By Fred Crawford and Ted Bililies, AlixPartners
We’ve all seen relationship triangles before — in film they make for great drama. But what about in business?
If you’re a PE sponsor, one of the most critical relationships you’ll encounter is that among you, the portfolio company CEO, and the portfolio company CFO. Like all triangles, this one carries special risks regarding maturity, trust, and even jealousy. But here, the stakes are exceptionally high.
A bad relationship among a portco CFO, CEO and sponsor can torpedo the success of an entire investment, leading to serious dysfunction and ultimately underoptimized returns.
To deliver superior performance, sponsors need to proactively manage this relationship, while being vigilant in mitigating risks.
Risk #1: Psychological considerations
A mid-market portfolio company wanted to hire a senior and accomplished CFO. On paper, this individual looked overqualified for the role, given his experiences and accomplishments. But this was his first experience with a private equity firm; he was used to a public-company environment.
As a result, the monthly reporting package and weekly phone calls felt very Big Brother to him. The need to explain situations to junior executives at the financial sponsor felt unnecessary, and he complied reluctantly. When performance dipped, the need to do in-depth analysis struck him as a waste of time.
As these interactions became more painful, the sponsor started going directly to the CEO for information. This caused the CEO to become frustrated over the amount of time she had to spend on what she saw as the CFO’s job. Eventually, the CFO was let go, which was very disruptive.
We see many instances where technical qualifications are overweighted and personality and communication skills underweighted, resulting in frustration and poor performance.
Better to be clear about expectations up front and to assess candidates rigorously, ensuring they have the requisite skills to thrive in this environment.
Risk #2: Trust
Relationship triangles are infamous for difficulty in establishing and growing trust, and the CEO/CFO/sponsor relationship is no exception.
We recall a situation where try as they might, the sponsor just could not get comfortable with the CFO, even though the CEO had a high degree of trust in him.
As the situation worsened, the CEO became agitated, then outright angry, about the sponsor’s insistence that a change be made, since this was not discussed during the acquisition process.
Finally, it came to an ultimatum that we thought might cause the CEO to exit. That, thankfully, did not happen, and a new CFO joined the firm.
At first, because the new CFO was a referral from the sponsor, the CEO was unsteady about the relationship — until he earned the CEO’s trust.
The new CFO knew that by never communicating with the sponsor without the CEO’s knowledge, pre-agreeing the messages delivered to the sponsor with the CEO, and having thorough debriefings with the CEO, he could build trust in the early days of the relationship. And he did.
This story had a happy ending, but many do not. The fact is all parties need to be honest and direct with each other and overcommunicate, especially in the beginning.
Risk #3: Credibility
It is an awkward dance during the sale/acquisition process. A sponsor must get enough information to understand whether a CEO and CFO have the right combination of experience, talent and personal chemistry to produce the necessary level of financial returns within the desired time frame.
How? Push too hard and the sponsor runs the risk of losing the deal. Don’t dig deep enough and the business case that is underwritten to the investment committee could well be put into jeopardy.
This is tough, but beyond the standard interview and referral check process, there are additional approaches that work well.
These include in-depth assessments administered by an independent third party, carefully and appropriately digging beyond the referrals provided to people who have worked with the CEO and CFO before, and carefully defining the characteristics and capabilities of each role specific to the situation.
Playing a great athlete out of position hurts both the executive and the company.
Strengthening the triangle
Managing the dynamics of the relationship triangle among sponsor, CEO and CFO is difficult. The keys to success include appropriate selection utilizing nontraditional tools, clear definition of expectations up front, and a commitment to communicating in a way that develops mutual respect and trust.
With these prerequisites in place, the relationship can thrive, enabling strong business performance and attractive returns.
Fred Crawford is a senior vice chairman and former CEO at AlixPartners and co-leader of the firm’s corporate development practice. Ted Bililies, Ph.D., is also co-leader of the corporate development practice and a managing director at AlixPartners, the New York-based global consulting firm. Reach them at [email protected] or [email protected].