Who’s leading your investment?

The vast majority of Private Equity (PE) and Venture Capital (VC) firms do not actively evaluate senior leadership during due diligence, nor do they manage leadership post investment. This was the finding from research we recently conducted.

Leadership has an integral impact on performance and therefore return on investment (ROI). The significant salaries paid to senior executives and considerable academic research support this view. Therefore this finding should be of concern to PE and VC investors/partners.

At Due Diligence Stage there are four key areas that need to be considered and understood

  1. What impact has leadership had on performance to date?
  2. What leadership attributes are required going forward.
  3. What leadership attributes do the incumbents have?
  4. How big is the leadership gap?

Given leadership is a predictive rather than historic performance indicator, knowing the leadership ability that is being invested in is essential to decision making.

Post investment the key focus is to manage the leadership gap. Leadership attributes need to be measured and considered against the leadership needs of the organisation. Once this is done only three options exist, to recruit, to develop or to guide leadership.

Measuring leadership performance and gathering this feedback for the CEO and the board/investors on an annual basis is not unlike having an annual health check. The leadership ability of an organisation’s CEO and their senior team is highly indicative of future performance. Therefore, undertaking this leadership assessment is likely to inform the board/investors of potential issues and problems before they are fully realised.

Measuring and managing leadership performance is not without its costs. However, compared with the cost of the investment not performing, or even failing the cost of measuring leadership ability is simply prudent risk management. Good leadership management should be more than just risk management, it should be about having the right leadership to seek and action opportunities, it should be about looking for future success rather than just protecting against failure. This creates a real opportunity for those organisations that pro-actively measure and manage leadership in line with needs and challenges. These firms and organisations are not only less likely to fail, but they are more likely to succeed and have higher rates of ROI.

So if you are investing remember, you’re not just putting your money into a business plan, you are investing in the organisation’s leaders to make the business plan a reality.


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