Effective Boards and Value Creation – The Meeting Points

Value creation is an important measure of success in Private Equity. This is why investment professionals do all they can to deliver outstanding returns. However, on closer look, you realise these experts rely on financial engineering and operational improvements, both of which constitute the rudimentary principles of the trade. Graduating from the rudiments to mastery requires introducing advanced tools and techniques, especially those that drive fundraising efforts while meeting the needs of other stakeholders.

This article discusses the perceptions arising from the development of more effective boards. We will analyse an all-encompassing approach to value creation using data rather than limiting the scope to only leadership and corporate development. This approach clearly improves the output value and governance and the story of fundraising. Furthermore, it enhances the management’s perception of a firm while showcasing collaborative efforts and development opportunities.

Let’s start with this critical question. Where and how is the value created? Private Equity as an operational model thrives on having the right people running the company’s affairs. But, so far, board evaluation data points to a contrary fact. Throughout any investment, the CEO turnover rate is usually around 50%, which may be higher in other board members. But the rate is 15% in the largest 2,500 public companies worldwide. Interestingly, 50% of CEO changes happens unexpectedly, with underperformance being the most common reason for these changes.

Are you wondering what causes the ‘underperformance’? It is not far-fetched. A CEO is bound to underperform when their skillset does not correlate with the requirements a change in strategy presents. Other causes include ‘human incompatibility’ with other board members, shareholders losing confidence, lack of empathy required for internal conviction, and failure to be the right role model for employees. It is important to note that several factors contribute to underperformance; we cannot mention them all.

Considering management plays a crucial role in value creation, it is somewhat surprising to see the relegation of the systematic development of portfolio companies’ executive boards. These individuals are the primary drivers of value creation in any portfolio organisation. So, why are they lacking in development as board evaluations have shown? In a few cases where development systems and programs are present, they are mostly inadequate for value creation.

How Can Board Audits And Development Programs Impact Value Creation Positively?

Having established the problem, let’s quickly discuss the possible solutions. Below are five criteria investment professionals must meet to ensure board evaluations and development programs deliver quality ROI and measurable positive impacts.

Integrate board audit and development into the value creation process.

Having a comprehensive understanding and knowledge of the value creation plan of the organisation must be a prerequisite for everyone involved in conducting a board development or audit. That way, it is easier to integrate the insights into the process.

Work towards an evidence-based approach.

Collecting data is half the job; the other important half is to use it right. Unfortunately, analyses have shown that most boards focus on issues lacking the evidence required to drive impact and value creation effectively.

Provide accurate data for the management.

Board effectiveness remains a myth without adequate and real data to shape decisions. No matter how clever executive board members are or how passionate they are about developing their personal and corporate reputations, they cannot achieve these without actual hard data. This is the only source of genuine insights that allow them to shine in their roles.

Create a secure, neutral, and confidential environment for the management.

Now that the management has the required data, they need an enabling environment to analyse them and consider possible actions that can help strengthen their individual positions and the board’s position to drive value creation.

Keep data collection ongoing.

This will require developing and maintaining the proper mechanism to ensure continuous data collection while the executive board tracks the progress over time.

7 Pointers of Drive Value Creation

Smashing the goals in your value creation plan is easier than ever with the following pointers;

Getting the board composition right.

You must know how various areas of expertise, differences in personalities, convenient corporate roles are interrelated. That way, you can integrate them correctly into the organisation’s development cycle and value creation plan.

Maximising members’ strengths.

Individual board members must understand their strengths, the collective strength of the board, and how these are perceived. Then, leveraging these the right way will ensure the correct implementation and execution of a value creation plan.

Understanding roles and responsibilities.

Avoid grey areas and loosely-defined responsibilities in every way possible. Although the exception is the norm, it is vital to have transparency of duties and roles at every step of the way.

Common vision.

Understanding the joint vision and orientation is non-negotiable. There must be transparency both inside and outside.

Efficient conflict resolution mechanisms.

Conflicts are bound to spring up. But these may hamper board effectiveness if these frictions are not timely and adequately resolved. Therefore, executive boards and their members must ensure conflicts between them and the subsequent management level are settled as soon as possible.

Outlining and organising the board’s work.

Board effectiveness depends on the organisation of the board’s work, which rests on the board secretaries and the collaborative efforts of the CEO and chairman. It is the board’s responsibility to organise and structure their work efficiently.

Continuous reviews and reflections.

Board members should get regular time-outs, presenting quality opportunities to connect and reflect on their works. This can help everyone prepare adequately for board evaluations.

In Conclusion

There is no doubt about the abilities of investment professionals to master the art of value creation. However, maximising these capabilities requires the exploration and incorporation of necessary tools and techniques into their operations to arrive at better returns and a sterling career.

Implementing the value creation pointers above correctly and professionally will change the fundraising story of any organisation. It makes the organisation more attractive and puts them in a stronger position over other competing firms. Finally, it makes board evaluations easier to identify possible rooms for improvement.