture and driving the talent agenda so critical to meet value creation objectives. HR leadership and associated practices and policies have a direct bearing on the velocity and adaptability of a company’s approach to the market. The CHRO’s role — to develop leaders, attract and grow talent, and create a culture of engaged employees in a dynamic environment – can make or break a company’s ability to meet aggressive performance targets.
Importantly, the required pace of change in a PE funded company often comes with a leveraged balance sheet and always with a discrete timeline to achieve value creation target. This change in ownership requires a sense of urgency, focus and discipline in all functional areas, including HR. Preferred candidates for this demanding role must be willing to exercise the cultural transformation rapidly with an eye on developing a highly motivated accountable workforce so high-impact initiatives can yield desired economic improvements. Whereas some may thrive in a faster paced environment, others may be less effective given the breadth of actions required that affect the entire human resource fabric of the company.
Celebrates and Preserves Culture
Culture drives performance and leadership drives culture. The CHRO is the top “culture carrier” and the most senior executive, other than the CEO, continuously focused on maintaining (and transforming) the firm’s culture in terms of values and behavior. This focus on culture is critical in any company, but it is especially crucial in fast-growing companies that need to recruit and assimilate large numbers of employees to meet customer / market demand and imbue ownership and accountability throughout the organization. Now more than ever, leadership must foster a culture of inclusion that embraces and rewards the diverse talents of employees. While it is important to celebrate “who you are” as a company and maintain diversity, it is equally important to be disciplined and process driven regarding employees who are not a good fit and respectfully help them exit the business.
“Berkshire invests in blue-chip management teams running companies that have developed a reputation for excellence in their market. We partner with the CEO, the CHRO, and the rest of the leadership team to preserve the aspects of a company’s culture that made it great in the first place, and potentially to evolve aspects of the culture the leadership team feels need to change to meet our collective goals for the business.”
Michael Anderson, Operating Director, Portfolio Talent, Berkshire Partners
Aligns with Business Economics
Along with culture being critical, the HR leader must also be strategic in thinking about how to support the business in the mission to build world-class teams in each function (and at the management team level). This requires a business-oriented HR executive who knows how to identify the key position holders – high-impact leadership roles that directly affect revenue, profit and productivity.
For example, if the mission of a fast-growth software / SaaS company is dependent on a next generation platform to annihilate the competition, HR better be focused on building the best engineering team in the world as fast as possible. Likewise, in a multi-site distribution or logistics business, the linkage between talent and profit and cash-flow is quite evident in the field in the ability of regional branch managers to achieve financial objectives. HR needs to know who the high performers are, develop or exit the ones who cannot be developed, and constantly be on the hunt for outside talent that aligns with the organization’s mission.
“There are plenty of HR heads who can deal with the tactical issues related to the workforce, compensation, legal and risk management and other traditional areas. The ones who drive real impact work closely with the Senior team, board, and the field to be sure the organization is focused on scaling and defining culture and understanding the roles that drive real value in the organization. They make sure we are disciplined in recruiting and development to find and cultivate the most valuable and needed talent to execute the thesis.”
Dan Tinker, Chief Executive Officer, SRS Distribution
Instills Change Readiness
During the lifecycle of an investment, PE sponsored companies almost always enable significant change to increase the velocity of the business and ensure optimum accountability. The pace of change is dictated by the PE sponsor’s investment thesis and corresponding operating plans developed by the management team. CHROs must build a change-ready organization, with a workforce that is nimble enough to maintain productivity through change and a management team fully committed to financial and strategic objectives. A culture that embraces new ideas and organizational development initiatives is a must. Transparent and direct communication across functions is required. Engagement of employees at all levels should be a constant objective to ensure a culture of ownership and accountability.
“In an agile, change-ready organization, the entire employee population is aligned around business objectives. It’s not enough to set annual performance goals. Leaders need to be able to clearly articulate the connection between individual goals and strategic objectives, evaluating goals as business needs change. This is an on-going dialogue that drives organizational effectiveness, not a check-the-box administrative exercise, and it requires a commitment from leaders at all levels of the organization.”
Stephanie Harris, Senior Vice President, Human Resources, Telular
Stays Out Front
As the Chief People Officer, it is not enough to be strategic and thoughtful about systems, measurement and the economics of the business. The CHRO must enjoy being IN the business and make constant and empathetic interaction with all levels of staff – from the Board to the management to the factory floor or engineering staff – a priority. Even with the best systems and processes in place, it is impossible to be credible in the role unless the CHRO practices “servant leadership” and the people in the company see him or her fully engaged in the business and working closely with all functions and employees at all levels. This must be a genuine effort to engage with and get to know the business at all levels. Employees will observe and follow the CHRO who leads by example, just like the CEO and others.
“The CHRO leads by example, is always “on” and ensures other members of the leadership team do the same and act accordingly. The CHRO, along with the CEO and leadership team, sets the tone for the organization ensuring that organizational health is a constant focus and doing what is right for the business and the employees is essential.”
Sanja Kos, Principal, GH Smart
Compensation Architect & Strategist
Few issues are more crucial than the leadership role the CHRO plays in the design of executive compensation plans and programs for the portfolio company that create alignment with value creation objectives. Compensation is a strategic weapon when thoughtfully considered and applied. The manner in which compensation is designed and implemented reflects the culture of company and is a symbol of the value creation behaviors that are endorsed. Several broad principals apply:
- What is the right mix, balance between cash and equity?
- What other incentives are appropriate beyond monetary ones?
- Who are the key strategic position holders whose success needs to be tied to company performance?
- What behaviors, values and objectives are paramount?
- How do we instill accountability, transparency, consistency and ownership?
- Is the plan effective at attracting and retaining key executive talent?
The last point is critical. Key leaders are attracted to a PE funded company to secure an ownership position and practice their craft as they drive value – to think and act like owners of the business. The CHRO and his or her team need to develop a recruiting machine that “sells” the equity opportunity based on the business plan being applied to achieve investor returns.
“We look at total rewards – cash, equity, and benefits – all of which must be market competitive to attract and retain top talent. Culturally, we believe that all employees need to feel like owners of the business, especially those at an executive level in the best position to effect strategic and financial performance. Compensation is not just about money; it underscores an emotional and cultural commitment to the employee where the values of the organization are emphasized.”
Laura Stepp, Vice President of People and Workplace, JAMA SOFTWARE
Knows HR Technology & is Data Driven
In today’s rapidly evolving world of technology, there are incredibly powerful tools available to HR professionals as they seek to better automate internal processes, work with outside service providers, assess potential employees, and more generally automate the “mechanics” of the HR and recruiting process. Specifically, the use of artificial intelligence in hiring, onboarding, learning, and talent management has resulted in increased efficiency, reduced bias in decision making, and lower operational costs. The CHRO needs to be a student of these systems working with the head of IT and make sure the company is “state-of-the-art” in its use of technology where the ROI of these systems is warranted. For example, one of the best ways to gauge organizational health is the thoughtful use of targeted survey tools. A CHRO who does not prioritize constant learning to keep pace with the emerging technology landscape will be less effective in the role.
“The CHRO must not only be aware of the latest technology, he or she must help drive the effective use and dissemination of data to help drive the talent agenda, irrespective of the platform. The establishment and relentless review of talent dashboards that provide key indicators of the health of the business from a talent perspective is critical.”
Brian Boylan, Former Chief Human Resources Officer at JDA Software
Thoughtful Senior Advisor
While the CHRO must act as a steward to the entire organization, the management teams of PE funded companies are especially under fire to produce results and meet aggressive performance targets. As a unit, therefore, they must operate like “clockwork” in their execution against the KPIs facing the business. An accelerated timeline and added pressure dictate trust, transparency and direct inclusive communication at all times. Every individual on the team overseeing every silo as well as the CEO has a functional “spike” in terms of their interpersonal and professional strengths. The CHRO must engage with the team as a trusted one-on-one and team counselor to break down barriers and ensure optimum performance at a management team level.
“The CHRO needs to be the glue that holds things together as the pressure increases and be regarded as a knowledgeable and an astute trusted advisor to the CEO and full leadership team. Being a strong listener with the ability to influence a wide range of strategic issues is essential.”
Simone Reynolds, Chief People Officer, October Hill International