The many benefits of a good Chairman
31 October 2018
Miles Otway, Partner, says that the independence, experience and rigour Chairmen bring should help businesses improve their performance: good news for ambitious SMEs on a growth journey – and their investors.
What does a Chairman bring to a business hungry for growth? It’s a question asked by many SMEs who are unsure whether they need one or why they are being asked to take one on by a private equity investor. What are the pros and cons of having such an individual on the Board, what sort of skills and attributes should they have and what can management expect from this relationship?
These are important issues, especially given that such an appointment will usually involve some sort of equity stake in the business. For business owners used to making all the decisions, it’s also a big step to bring in an outsider who may have different views and ideas about the running of the company and its strategic direction.
That’s the fundamental point. Having an experienced Chairman brings in another, well-rounded perspective and provides the business with the benefit of his or her extensive expertise. This can help management sense-check their plans, “professionalise” a business as it grows and ultimately help drive performance.
For a start, a good Chairman will want to ensure good governance procedures are in place, so that decisions are brought before the Board for proper debate. They will want to see challenge and rigour around the decision-making process: in this way, even if the same decision is taken in the end, it will give comfort that it was well-informed and adequately scrutinised, not just based on pure gut-instinct. This kind of transparency is something private equity investors will be pushing for – and that can be a big change for an owner-led business.
Transparency and open debate are important because, as valuable as gut-feel is, even successful business owners often don’t know what they don’t know, especially if they’ve only ever run that one company. A Chairman who has seen different modes of operation, has worked with a variety Boards, has experienced the ups and downs of many businesses and has learned lessons accordingly can bring really valuable insight and guidance.
It might take a bit of adjustment to get used to initially and there might be some hard truths but also much constructive support. Peter Barrett, Chairman of Connection Capital portfolio company Tempcover, makes the point: “A good Chairman should challenge and encourage in equal measure.”
A guiding hand
That may mean guiding management away from potential mistakes: equally it could mean giving them the confidence to take risks or be more ambitious in their strategy. As Simon Burke, Chairman of another investee company The Light Cinemas puts it,
The Chairman is a really important role for many reasons – a key one is that they can help give management and investors confidence over what the business is doing. Without the Chairman to run ideas past and get a valued second opinion, management might be overly cautious and miss out on opportunities to try new ideas, push a bit harder in negotiations or be a bit more radical.
It can also help them see their business models in a new light. For example, small owner-managed businesses are often single-mindedly focused on bottom line profits rather than wider shareholder value.
An example could be driving a high-volume, high-margin business model but in which customer contracts are short and churn is high – and long-term value is undermined. A good Chairman should be able to help management properly evaluate whether this is the best strategy, or whether the business could drive improved shareholder value over the longer term by investing in other “quality of earnings” factors.
With investors and owners often having one eye on a future exit, more consideration may be given to making decisions that would be more attractive, in time, to potential buyers.
An independent broker
All of the above are general benefits, applicable to any growing business – but there are also several specific reasons why a Chairman is a particularly key role in private equity-backed businesses.
A good Chairman should command the respect of both the management team and investor, so that their opinion carries weight on both sides. This is vital, as they should act as an “independent” broker between the two, helping translate each other’s viewpoints to avoid misunderstandings and increase alignment. After all, as Peter Barrett says, “We’re all part of the same team. We all want the business to be successful.”
Their input tends to make for constructive dialogue. For example, a Chairman can often help explain an investors’ point of view to an owner or management team who are unused to having to take a third party’s opinions or requirements into account. Similarly, he or she is often in a better position than management to convince investors of the commercial imperatives behind a particular decision or to make the case to investors if a business’ underperformance is due to factors outside the company’s control.
In this way, the Chairman can ensure that the interests of all shareholders are properly considered and represented.
Been there, done that
For investors, a Chairman would preferably have first-hand experience of the private equity process from end to end, so they can help them craft the journey. That should equip them to guide the company through getting investment-ready, steer them through deal delivery, oversee growth and help manage an exit: facilitating the business’ development along the way.
SME owners often assume their Chairman should have direct experience in their specific market sector – but I would argue that though that is useful, it’s not the most important factor.
For example, yes, it helps if they’ve held senior positions at leisure brands if it’s a leisure business, but if their background is in say hotels not health clubs, that’s usually enough. It’s their commercial acumen, business insight and track record that matters most. A decent level of familiarity with and understanding of the sector should be sufficient – their purpose is not to generate sales leads through having the right industry-specific contacts.
A good fit
For businesses and their management teams, having a Chairman that they can use as a sounding board is very important, especially as the business develops and expands. Sometimes, being a CEO can be a lonely role, so having someone independent and approachable to talk to “off the record” can help work through problems and can be immensely reassuring.
For that reason, it’s vital that the Chairman is a good fit for the company, both in terms of expertise but also in their personal relationships with management and especially the CEO. There needs to be mutual respect, trust and understanding between the two, and skills (hard and soft) that complement each other.
Where appropriate, the Chairman should be able to mentor the CEO, helping them round-out their skills sets, fill gaps in their knowledge or expertise and grow, professionally, as their business grows. Peter Barrett explains,
A CEO should not feel threatened by a Chairman – but supported and supplemented by them. Getting the chemistry right with a thorough, upfront selection and matching process is essential
A vital role
Keith Pullinger, CEO of the Light Cinemas sums up why the Chairman has such a critical role to play like this: “Our Chairman has a lot of experience and excellent skillset and he brings something different to the table. We always talk before Board meetings to make sure they’re as efficient as possible. He has worked with PE investors before so he knows what they want and understands their concerns. He also acts as a buffer and a conduit for two-way information flow.”
A ringing endorsement indeed. Simon Burke’s view of his role is unambiguous: he says that for ambitious, growth businesses, and certainly those with PE backing, “it’s a false economy not to have an independent Chairman”.
It should absolutely be noted that a bad Chairman can be worse than none at all, because if there’s no respect or if the relationship with management or investors is difficult or worse, dysfunctional, that can create more problems than it solves.
But the benefits of a good Chairman are many and varied. The experience and discipline they bring to developing businesses, their complementary skills sets, their input as mentor and sounding-board, their independence and credibility: all these attributes can add enormous value and enhance business performance. And that’s got to be extremely motivating and rewarding – for all involved.
Top 10 features of a good Chairman:
- Complementary skills
- Another perspective
- Rigour and challenge
- Encouragement and support
- The respect of management and PE investors
- A good working relationship with both and be a good fit for the management team
- The ability to act as a mentor and sounding-board
- The skills to act as an independent broker