CHRO Role in PE-Funded Organizations

August 12, 2022 – In the current and increasingly competitive business climate, with dynamic and shifting markets and associated customer requirements, the chief human resources officer is one of the essential links to the successful growth and profitability of PE sponsored companies. The top HR officer is at the vortex, with the CEO, in defining and cultivating the culture and driving the talent agenda so critical to meet value creation objectives, according to a DHR Global report authored by Christopher Knipp. “HR leadership and associated practices and policies have a direct bearing on the velocity and adaptability of a company’s approach to the market,” the report said. “The CHRO’s role — to develop leaders, attract and grow talent, and create a culture of engaged employees in a dynamic environment – can make or break a company’s ability to meet aggressive performance targets.”

DHR Global notes that the required pace of change in a PE funded company often comes with a leveraged balance sheet and always with a discrete timeline to achieve value creation target. “This change in ownership requires a sense of urgency, focus and discipline in all functional areas, including HR,” the firm said. “Preferred candidates for this demanding role must be willing to exercise the cultural transformation rapidly with an eye on developing a highly motivated accountable workforce so high-impact initiatives can yield desired economic improvements. Whereas some may thrive in a faster paced environment, others may be less effective given the breadth of actions required that affect the entire HR fabric of the company.”

Celebrates and Preserves Culture

Culture drives performance and leadership drives culture. According the DHR report, the CHRO is the top “culture carrier” and the most senior executive, other than the CEO, continuously focused on maintaining (and transforming) the firm’s culture in terms of values and behavior.

“This focus on culture is critical in any company, but it is especially crucial in fast-growing companies that need to recruit and assimilate large numbers of employees to meet customer / market demand and imbue ownership and accountability throughout the organization,” said Mr. Knipp. “Now more than ever, leadership must foster a culture of inclusion that embraces and rewards the diverse talents of employees. While it is important to celebrate who you are as a company and maintain diversity, it is equally important to be disciplined and process driven regarding employees who are not a good fit and respectfully help them exit the business.”

Aligns with Business Economics

Along with culture being critical, the HR leader must also be strategic in thinking about how to support the business in the mission to build world-class teams in each function. This requires a business-oriented HR executive who knows how to identify the key position holders – high-impact leadership roles that directly affect revenue, profit, and productivity.

Related: 3 Qualities Private Equity Firms Seek When Picking Portfolio CEOs

“There are plenty of HR heads who can deal with the tactical issues related to the workforce, compensation, legal and risk management and other traditional areas,” said Dan Tinker, CEO of SRS Distribution. “The ones who drive real impact work closely with the senior team, board, and the field to be sure the organization is focused on scaling and defining culture and understanding the roles that drive real value in the organization. They make sure we are disciplined in recruiting and development to find and cultivate the most valuable and needed talent to execute the thesis.”

Instills Change Readiness

During the lifecycle of an investment, PE sponsored companies almost always enable significant change to increase the velocity of the business and ensure optimum accountability, according the DHR report. “The pace of change is dictated by the PE sponsor’s investment thesis and corresponding operating plans developed by the management team,” DHR said. “CHROs must build a change-ready organization, with a workforce that is nimble enough to maintain productivity through change and a management team fully committed to financial and strategic objectives. A culture that embraces new ideas and organizational development initiatives is a must. Transparent and direct communication across functions is required. Engagement of employees at all levels should be a constant objective to ensure a culture of ownership and accountability.”

Stays Out Front

As the chief people officer, it is not enough to be strategic and thoughtful about systems, measurement and the economics of the business. “The CHRO must enjoy being in the business and make constant and empathetic interaction with all levels of staff – from the board to the management to the factory floor or engineering staff – a priority,” the DHR report said. “Even with the best systems and processes in place, it is impossible to be credible in the role unless the CHRO practices servant leadership and the people in the company see him or her fully engaged in the business and working closely with all functions and employees at all levels. This must be a genuine effort to engage with and get to know the business at all levels. Employees will observe and follow the CHRO who leads by example, just like the CEO and others.”

What Private Equity Firms Seek in Their Next CHRO

The HR leader is a vital role for PE firms looking to grow a portfolio company. According to Salveson Stetson Group in a new report, among the qualifications and competencies hiring managers look for in candidates for the job are a demonstrated track record, a history of leading transformational change, and strong talent management experience.

“The CHRO leads by example, is always on and ensures other members of the leadership team do the same and act accordingly,” said Sanja Kos, principal, GH Smart. “The CHRO, along with the CEO and leadership team, sets the tone for the organization ensuring that organizational health is a constant focus and doing what is right for the business and the employees is essential.”

Compensation Architect & Strategist

Few issues are more crucial than the leadership role the CHRO plays in the design of executive compensation plans and programs for the portfolio company that create alignment with value creation objectives. The DHR report notes that compensation is a strategic weapon when thoughtfully considered and applied. The manner in which compensation is designed and implemented reflects the culture of company and is a symbol of the value creation behaviors that are endorsed. The report notes that several broad principals apply:

What is the right mix, balance between cash and equity?

What other incentives are appropriate beyond monetary ones?

Who are the key strategic position holders whose success needs to be tied to company performance?

What behaviors, values and objectives are paramount?

How do we instill accountability, transparency, consistency, and ownership?

Is the plan effective at attracting and retaining key executive talent?

The last point is critical, the DHR report says. “Key leaders are attracted to a PE funded company to secure an ownership position and practice their craft as they drive value – to think and act like owners of the business,” said the study. “The CHRO and his or her team need to develop a recruiting machine that sells the equity opportunity based on the business plan being applied to achieve investor returns.” ​

Knows HR Technology & is Data Driven

In today’s rapidly evolving world of technology, there are incredibly powerful tools available to HR professionals as they seek to better automate internal processes, work with outside service providers, assess potential employees, and more generally automate the “mechanics” of the HR and recruiting process, the DHR report notes. Specifically, the use of artificial intelligence in hiring, onboarding, learning, and talent management has resulted in increased efficiency, reduced bias in decision making, and lower operational costs. “The CHRO needs to be a student of these systems working with the head of IT and make sure the company is state-of-the-art in its use of technology where the ROI of these systems is warranted,” the report said.

“The CHRO must not only be aware of the latest technology, he or she must help drive the effective use and dissemination of data to help drive the talent agenda, irrespective of the platform,” said Brian Boylan, former CHRO at JDA Software. “The establishment and relentless review of talent dashboards that provide key indicators of the health of the business from a talent perspective is critical.”

Thoughtful Senior Advisor

While the CHRO must act as a steward to the entire organization, the management teams of PE funded companies are especially under fire to produce results and meet aggressive performance targets. DHR notes that as a unit, therefore, they must operate like “clockwork” in their execution against the KPIs facing the business. “An accelerated timeline and added pressure dictate trust, transparency and direct inclusive communication at all times,” the report said. “Every individual on the team overseeing every silo as well as the CEO has a functional spike in terms of their interpersonal and professional strengths. The CHRO must engage with the team as a trusted one-on-one and team counselor to break down barriers and ensure optimum performance at a management team level.”

“The CHRO needs to be the glue that holds things together as the pressure increases and be regarded as a knowledgeable and an astute trusted advisor to the CEO and full leadership team,” said Simone Reynolds, chief people officer at October Hill International. “Being a strong listener with the ability to influence a wide range of strategic issues is essential.”

Related: Larger Funds Bring Increased Competition for Private Equity Talent

Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media