Investment firms that want top talent, particularly those looking to diversify their boards, need to be strategic in engaging with prospective candidates.
Victoria Lakers, Partner at The Lancer Group, discussed “Seven Attributes Top Executives Are Looking For In Board Placements” for Forbes Business Council. Her article is reprinted below:
PitchBook’s 2021 U.S. Private Equity Outlook predicted that 2021 would be a record year for fundraising, with private equity fundraising expected to exceed $330 billion. Increased competition to invest these large capital inflows will likely continue to drive up already frothy valuations, particularly for recurring revenue business models such as software.
PitchBook’s report predicted 20% of buyouts will be priced above 20 times a company’s earnings before interest, taxes, depreciation and amortization (EBITDA). Given this backdrop, investment teams will need to seek higher conviction around their investment thesis and increase confidence that the management team and board can execute the value-creation plan.
At the same time, numerous recent events have highlighted a lack of gender and ethnic diversity in the workplace. As a result, the legal and social landscape is requiring greater equality. We’ve seen this evidenced by California’s Senate Bill 826, which required all publicly held domestic or foreign corporations with headquarters in California to have at least one woman on their boards by December 31, 2019 (with one or two more required by December 31, 2021, depending on board size). In December 2020, NASDAQ filed a proposal with the U.S. Securities and Exchange Commission proposing new requirements for board diversity for all companies listed on the exchange.
While private equity-backed company boards aren’t yet subject to these regulations, many are considering a future initial public offering. Additionally, companies with higher diversity are more innovative, handle risk better, have more engaged employees and ultimately are more profitable, which is important when valuations and returns are based on a multiple of EBITDA. As more firms recognize the advantages, diversity has become a strategic initiative for many private equity firms and their portfolio companies.
The resulting increase in demand for promising or experienced independent board members is driving an extremely competitive search environment. For private equity-backed companies where hundreds of millions of dollars are at stake, how can investors and their portfolio companies recruit and retain the best independent board directors who will really drive value?
As a search firm focused on helping private equity firms find C-suite and board talent for their software companies, The Lancer Group speaks with many leaders in software about their board preferences. We also recently launched our investor-nominated Top 25 Women in Private Equity-Backed Software Companies awards, which provided visibility into the top leaders nationally in software.
We found that most private equity-backed executives are in high-pressure environments with little bandwidth outside their main role, yet they are approached by multiple companies seeking a similar profile. Culled from our conversations across the talent landscape, below are seven attributes I learned many top leaders are looking for in a board placement. To be more attractive in a highly competitive market, I encourage companies to take a strategic view of their board composition and diversity and approach board candidates with a compelling proposition based on the following:
1. Interest in the company or industry: Outside of potential conflicts of interest with their current companies or other portfolio companies of their private-equity investor, I learned executives are primarily interested in joining boards that align with their interests. For some, this might be a company in another industry that provides a different perspective. For others, this might be an adjacent vertical to their current roles that would augment their knowledge and experience.
2. Strategic partnership: Top performers also typically want an active role in driving corporate strategy and are not interested in a board that simply receives quarterly updates with little room for discussion or direction. They want to help set the direction and execution strategy to drive growth, rather than acting as either a rubber stamp for C-suite decision-makers or the private-equity investors.
3. Strong board culture: Similar to a work environment where culture is vital to implementing a vision, many executives look for a board where there is a strong culture among the board members themselves, including a broad sense of respect.
4. Chemistry with the CEO: Candidates also often look for boards that maintain a strong relationship with the CEO. Rather than grilling the CEO on metrics, executives should be more like coaches and take a consultative approach with the CEO. Additionally, a personal alignment of values with the CEO is an important factor. One executive mentioned that an interview with the CEO would be a requirement for her prior to joining the board. If the CEO didn’t look forward to board meetings as a source of strategic counsel as she did with her own board, she wouldn’t join.
5. Diversity of thought and board composition: A strong commitment to diversity — including gender, ethnicity, industry and functional backgrounds — is important. Many executives recognize the benefits alternate perspectives bring and seek an environment that encourages innovative views. Boards that take a functional approach to board composition and recruit several diverse members simultaneously are more likely to optimize the value of differing viewpoints.
6. Smaller board sizes: Some executives prefer smaller boards (fewer than 10 directors) because a smaller number of members can be more strategic and nimble. Additionally, a small board tends to ensure all board members can contribute in a meaningful way.
7. Remote board potential: As a result of Covid-19, many companies have come to appreciate the ability to conduct business remotely. Numerous companies have since committed to keeping some portion of their board meetings virtual for the long term. Many board meetings are in other parts of the country, so for executives who already have a lot of travel commitments, saving time on flights can be a powerful differentiator.
In a competitive environment, investors and their portfolio companies must take a strategic approach to recruiting talented executives for independent board roles. As a result, they will be more likely to engage their top choices and therefore fully participate in the value creation that these high-caliber executives bring to a board.