Growth and profits are at the mercy of employee engagement and commitment. Corporate culture is therefore a critical piece of the growth plan. So why is it so often neglected? As Private Equity investors, do you have confidence your portfolio businesses are establishing the optimum culture to deliver growth? And what can you do to help them?
The Great Resignation continues apace, a clear sign that the COVID pandemic has prompted many to re-evaluate their lives on a scale never seen before. A 2021 McKinsey1 survey found that nearly two thirds of US employees were reflecting on their purpose in life and, for 70% of them, their sense of purpose was defined by their work. So what implications does this have for PE and their portfolio businesses?
At Highwire, we think it will likely compound a problem that already existed prepandemic: the war for talent. Potential new hires will become more discerning about which businesses they want to work for, basing their decisions more than before on an organisation’s purpose, culture and values. This is not new - millennials have been doing this for some time. But this trend has now extended to people in mid- or late-career. And these people are likely to be highly experienced. For portfolio businesses who need to expand their senior team quickly post-deal, attraction of new talent will depend on more than just salary and sweet equity. Being able to show how culture and values are truly embedded and ‘lived’ will likely play a big part in their decision to join.
To attract key hires and keep them engaged and productive, businesses need to define and communicate their purpose, culture and values.
But how many portfolio businesses take the time to do this?
In our experience, hardly any. We explore culture and values as part of our Management Due Diligence (MDD) work. When we ask CEOs and business owners to define their culture, they rarely describe it in a clear and consistent way.
Some cannot articulate it at all. Yet in the next breath, they tell us that the culture is essential to business success and must be protected at all costs.
New recruits want to know ‘what is it really like to work here?’. Investors should want to know this too, particularly with the increased focus on ESG. So, in addition to our MDD work, we often undertake a broader assessment of culture by talking to a cross-section of employees (people are surprisingly open with us!). Interestingly, the culture they experience can differ substantively from the culture the leadership team thinks is in place (or aspires to). And when we ask who owns and drives the culture and values, people rarely know.
In their defence, the all-consuming nature of preparing for PE investment leaves little time for leaders to focus on running their businesses, let alone actively managing culture. Many simply lack the bandwidth or expertise to give it the attention it deserves. And post-deal, it is a similar story as the business sets about delivering on its growth plan.
But in the context of The Great Resignation, culture needs to be given much greater focus. The growth plan often depends on hiring new talent, so having the right culture may well make the difference between people staying or going. Building an early picture of the culture through your due diligence (and early conversations) will help flag any issues that may need to be addressed post deal. PE houses can be influential in pulling culture to the forefront of the strategic agenda with some simple steps.
How Private Equity can sharpen the focus on culture
Start talking about culture early in the relationship – this sends a positive signal that it is important to you as an investor. In the competitive pre-exclusivity phase, this will probably enhance how you are seen by the business owners
Ask the CEO and other key players to define the culture for you – how is the culture communicated to employees, to new hires, how do they leverage it as a USP? Encourage them to consider if they are doing enough in these areas
As you enter your due diligence, incorporate some assessment of the culture (Speak to us about how Highwire can help you)
Ensure your MDD addresses key questions: - Is the CEO the culture champion and architect? If not, who is? - How well does the senior team role model the desired behaviours?
Explore the risks of resignations to the growth plan. How easy is to attract new talent? What is the company’s track record in recruitment? Who leads on it?
Find out what employees think of the culture. What keeps them engaged and committed? What would it take for them to leave? How precarious is the employee base?
Speak to new hires – what was their experience of the culture in the early stages? How did this compare to their previous organisation?
Ask all your DD providers to give a view on the culture, based on their experience (remembering that their experience is only a snapshot and the stresses of due diligence may make this a distortion of reality