Driving Enterprise Value Through People

Most leadership breakdowns occur because good people are operating with habits that no longer fit the scale, context, new structure, or business expectations. As an owner or board, try not to take challenges personally and realize your own thoughts, beliefs, triggers when leadership goes sideways. Remember that every leader is different with a different story So take time to consider how you'll approach each individual and each situation with the greatest level of care and intentionality.

From Smart Business Network, I'm Michael Marzek. And this is the Smart Business Dealmakers podcast, where we talk to the entrepreneurs, investors and advisors driving middle market M&A activity nationwide. Here's Smart Business Editor Adam Burroughs. Every deal lives or dies by the people at the top.

While financial diligence sets the price, leadership diligence is crucial to unlocking deal value. Craig McCall, president of MCG Human Capital Solutions and a corporate psychologist, joins the pod to talk about how aligning talent and culture better ensures sustainable enterprise value. From spotting the leadership red flags that erode value post-close to mastering the first 90-day moves of a high-performing integration, Craig explores how to deploy the human solutions that turn an investment thesis into a reality.

For skeptical investors who see leadership diligence as an extra cost, how do you demonstrate that it actually drives ROI? So I think leadership assessment and diligence is really about managing risk and accelerating the thesis. In most companies, a disproportionate amount of enterprise value runs through just a few leaders. And if they struggle to adapt, execution is going to slow and risk will compound.

It's no surprise that bad leaders and teams carry a significant cost for a business over time. So research demonstrates consistently that good senior hires that stick is a 50-50 proposition, whereas conducting an assessment raises your so-called good hire rate to about 80%. Now, that's significant and gives decision makers more confidence in the outcome. You could also consider executive failure cost, which probably runs two to four times base salary once you consider severance, lost momentum, team impacts, and opportunity cost.

So from an ROI standpoint, leadership assessment and development should pay for itself by accelerating good decisions, preventing missteps, and reducing leader risk. There's one other area of upside from a good assessment process, which is greater knowledge of the leader and how to best support and leverage them for optimal results going forward. So end of the day, I would say tackle leadership risk early versus fix it once performance or trust erodes. As companies scale or change ownership, what predictable leadership patterns tend to stall execution for a leadership team or CEO?

And how could somebody spot them early? I think leadership issues most often show up at rather predictable inflection points, like higher growth or expectations, increased complexity, mergers with multiple cultures, new ownership, increased board scrutiny, other things. When the context changes significantly, it requires most leaders to change how they lead. Something I see quite a bit during periods of change, and I actually see it in myself sometimes, are leaders that tend to instinctively just work harder get more involved tighten controls and this usually creates drag instead of momentum I see time and time again that greater complexity requires us as leaders to step back and up and lead at a higher elevation A colleague of mine, Mark Nevins, I think conveys this idea very well in his book, What Happens Now?

And I see it in my practice all the time. Leaders typically don't fail randomly. They stall when the context outgrows the behavior that made them successful before. This could be managing a new set of stakeholders, conveying a clear strategy or purpose, and developing better leaders instead of just throwing a headcount to manage through problems.

So it's a real advantage to recognize that leadership risks can often be anticipated and therefore better managed. Patterns to look for, I think, include evidence of micromanagement, lack of a clear plan and priorities, a disgruntled leadership team, a CEO not leading across the business, but defaulting to his or her previous areas of expertise. These would all be watchfuls for me. When you assess a leader or leadership team before or after a deal, what tells you they can actually deliver the investment thesis three to five years out, not just today?

So I look for several things. I want to see evidence of leadership maturity, leadership disciplines. I want to see adaptability. Do they have a credible plan?

Have they effectively mobilized teams before? Which leaders have taken on stretch roles and have delivered repeatable results through various business cycles? Have they learned from setbacks and challenges? The more proven and tried leaders are, the more confident I become they can deliver on the thesis.

As you consider assessing leaders, make sure you're leaning in with this type of thorough and behaviorally based questioning instead of the typical hiring process, which is often based on resume, pedigree, good chemistry, and complimentary personality, which is often a lousy predictor of success. Another way to figure out if they can deliver is to use validated legally defensible assessment data to understand people's personalities, their motivational drivers, critical thinking, intellectual horsepower, leadership style, and importantly, how people behave under stress and pressure.

Because as you know, deals magnify stress. You can get this data and it's immensely helpful to predict how people will likely perform in role. Also, and importantly, you want to look for future fit, not just past success. Consider whether leaders have the strategic, operational, and interpersonal capacity to scale in the environment that thesis assumes.

So bottom line, it's determining a match between capability, disciplines, predicting leadership behavior, and a good fit with what's to come. Beyond the numbers, what leadership or cultural red flags most commonly erode value post-close? and how do you address them early? So the biggest red flags I see are behavioral, resistance or lack of transparency with the board or new ownership, leaders who operate like it's the old company or protect their turf.

Another is low adaptability and the inability to pick up the pace for PE, which will almost always bring a faster cadence and higher expectations. So can leaders and teams shift their speed and level of sophistication to accommodate and then post repeatable results From a psychology standpoint poor emotional regulation and EQ under pressure is a real risk I'd say another red flag would be lack of alignment on the team with people pulling in different directions, unaware of key priorities, or apparent issues with trust, or you notice workarounds on the leadership team.

If you see any of these, I suggest having open conversations with your CEOs and teams. You could have front-end conversations about expectations and how you want the working relationship to be, how you'll address things if or when things come up. I also think assuming positive intent, leaning into difficult conversations without assumptions, and asking curious questions works really well. You want to have your CEOs walking away believing they are supported and that you're not just there to drive results.

Another idea to consider is leveraging a targeted 360 for a leader or the executive team, which can help gather structured feedback on what's working particularly well and not as well. It can also help uncover red flags for you. You can also leverage transition coaching for key leaders in the first six to nine months, which can accelerate learning and refine ways of leading and operating, and also be incredibly valuable in the process. What leadership moves in the first 90 days separate strong integrations from chaotic ones?

The best boards and leadership teams I work with are careful about changing things too soon, and they spend the time to learn how things actually work in a company, on a team. They assess and understand capabilities and people dynamics and how decisions get made. Great teams focus on alignment and clarity of roles and priorities early on. I often see teams that are unclear about the short-term strategy, priorities, and the scoreboard.

I suggest you work on this early because it's a common miss. You can make improvements to process and routines first 90 days, but I would suggest you resist the temptation to reorg too soon since the company's probably just experienced a lot of stress in the system through the deal. However, you can certainly move swiftly if you see toxicity or ineptitude on the team. If a management team hasn't failed, but could clearly be better, how should owners intervene without demoralizing them?

It's a great question that I'm asked often. Great teams work on how they work together. Remember Tuchman's stages of team effectiveness, forming, storming, norming, performing. And this can be normalized with the team.

Be as supportive as possible and say you want to align around common goals and agendas. Stress that high-performance teams routinely get help to fine-tune their approaches. I just recently helped a leadership team at a top F1 racing organization who's looking to get even better. That's what great teams do.

They work on themselves often, not just the so-called what work, but the how they work together and looking for their growth edge. So that is how I might frame it. You can also gather data and diagnostics via observation or 360s. You want the team to experience this work as an investment to set them up for success instead of judgment.

Lastly, I love when I see private equity doing this kind of thing internally so that you can share that story. Hey we do it so we not asking you to do something that we don apply to ourselves like assessments off coaching working on team alignment those kinds of things How can structured coaching and feedback be used early to fix alignment issues before they become a permanent drag? Coaching senior leaders works best when the work is tied directly to the business context and strategic priorities.

It can absolutely shorten the learning curve during transitions by helping leaders be strategic on how to best accelerate their learning and their influence. Ultimately, you want to help leaders adapt faster than the environment is changing. If you're an owner or board, create a situation where a coach, if you hire a coach, works with a leader for just say three to six months to see how much value they can bring in a short period of time. Stay abreast of progress and get observations and insights from the coach.

You're testing, again, value add from the engagement. Ensure the coach has worked within the industry of a similar size or rate of growth and with that type of leader. I would ask for success stories and challenges when hiring an advisor. Based on everything you see across deals, what's the best advice you'd give owners, buyers, PE firms about using leadership and psychology well without overcomplicating it?

I'd offer three pieces of advice. First, treat leadership risk as predictable. Watch for moments when leaders are especially challenged and try to understand the context. Also, get to know your leaders and their preferences, their particularities, styles, motivational drivers, agendas, fears.

This is all valuable information. Most leadership breakdowns occur because good people are operating with habits that no longer fit the scale, context, new structure, or business expectations. As an owner or board, try not to take challenges personally and realize your own thoughts, beliefs, triggers when leadership goes sideways. Remember that every leader is different with a different story, so take time to consider how you'll approach each individual and each situation with the greatest level of care and intentionality.

I actually coach deal and operating partners at mid-market PE firms around this very thing, and it does make a difference. Second, I would establish and track actions around leadership diligence and development to make sure your efforts work and drive real behavioral change. Keep things simple and actionable. Also, keep close to the work that coaches and advisors are doing to ensure you're getting value from the work and you can do what you can to support and get the results that you need.

Lastly, focus on the few leaders and teams that matter most. Every business has one or two roles where leadership quality massively affects outcomes. Put your energy, time and resources there and invest in their growth and ensure that you're supporting the leaders and teams that are carrying the most weight. If you like what you heard on this Smart Business Dealmakers podcast, please share with your colleagues and subscribe to receive future episodes.

You can also visit smartbusinessdealmakers.com for more insights from the entrepreneurs, investors, and advisors driving M&A across the country.