How do you determine employee talent requirements?

If you don’t have the right talent, your company cannot survive or prosper.  You cannot put in place talent recruitment, development, compensation, and exit plans until you know what the talent requirements are.

This document focuses on management and staff, excluding the board of directors, founders/C-Suite, and advisory board. The following is a broad framework.  You need to customize it for your specific situation.

To succeed, a company’s target customers must perceive they are obtaining competitively differentiated value over time.

The four 4 questions you must answer are:

#1 What is that competitively differentiated value?

#2 Which components of the business framework1 are required to deliver that value?

#3 What roles are required, and how will each role help deliver that value?

#4 What are the characteristics of the person in that role?

The answers to the 4 key questions depend upon the specific situation of the company.

Where is the company now, what’s the future direction, and what are the upcoming challenges? Some of the possible situations include:

Startup has no MVP2 (Minimum Viable Product) yet, is targeting a major market, and hopes to grow to 100+ employees.

#1 What is that competitively differentiated value?

At this point the founders are still figuring this out.

#2 Which components of the business framework1 are required to deliver that value?

The startup is focused on just a few components of business framework, and only a few pieces of the business model – who are target customers, what are their needs?

#3 What roles are required, and how will each role help deliver that value?

There are no detailed role descriptions. Everyone working on everything.

#4 What are the characteristics of the person in that role?

Everyone must be comfortable in chaos, dealing with daily new problems, have the ability to make rapid personal changes, and be relentless in overcoming obstacles.

Startup, has Product/Market Fit3, a small niche market, and will grow to a handful of employees.

#1 What is that competitively differentiated value?

The founders have determined this.

#2 Which components of the business framework1 are required to deliver that value?

The founders have identified and documented this.

#3 What roles are required, and how will each role help deliver that value?

There must be clearly defined roles for a stable business. The days of chaos should be over.

#4 What are the characteristics of the person in that role?

What are the necessary skills, experience, values, morals, and ethics to carry out that role?  Each person must have the ability to learn and change over time as the company continues to evolve.

Large company, with Product/Market Fit.

#1 What is that competitively differentiated value?

This must be documented.

#2 Which components of the business framework1 are required to deliver that value?

All the components are required for continued success.

#3 What roles are required and how will each role help deliver that value?

For each role, there must be a clear definition of the future challenges, issues, changes, obstacles to overcome and expected outcomes for that role.

#4 What are the characteristics of the person in that role?

Focus on the skills, experience, values, morals, and ethics to carry out the role.  Every company has a small number of roles that enable the bulk of competitively differentiated value. These roles are not based on management hierarchy.  You must identify and target these roles.

Large company that has lost Product/Market Fit, the market is shrinking, there is intense competition, and the company must be transformed.

#1 What is that competitively differentiated value?

At this point the company does not have competitively differentiated value with a large percentage of customers recommending the company to others. The leadership must rethink who the target customers are, what their problems are, and how the company can provide a solution which solves those problems.   In some cases, such as many paper-based publications, there is no future value and the company will disappear at some point.

#2 Which components of the business framework1 are required to deliver that value?

All components are required. It’s likely all components will undergo major changes.

#3 What roles are required, and how will each role help deliver that value?

First there must be the right board of directors and CEO.  The current board and directors got the company into this situation.  Leadership transformation begins at the top.

#4 What are the characteristics of the person in that role?

The board of directors and CEO are dealing with the same issues as an early stage startup.  Everyone must be comfortable in chaos, dealing with daily new problems, have the ability to make rapid personal changes, and be relentless in overcoming obstacles.

Some of the challenges in determining talent requirements include:

#A Many large companies do not realize they no longer have Product/Market Fit, and are hiring the talent based on invalid historical requirements.

#B Many startups attempting to scale don’t understand that the talent that got the company to this point is not what is going to help them create a successful future

#C Many startups simply do not have the CEO and founder talent to succeed. There is some combination of the founders: not understanding the customers problems, not understanding what solution is required, and not able to attract the necessary talent and help that talent work together.

Your next steps:

Define your current situation, based upon facts.  Your advisory board can challenge your thinking and help you understand your company’s situation.

Footnotes

1 Business Framework has inter-related 10 components:

#1 What can only the CEO do

#2 Company purpose

#3 Values, morals, and ethics

#4 Customer perceived value proposition

#5 Business model

#6 Talent management

#7 Capital and cash management

#8 Investor management

#9 Exit management

#10 Governance

2 A product or service with just enough features to delight early customers, and to provide feedback for future development.

3 Product/Market Fit.  Marc Andreessen’s definition of product/market fit:

“The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.” On product/market fit for startups

 

 

 

Do you have product/market fit?

How do you know you have product/market fit?

I like Marc Andreessen’s  definition of product/market fit1:

“The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.”

At this point you are not yet ready to scale.

 What has been your journey to date?

  • You have been building multiple MVP (Minimum Viable Products) versions.
  • Each iteration of your MVP delightfully solves more of the customers’ problems, increasing the size of your potential market.
  • You have been doing many things which do not scale profitably. Your processes, talent, and technology may need to change.
  • You may lack the channels and partners necessary to scale.
  • Your company is inefficient.
  • You’re likely unprofitable, and cashflow negative, requiring capital investments to keep the business running.

You are not ready to scale.  You have lots of work to do to get ready to scale.

What are the facts?

Do you actually have product/market fit, using Marc’s definition? Product/market fit is not determined by your number of employees, your round of financing, or your growth rate.

  • How big is the (TATT) total addressable target market? This is the total demand for a solution. These are the customers who understand they have an urgent problem and they need a solution. If you had 100% market share, what would be your revenues? I’ve met several startups in which the target customers don’t know they have a problem which requires a solution. (TATT is low or close to zero).  The lifetime value of a customer in this situation can be lower than the customer acquisition cost.
  • Do the customers perceive you as the preferred solution?
    1. What is your NPS (net promoter score)? (Above 0 is good. Above 50 is excellent. Above 70 is world class.)  How do you compare to your industry and competitors?
    2. What is your retention rate? What is your initial fall-off? After the initial fall-off, is your retention rate flat?
  • Are customers who perceive they have an urgent problem seeking you out? Are your sales quick and easy to achieve? Or, is the sales cycle long, difficult and very competitive.

What are the implications and potential decisions?

There is broad range of potential situations. The following are a few of those:

  • NPS is positive. Customers recommend you. Sales are easy to achieve. TATT is a few million dollars. Will this business meets the founders’ needs, if the business is made efficient?  The founders must decide whether to continue, pivot, or shut down the business.
  • NPS is negative. Customers don’t recommend you.  Reviews are poor. Sales are difficult to achieve.  The founders are fighting to survive. The company does not have product market fit.  If TTAT is low, then the founders must decide whether to pivot to find a larger TATT, or shut down the business.  IF TTAT is larger, then the founders must continue to evolve MVP until the customers are delighted and NPS is positive.
  • NPS is positive. Customers recommend you. Sales are easy to achieve. TATT is large. The founders must now get ready to scale.  This means making the company efficient, putting in place the talent, processes, technology, channels, and partners to enable scaling.  The founders must transform themselves and the company.

Observations

  • Most startups don’t actually achieve product/market fit with a large TATT.
  • Many startups are not able to successfully scale, because the founders are unable to transform the company and themselves.
  • Many existing large companies have lost product/market fit and are in a fight to survive, often with a declining TATT. These companies don’t recognise they are in this situation and devote the bulk of their resources to resolving secondary issues, leading to decline.

Your next steps, regardless if you’re a startup or a long established company:

  • Get the facts on your current situation.
  • Discuss the implications.
  • Identify the options to move forward.
  • Make the decisions and put a plan in place.

Footnotes:

1 Marc Andreessen  On product/market fit for startups

Successfully scaling startups are different from public companies. V2

I observe major differences between long established public companies and successfully scaling startups.  The two major things that strike me are:  the startups have an in depth understanding of the customer; and the startups are incredibly focused on having the right talent: talent in management, on the board, on the advisory board, as well as talented investors.

This version 2 of my document includes 3 key concepts:

  • Startup board of directors are focused on creating value. Public company boards often focus on “oversight”
  • Startups make 5-10 minute “pitches” for investments, focused on “What is the customer problem” and “What is the solution the customer will pay for” Public companies often have very long presentations regarding “business cases”.
  • Startups are constantly re-inventing themselves and transforming. Public companies often view transformation as a one time event and create temporary organizations such as “The Transformation Office” and “The Chief Transformation Officer”.
Successfully scaling startups Long established public company
Planning driven by: what is the customer problem or need; how does the customer perceive that the solution is significantly differentiated. Planning driven by vision and mission statements.  Often little differentiation among competitors.
Often clarity as to the beneficial impacts on society. Beneficial impact on society is not a consideration.
Focus on meeting the needs of customers Focus on growing shareholder value
Every member of the board of director is focused on growing company value.  They have previous experience in growing value. Board of directors has an “oversight” role.  There often the concept of “noses in, fingers out”.
Investors make decisions based on talent: talent of the founders and management team, talent on the board, talent on the advisory board, and talent of the other investors. Talent does not play a major role in deciding on whether to invest or divest.
Most things are broken most of the time.  The focus is on solving the daily issues which arise from scaling and meeting evolving customer needs. Risk management and Enterprise Risk Management play a major role.  Focus on “mitigating risk”.
Transformation is an ongoing and integral part of the business. As the company grows from a few co-founders to 10 people to 50 people to 150 people to 500 people, the company re-invents itself every 6 months.  Everything changes: the role of the CEO, who you hire and how you hire, how internal meetings are structured and organized, the technology, the business processes, etc.

There are no such things are “Chief Pivot Officer” or “The Pivot Office”.

Companies launch stand-alone transformation initiatives.

The is a Chief Transformation Officer and a Transformation Office.

Transformation is views as a focused one-time event,

The start-up is the disrupter due to deep understanding of the customer and providing solutions which the customer sees as very superior and different. Companies are “disrupted” because they no longer understand customer problems, needs, and why the customer should buy from them.
Uses advisors and experts who can help invent (and re-invent) and create what will be successful in a future which is very different from what was successful in the past. Use advisors and experts who understand in detail what has been successful in the past in the industry, with other companies.  The phrase “best practices” is often used.
Pitches to justify investments are often 5-10 minutes long.  The focus is on:

One-on-one interviews with potential customers have validated that there is a problem and customers would consider for a solution.

Minimum Viable Products are piloted until the there’s validation that customers will actually pay for the solution.

Then major investors are made in growth

Business cases to justify  are built, with long and detailed presentations.

Often years pass in building a solution before launching to initial customers.

 

 

What is the status of your startup? (V2)

You can use this framework to enable startup stakeholders establish a common understanding of the current status of the startup, which stage it is in (pre-seed, seed, or Series-A), and the next milestones in its evolution. This framework is not intended to be a cast-in-concrete structure for every single situation.  The start-up stakeholders may adapt this to their specific situation.

Version 2 of the framework includes:

  • An illustration of how to complete the framework.
  • A description of why it is critical to have documented interviews of potential customers.

The simplest way to use the framework is:

  • Go through the framework, component by component.
  • Clearly and simply describe where the startup and place the description in the appropriate stage.
  • Outline the key milestone, to get to the next stage and identify who is accountable for each milestone.
  • State any critical issues.

The facts and assumptions you assemble will feed into the startup’s monthly cash flow forecast.

The framework reflects technology enabled services startups intended to grow into businesses with a valuation of at least $100 million. You can adapt this to other situations. This framework does not address fundraising.

You can download the complete template from my website:

What is the status of your startup (V2)

The column headings refer to where the startup is at the beginning of that stage. The following is the defined framework.  You will use this to position your company, state the future milestones and outline any critical issues.

Component Pre-seed Seed Series A
Product/Service Idea MVP (Minimum Viable Product) – A product or service with just enough features to have satisfied early customers, and to have obtained customer feedback for future development. MVP has been revised until market/product fit is proven. Product/service ready to scale.
Value proposition: This is the customers perception.  What are all the benefits achieved (financial and non-financial) achieved by the customers?  What are all the costs incurred by the customer (purchase costs, costs to switch to your company, other adoption costs, ongoing costs)?

 

Not validated with customers. Customers have validated the value proposition.

Have documented experience with customers to prove satisfaction with MVP.  Alpha launch completed and customers in place for Beta launch.

Completed Beta launch.

Start to grow, month by month.

Revenue 0$ to < $5K/month >$5k/month >$100k/month
Market Traction -Customer/Revenue growth None. Might be a pilot customer. Starting to generate revenue, increasing month by month 6+ months of 10% growth per month
Distribution channels i.e. how are you going to get it into the customers hands. None Initial identification and discussion with distribution channels. Distribution channels in place, with low volume.
Profitable? No No No.  May be profitable 18-36 months in the future
Scalable? No No Technology enables scaling at low marginal cost.

Processes in place to enable growing talent.

Intellectual property Maybe Maybe Must have legal or other protection in place
Co-Founders team 1-4 co-founders, could be part time. 2-4 full time co-founders 2-4 full time co-founders
Overall team Co-Founders with relevant skills and experience. Co-founders + 1-5 people with relevant skills and experience? Co-founders plus 5-20 people with relevant skills and experience.
How long until run out of money Personal cash flow plus friends and family will sustain co-founders. 6-18 months 6-18 months

 

Advisory board, with regular communications processes in place. 1-2 industry credible experts 3-6 successful entrepreneurs, industry experts 6+ successful entrepreneurs, investors, industry experts
Board of Directors None 1-2 co-founders 1-2 co-founders, 1 successful entrepreneur, prominent investor or industry leader

 

Corporate governance: decision making, etc. Informal Clear decision-making roles.

Incorporation results in legal, financial, reporting requirements and policies.

Decision making roles clear for investors, shareholders, board, and management.

Having employees drives requirement for talent policies and processes.

Is the business viable Unknown Unknown Yes. The question is, can the business scale successfully?
Source of funds Personal, family, friend, fans, incubators, accelerators, government Angel investors, lead investor. Investors with deep pockets who can fund future rounds. Startup debt providers.
Financial ask <$50K – $250K $500K – $2 million $2 million to $10 million
Market place communications Little or none Website, newsletter, and social media begun. Enhanced website, newsletter, and social media processes.
Investor engagement and relationship management Little or none Defined the characteristics of target investors and investor introduction approach. CRM technology and processes in place to manage investor and investor ecosystem relationships.
Cash Flow Forecast

 

Likely none Monthly cash flow forecast and tracking. Monthly cash flow forecast and tracking.  Ties to key milestones.
Financial and operational metrics

 

Likely none Know what the metrics should be.

Initial targets set.

6+ months historical reporting of financial and operational metrics.

 

How do you measure the success of your startup?

The critical metrics are focused on the customer.  If you don’t understand your customer, you cannot succeed.  The second set of metrics is your monthly cash flow forecast and tracking.  Your business will shut down without cash.  These two sets of metrics depend upon your financial processes and General Ledger structure as well as your Customer Relationship Management processes.

The following illustrates the metrics as your company progresses from pre-seed to seed to Series A.

Pre-seed stage – beginning

You have no customers using a pilot or beta version of what you hope will become your MVP (Minimum Viable Product).  You may just be at the idea stage.  You may not be clear on who your target customers are.  You do not have product/market fit. You have some written assumptions as to who your target customers are, what their problems are, and your potential solution.

Your goal is to validate your assumptions by understanding your customers problems.

  • Meet with 20 customers one-on-one.
  • Ask them questions to understand their demographic fits.
  • Ask them to show you how they currently solve their Problem.
  • Ask them what their issues and challenges are.
  • Present BUT DO NOT TRY TO SELL your solution.
  • Ask for feedback about your solution i.e. What do they perceive as your Value Proposition e.g. to what degree does your solution address their problem, what do they see as the benefits (financial and non-financial) to them, what are the customer costs (financial and non-financial) to implement your solution and achieve the benefits?
  • Document all of the above for each customer.
  • Analyze the results.
  • What changes do you need to make in your assumptions?

Your key metrics are:

  • Documented customer problems.
  • Documented customer perception of your value proposition.

Monthly budget and tracking

You must have a monthly cashflow budget and tracking.  Cash is king. You are likely funding from your life savings, friends and family.  You have to budget to until you have more capital (from yourself, friends, and family) or some customer revenue.  You must track every expenditure.

CRM (Customer Relationship Management)

You must have a CRM process.  The software supporting this depends upon the number of people in your ecosystem (potential customers, investors, employees, suppliers, etc.)

Pre-seed stage – close to the end

At this point you have some pilot customers and perhaps a few paying customers. You have not yet validated product/market fit.

Your goal is to measure and validate product/market fit

The single most important question is asking “Would you recommend our solution to others?”  This metric is known as NPS (Net Promotor Score).  Follow on questions could be “If so, why?  If not, why not?”

A more detailed question would be (Sean Ellis developed this). “How would you feel if you could no longer use our product or service?

  • Very disappointed?
  • Somewhat disappointed?
  • Not disappointed – it’s not really that useful?
  • I no longer use?

At least 40% of your target customers must say “very disappointed”.  If it’s less than 40% you need to reposition/change your product.  One approach can be to segment the answers to find a customer segment where the response is above 40%.

You must understand the group above 40%.  The 5 questions to ask them are: 1) who are you (demographically) 2) why did they seek out your product/service?  3) how are they using it 4) what is the key benefit 5) why is that benefit important?

Your key metrics are:

  • NPS

Continue to measure:

  • Documented customer problems.
  • Documented customer perception of your value proposition.

Monthly budget and tracking

Your monthly cashflow budget and tracking.  Your forecast now is tied to your business milestones.

CRM

You must have CRM software supporting your CRM processes.  At this point you will have many relationships with many different types of people in your ecosystem.  You CRM approach will help you to communicate with your ecosystem in a variety of ways (social media, newsletters, email, etc.).  Your CRM will enable customer surveying and keeping track of the survey results.

Seed stage – midway through

You have a MVP (Minimum Viable Product) with some satisfied customers proving some revenue.  You have found some distribution channel enabling consistent customer acquisition.  Monthly churn rate is 1-2%.  There is still a lot for you to figure out. You might still be measuring and validating product/market fit.

Your two goals are:

  • Grow MRR (Monthly Recurring Revenue). Annual subscription fees need to be allocated by month, not just when the cash comes in.
  • Control churn. Churn is the % of paying customers who leave each month.  Your target should be at most 2% per month churn.  5% per months means you are in trouble.  You must figure out and fix the churn problem if you hope to grow your company.

Your key metrics are:

  • MRR
  • Churn

Continue to measure:

  • NPS
  • Documented customer problems.
  • Documented customer perception of your value proposition

Monthly budget and tracking

By thus point in time you need to have your GL (General Ledger) set up.  You need advice from an experienced SaaS CFO (Chief Financial Officer) to help set up financial system and associated software.  The software would ideally support both financial and non-financial metrics.  The need to set up the GL at this point (which is the very latest) is to both create historical results for the late seed stage as well as cope with the fact you have both cash flow and accounting forecasts and tracking.

CRM

Your CRM, operational metrics, and financial metrics processes and supporting technology are integrated.  This is key to having accurate data at low cost.  Your CFO has the plans to achieve this.

Late Seed stage or early Series A stage

Your churn is under control and you’re either ready to scale or starting to scale. You have validated product/market fit i.e. the right product for the right market.

Your two goals are to:

  • Keep customer acquisition costs to no more than one third of LCV (Lifetime Customer Value).
  • Each customer must be profitable within 12 months.

Your key metrics are:

CAC (Customer Acquisition Cost), and LCV (Lifetime Customer Value).

Continue to measure:

  • MRR
  • Churn
  • NPS
  • Documented customer problems.
  • Documented customer perception of your value proposition

Additional metrics

You will have additional metrics to manage your business.  Thank you to Christoph Janz, a Partner at Nine Point Capital, who has an excellent illustration of SaaS metrics via a dashboard  http://christophjanz.blogspot.com/2013/04/a-kpi-dashboard-for-early-stage-saas.html Christoph gave me permission to share this with you.

Monthly budget and tracking

Your budgeting and tracking become more complex.  You may have: multiple offices, multiple distribution channels, starting to open in different countries, multiple currencies, etc. Your processes and enabling software must be able to cope.

CRM

Your ecosystem is more complex. You have different types of customers, different types of investors, multiple distribution channels, perhaps multiple languages, etc.

Understand how sophisticated investors and other define metrics

I have heard stories of startup founders who incorrectly allocated CAC and COGS (Cost of Goods Sold) to G&A (General and Admininstration), which results in artificially inflated gross margins and artificially low CAC.  I have also heard stories of founders deliberately misallocating.  The reputation you want to build in your ecosystem is that you understand metrics, you understand what drives value in your company, and that you are someone investors can trust with their money.

What are the definitions of the metrics?

CAC includes all the costs to acquire a new customer:

  • Sales
  • Marketing
  • Onboard
  • Related compensation of the people.
  • Overhead associated with the people.
  • Technology to support CAC.
  • Legal expenses associated with sales and marketing

If you have a freemium business model, then all of the costs associated with the “free” service fall into CAC.

LCV = (Average MRR per customer)/monthly churn

What comprises cost of COGS? Everything required to meet the direct needs of current customers.  E.g.

  • Customer support people, and software
  • Technology e.g. software, cloud services, communications costs.
  • Bug fix and minor enhancement to the software – after all you do need to retain current existing customers.

What comprises G&A?

  • Payroll administration
  • Recruiting administration
  • Finance
  • IT security
  • Corporate development e.g. M&A
  • CEO salary/benefits
  • Legal expenses (both in house and external), other than those associated with sales contracts

Let’s use QuickBooks to illustrate the concept of the financial metrics.

There is a GL line item for salaries.

Then then there is a class i.e. where does the salary belong?  (i.e. QuickBooks class)

  • CAC?
  • Cost of goods sold?
  • R&D/Engineering/new Development?
  • G&A?

 

Survey – How do asset managers assess Private Equity fund managers?

I asked asset managers the following question: “How do you assess PE (Private Equity) funds, and their leaders) to determine which fund to invest in?”  Asset managers included: pension funds, large global asset managers, and family offices.  Insight was also provided by advisors to asset managers.

The following illustrates the consolidated set of assessment approaches used.  Many asset managers use similar approaches.  Some approaches are used by only one asset manager.  This document is focused on what is done, not on how assessment is done or specific analytical techniques.  (Some asset managers shared their techniques.  That information is confidential). There is no recommendation as to what is a good or bad approach.

Analysis of performance

  • PE firms may provide detailed financial and operational data on all portfolio companies.
  • What is the consistency of returns over time? Many respondents noted that persistence of returns is declining, perhaps due to high purchase valuations leading to difficulty in PE partners achieving significant value increase.
  • What have been the exit results? What have been the successful and unsuccessful exits?
  • How much additional return has the PE fund been generating, taking into account both financial leverage and public market returns of similar companies?
  • Avoid funds and firms with historical returns in the 3rd or 4th

Analysis of strategy

  • Industry focused or generalists?
  • Limited range of deal size?
  • How consistent has the strategy been over time?
  • What is the leverage being used? 3-4 times or 7-8 times?
  • Is the strategy to have similar returns from all portfolio companies or depend upon one company to provide outstanding returns which compensate for poor returns with other companies? This impacts the volatility of the portfolio.
  • Is the PE firm due diligence approach supporting the strategy? Do reference checks with the portfolio companies confirm the stated due diligence approach and fund strategy?

Analysis of PE fund partners

  • How long have they been with the fund?
  • What’s been their previous history?
  • What have been their personal achievements, rather than the achievements of the companies they’ve been with?
  • What has been the partner experience with business operations, rather than finance or investment banking?
  • If the strategy is changing, how has the PE team talent changed to bring in the experience with the new strategy?
  • How much of the fund capital is provided by the partners?
  • How have the partners increased the value of portfolio companies, in addition to providing capital?
  • How do portfolio company CEOs like working with the partners?
  • Run background checks on the partners: social media and publicly available records.
  • Hire a third party to work with the PE partner to conduct a deep psychological and historical analysis. This could include questioning colleagues, subordinates, other asset managers, friends, and family.  This could conclude with a multi-hour walk through with the partner of their entire life

Relationship Management – Between asset managers and PE funds.

  • Proactively seek out emerging PE funds.
  • The asset manager re-underwrites each new PE firm deal with different staff, to avoid the bias of personal relationships.
  • The asset manager maintains a long-term personal relationship with the PE fund partner(s).

Observations that were made to me

  • There are lots of good PE firms and partners. Asset managers can only deal with a small number of PE firm.  Each firm requires management time.
  • There are not enough good opportunities for PE funds. There is over a trillion dollars of PE capital not invested, with valuations at all time highs.
  • Sovereign wealth funds are a partial enabler of high valuations, because some funds are satisfied with single digit returns.

My observations

  • Some asset managers make a major effort in assessing the talent of individual PE partners.
  • Some asset managers are heavily focused on performance metrics.
  • The nature and degree of quantified, comparative (or benchmark) analysis varies enormously among asset managers.

How can the the board of directors create value? (V3)

I have added a 4th article to the “Further Reading Section” of my article “How can the board of directors create value?” https://koorandassociates.org/points-of-view/how-can-the-board-of-directors-create-value/

This 4th article suggests enhancing the board’s role in value creation three ways: assessing the full suite of options for value creation; evaluating how strategic options affect total shareholder return; and understanding long-term shareholders’ views on value creation.  The authors are from: Norton Rose, BCG, and RBC Capital Markets http://www.nortonrosefulbright.com/knowledge/publications/137271/beyond-governance-a-canadian-perspective-on-preempting-shareholder-activism-through-value-creation

 

 

 

Long-term value growth demands a talent driven board and C-Suite.

Business competition is intense.  It is competitively differentiated board and C-Suite talent which develops differentiated strategies, business models, plans, and successfully executes them.

 Few companies survive the competition.

Most public companies will not survive. A

  • A Fortune 500 company will survive an average of 16 years.
  • The typical half-life of a North American public company is 10 years.
  • Global public companies with $250 million+ market cap have a typical half-life of 10 years.
  • 50% of all U.S. companies survive for 5 years.

Most venture-backed start-ups will fail.B

  • Three quarters of venture backed firms in the U.S. don’t return investors capital.
  • 30-40% of high potential start-ups lose all of the investors money. Many start-ups do not have any venture-backing. The overall start-up failure rate is very high.

 Few companies generate significant value.

  • McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic value (i.e. profit after cost of capital) created by those corporations.  The middle 60% generated 16% of the total economic value.  The bottom 20% lost 74% of the total.C
  • Mark Leonard, CEO of Constellation Software, his final annual CEO letter. “Qualified and competent Directors are very rare, and not surprisingly, the track record of most boards is awful. According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one – month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-bill rate over that period. This means that 4% of boards oversaw all he long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.”  http://www.csisoftware.com/wp-content/uploads/2018/04/Presidents-Letter-April-2018-Final.pdf

 CEO and leadership development programs are ineffective.

7% of CEOs believe their companies are building effective global leaders.  Only 10% of CEOs say their leadership development initiatives have a clear business impact.  Just 11% of global executives agree that their leadership-development interventions achieve and sustain the desired results.D

 Board direction selection and development processes are broken.

A McKinsey survey of board directors revealed that “Only 16 percent said directors strongly understood the dynamics of their industries, just 22 percent said directors were aware of how their firms created value, and a mere 34 percent said directors fully comprehended their companies’ strategies.”E

 Boards must also consider the company’s role in society.

Larry Fink articulated the challenge in his 2018 letter to the CEOs of Blackock’s investee companies. “Furthermore, the board is essential to helping a company articulate and pursue its purpose…..Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that will help them achieve their goals?”F

1981 US Business Roundtable Statement on Corporate Responsibility: “Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” “Business and society have a symbiotic relationship: The long-term viability of the corporation depends upon its responsibility to the society of which it is a part.  The well-being of society also depends upon profitable and responsible business enterprises.”G

 External talent must also be part of your talent pool.

No company has all of the talent it requires.  External talent can include: your personal network, advisory board, strategic advisors, consultants, lawyers, accountants and other experts.

 What do you do about it?  

  • Determine the talent needed over the next 5-10 years on the board and in the C-Suite, in order to grow long-term value and beat the competition.
  • What’s the talent your company has (both internally and externally)?
  • How do you close the gap with a combination of internal and external talent?
  • What talent and processes need to go in place to ensure the gap does not reappear?

This sounds easy, but incredibly difficult to do in practice.

 Footnotes

A “Corporate Longevity”, Credit Suisse, February 7, 2017

B “The venture capital secret : 3 out of 4 start-ups fail”, Deborah Gage, Wall Street Journal Small Business, September 19, 2012  discusses research by Shikhar Ghosh, Harvard Business School

C Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-to-beat-the-odds , Tom Koor analysis

D Claudio Feser, Nicolai Nielsen, and Michael Rennie, “What’s missing in leadership development?”, McKinsey Quarterly August 2017, https://www.mckinsey.com/featured-insights/leadership/whats-missing-in-leadership-development

E Eric Kutcher, “Corporate Boards need a facelift”, McKinsey May 4, 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/corporate-boards-need-a-facelift

F Larry Fink, “Larry Fink’s Annual letter to CEOs.  A sense of purpose”, Blackrock,  https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

G Ralph Gomory and Richard Sylla, “The American Corporation”, April 2013, page 6, The Wall Street Journal http://online.wsj.com/public/resources/documents/50b74ca9c91e6TheAmericanCorporation11292012.doc.pdf

 Further reading

My website has several points-of-view relating to value growth and talent.

Survey – how do board directors impact long-term corporate value?

This report contains the high-level findings from my survey regarding ” How do board directors impact-long term corporate value?”  A PDF with more detailed data is available for download here. (How do board directors impact long-term value?) People I know from three groups (7 CEOs/Presidents, 8 directors, and 10 major investors) responded to my two questions.

The survey findings are intended to help discussion among your board, C-Suite, and major investors.  You should do a similar survey, focused just on your company.  My survey findings are not conclusions regarding the overall views of all directors, CEOs, or major investors.  The sample size was too small.

What follows are:

  • Summary observations
  • Summary data
  • A link to the spreadsheet with detailed data

Summary observations

Question #1  What are the three board of directors decisions (or actions, behaviours) which have the greatest impact on long-corporate value?

Most major investors believe CEO selection is one of the top 3 value impacting decisions made by directors.  A minority of directors and CEOs responded this way.  Investors believe that the talent of the CEO has a massive impact on value growth.  80% of investors responded that CEO selection was one of the top 3 decisions.  Only 38% of directors, and 43% of CEOs responded that way.

Major investors and CEOs, unlike directors, believe that directors should challenge and approve the strategy, resource allocation, and major initiatives. Investors and CEOs want directors to help with the creation of robust plans and resource allocation.  Several investors told me that the allocation of capital and talent by the board has a major impact on long-term value.  One director was quite blunt – the board does not get involved with talent allocation. 50% of investors and 57% of CEOs responded.  Only 13% of directors responded directors should challenge and approve the strategy, resource allocation, and major initiatives.

Many CEOs want to have a both a deep and challenging discussion with directors.  50% of directors responded only to approve the strategy. No CEOs or investors responded that only approve the strategy was sufficient involvement.

Question #2 In order to make those three decisions, what skills, experience, values, morals, and ethics must each director have?

Every CEO and most investors (70%) responded that directors should have skills relevant to the company.  Only 50% of directors responded this way.  I wonder how directors are able to make decisions which impact long-term corporate value if they don’t have skills relevant to the company.

Most directors, unlike CEOs and investors, perceive that values, morals, ethics, and courage to make tough decisions are required to make the top 3 decisions.  63% of directors responded with some or all attributes of values, morals, ethics, and courage to make tough decisions.  Only 29% of CEOs and 30% of investors responded.

Each group provided similar responses regarding diversity i.e. about 30%.  No-one mentioned gender diversity.  One interpretation is that the requirement for board gender diversity in 2018 is a given.  Thus, it no longer appears as a critical director requirement enable the three major value creating decisions.

Independent of management had a 0% response from investors, only 14% from CEOs while 25% from directors.  My interpretation is the perception that independence does not drive value growth.

I was surprised by the low response regarding the need for a broad personal network. All three groups had similar responses – approximately 12%.  No-one has a perfect and complete set of skills.

25% of directors responded with the ability to work together on the board.  No CEOs or investors responded.  I suspect that this an issue only for directors.

Overall observations

  • Directors, CEOs, and investors often have very different points of view as to:
    1. how a board can enable long-term value creation.
    2. what a director has to bring to the table in order to make those long-term decisions.
  • There was a extremely broad range of responses.
  • Some people saw a direct link between directors’ actions and the types of directors required for those actions (e.g. decision making on succession planning require experience in senior executive succession planning). Others did not see a link.
  • The words “strategy”, “strategy planning”, etc. mean very different things to different people. Cleary each company requires a written definition of the terminology they use, given that directors will come from different backgrounds where the words had different meanings.
  • Directors without skills relevant to the company will have difficulty in value creating challenges and approvals of strategy, resource allocation, and major initiatives.
  • At first it might look good that 63% of directors responded with some aspect of values, morals, ethics, and courage. This will actually have limited impact on the company because only 13% of directors will challenge the strategy, resource allocation, and major initiatives.  Only 13% of directors responded with establishing the right culture.  Although the directors may have high moral, values, and ethics, it’s not clear those beliefs will be reflected in management.

Summary Data

Question #1  What are the three board of directors decisions (or actions, behaviours) which have the greatest impact on long-term corporate value?

CEO Selection” – 56% The individual group rankings were:  Investors 80%, CEOs 43%, directors 38%

Strategy approval” – 56% The individual group rankings were: Directors 63%, CEOs 57%, Investors 50%

“Strategy approval” has two sets of responses:

Response #1 was only “Approve the strategy”.  The individual group rankings were: Directors 50%, CEOs 0%, Investors 0%

Response #2 was some or all of “Challenge and approve the strategy, resource allocation, and major initiatives”. The individual group rankings were: CEOs 57%, Directors 13%. Investors 50%

Set the long-term direction or management goals”– 36% The individual group rankings were: Investors 70%, Directors 25%, CEOs 0%

Ensure the right talent in management and staff – 20% The individual group rankings were: Directors 38%, CEOs 14%, Investors 10%

Set compensation for CEO and C-Suite” – 12% The individual group rankings were: Investors 20%, CEO 14%, Directors 0%

Challenge and validate what management says -12%  The individual group rankings were: Investors 30%, CEOs 0%, Directors 0%

Establishing or ensuring the right culture – 8% The individual group rankings were: CEOs 14%, Directors 13%, Investors 0%

Ensure management meeting objectives” – 4% The individual group rankings were: Investors 10%, CEOs 0%, Directors 0%

There were three other sets of replies, each with a total of 4%:

Ensure C-Suite and succession plans in place; establish the culture; and ensure management meeting objectives.

Here were 13 unique replies which I did not put into any of the above groups.  Those replies are listed in the detailed findings PDF.

Question #2 In order to make those decisions, what skills, experience, values, morals, and ethics must each director have?

Skills relevant to the company” – 72% The individual group rankings were: CEOs 100%, Investors 70%, Directors 50%

“Skills relevant to the company” was comprised of distinct sets of responses, as shown below in terms of total respondents: 44% – “up-to-date industry and ecosystem knowledge”

4% each for the following 7: operational skills in the company’s industry; public company directors have public company experience; understand how the director can enhance the company’s long-term value; skills relevant to the company’s long-term value creation; understanding the impact of technology; and relevant to the company.

Values, morals, ethics, and courage to make tough decisions (some or all of these) – 40%

The individual group rankings were: Directors 63%, Investors 30%, CEOs 29%

Diversity – 28% The individual group rankings were: Investors 30%, CEOs 29%, Directors 13%

Respondents identified 3 different types of diversity: skills; opinions; industry and society backgrounds.

C-Suite experience – 12% The individual group rankings were:

Directors 25%, Investors 10%, CEOs 0%

Respondents identified 3 different types of C-Suite experience: Been a CEO before; Retired CEO or C-Suite executive; significant C-Suite experience

Independent of management – 12% The individual group rankings were:  Directors 25%, CEOs 14%, Investors 0%

Experience in succession planning for senior roles – 12% The individual group rankings were: Investors 20%, Directors 13%, CEOs 0%

Broad personal network, relevant to the company” – 12%  The individual group rankings were: CEOs 14%; Directors 13%; Investors 10%.

4% of the replies were very specific “Every director must have a personal network relevant to the company”.

Ability to work together on the board – 8% The individual group rankings were: Directors 25%, CEOs 0%, Investors 0%

Ability to engage in constructive conflict – 8% The individual group rankings were: CEOs 14%, Investors 10%, Directors 0%

Here were 19 unique replies which I did not put into any of the above groups.  Those replies are listed in the detailed findings PDF.

How was input gathered?

The two questions were asked. Question #1 focused on what was most important.  Question #2 focused on what was necessary to achieve the responses in Question #2.  This approach was designed to capture top of mind thinking, without the guidance of a check-the-box survey.  I had to interpret the responses and many times seek clarification.

I did not use a check-the-box survey because

  • I wanted to understand the breadth of what people were thinking. A check-the-box survey constrains the breadth.  In term of question #1 I was surprised by some of the responses. I would never have guessed at some of them.
  • Question #2 was based on the response to question #1. This would have required a massive list of options.
  • I wanted top-of-mind responses. g. what are the first things that come to mind when you think about director decisions which impact long-term value.

Your next steps

This report draws no conclusions or observations regarding the overall views of directors, CEOs, or investors.  You must conduct your own anonymous survey with your directors, C-Suite, and major investors. You must ask open ended questions to obtain top-of-mind responses, rather than a guided check-the-box survey. In the course of this you must define the terminology for your company e.g. what exactly is meant by the word “strategy”. You can then have a discussion specific to your company regarding the findings, observations, and conclusions.

You can download here the PDF containing the detailed excel spreadsheet showing the results.

How do board directors impact long-term value?