Talent

The Market Cap Multiplier

Ram Charan, Anish Batlaw

• Publisher: Ideapress Publishing
• Year: 2022
• ISBN:
  9781646870868
• Topic: Commerce
• Subtopic: Capital de connaissances

How do some Companies Multiply their Market Cap several times over?

Learning to build a high performing talent engine – today's strategic imperative!

Inthis book, General Atlantic's Operating Partner Anish Batlaw and veteran business advisor and New York Times bestselling author Ram Charan, show you how to build and incentivize management teams that can multiply enterprise value several times over in 4-5 years.

No matter how high your company's growth goal is, you'll get from here to there by learning from this book's riveting narrative of the high-stakes personnel decisions and bold actions taken by CEOs, investors, and boards who grew six real—and world-class—companies, ranging from ecommerce startups to major corporations like Johnson & Johnson. Told from both authors' firsthand vantage point inside each company, and from Batlaw's active role in shaping their outcomes, TALENT offers a rare inside look at how shareholder value is created when CEOs move with speed and accuracy to get the right leadership teams in place.

How can you be sure that your company can grow its value as much as these six companies did? By learning from the versatile and replicable methodology presented in this book, whichhas worked effectively across geographies, cultures, and sectors. TALENT is the answer. Now is the time.

CHAPTER 1

TALENT: THE ENGINE OF VALUE CREATION

WILLIAM E. FORD, CHAIRMAN AND CEO, GENERAL ATLANTIC

General Atlantic has enjoyed a long history of success as a pioneering growth equity investor by applying a distinctive formula, enabling the firm to create exceptional multiples in value by building up great companies. The firm was founded by the entrepreneur and philanthropist Chuck Feeney, who had previously cofounded the airport retailer Duty Free Shoppers. In 1980, he established General Atlantic as a direct investment entity to support visionary founders, as well as magnify his ability to “give back” and achieve his mission to give away his accumulated wealth in his lifetime.

In 1982, Chuck formally established Atlantic Philanthropies. The Foundation operated anonymously for its first fifteen years because of Chuck’s desire for flexibility and a low profile. In its thirty-eight years of existence, Atlantic Philanthropies provided close to $10 billion in grants, creating opportunity and promoting greater fairness and equity in communities around the world. Chuck has said before, “I see little reason to delay giving when so much good can be achieved through supporting worthwhile causes today.” This is the guiding principle of the “Giving While Living” philosophy that has become an inspiration to so many philanthropists and still permeates the culture at GA today.

The founding team at General Atlantic, including Steve Denning, former CEO and Chairman Emeritus, and Dave Hodgson, Vice Chairman, believed deeply in the power of technology and its ubiquitous potential. Our firm’s strength is partnering with high-performing entrepreneurs and leadership teams and scaling up promising global businesses, investing in innovative products, new markets, and, importantly, people. It is a uniquely optimistic philosophy, a commitment to creating durable business successes that enrich their numerous stakeholders, customers, employees and executives, communities, and investors.

Even with GA’s strong track record, Bill Ford, our CEO since 2007, reflected on that formula a few years ago and felt we could do even better. His objectives focused on what his long experience in the industry told him was one of the most elusive yet consequential—and in many ways underappreciated—elements in the success of GA’s portfolio businesses: talent.

Bill believed that, in many instances, it was taking too long to install the right leadership teams at portfolio companies, or that the companies were having to change leadership multiple times before finding the right fit, costing them valuable time and diminishing returns. The data clearly supported his views. The solution, Bill decided, was to invest in building a comprehensive, data-driven, and disciplined approach to identifying, assessing, and nurturing high-performing talent and building high-performing cultures in a consistent way. His fundamental insight, borne out by an analysis of our performance over the years, was that talent was the key engine of value creation, particularly in today’s challenging, and rapidly changing, knowledge economy. Getting the right leaders in place quickly and more consistently needed to become a core discipline for the firm.

“I had a deep conviction, particularly with growth companies, that talent was the single most significant variable in differentiating outstanding performance from just good success,” Bill said in an interview. “Before, we focused on having the right investment, the right price and deal structure. But we’ve learned talent is as important as all of those things.” By his own account, Bill has become something of an evangelist for talent and has taken a series of concrete steps that have been transformative for the firm and its portfolio.

Today, GA’s talent function is integral to the investment process, deeply involved in portfolio management, and a critical part of value creation. My role, as an Operating Partner within the firm, is focused entirely on supporting our portfolio companies in building high-quality management teams and Boards of Directors, and in developing highly engaged and diverse workforces. This work is made possible because of Bill’s sponsorship.

Like Bill, I have been a student of leadership for my entire career and have witnessed firsthand the impact that talent has on creation of value. I have worked in the private equity industry for over fourteen years, which includes seven years with GA and six years previously with TPG Capital. Before coming into private equity, I worked at PepsiCo, Microsoft, and Novartis, where I came to understand the universal impact that strategic talent management has on companies across different industries, geographies, and stages of scale.

Within a few months of my joining GA, Bill and I set a long-term goal of “getting the right management team in place at portfolio companies within six months of closing a deal”. That was a critical first step and, importantly, it became a firm-wide goal that I share with my partners on the investment side. I then worked with Bill and our partners to codify the approach in a landmark series of memos in 2016. This model, which we call the Talent Playbook, is built on a foundation of rigorous analysis of data, a consistent methodology, and replicable results.

“Building leadership capability within our portfolio companies is one of the most important things we do,” Bill once wrote.

To develop this playbook, we started by looking at data on our investments over a period of twelve years. The findings were striking. We found that when we made a mistake with a CEO change, the average IRR for those deals dropped by about 82 percent compared to when we got the CEO change right the first time. In addition, when a change was successfully executed within the first year of the deal, the average IRR ended up being 6× greater than if the change was made after the first year. Backing the right leader and teams and moving with speed and conviction lead to exceptional results; getting it wrong can be damaging.

All deals that are presented to the Investment Committee include a page dedicated to talent and culture. This page typically includes an overview of current management capability and future needs, Board composition, and observations on culture and diversity. Not only do we look at the top one or two executives at each company, but we go deep within each organization to gain an understanding of their entire leadership team, organization structure, operating rhythm, talent systems and employee engagement.

On the heels of a deal, we immerse ourselves with the management team to better understand areas of strength and potential opportunities for development, all in the context of scaling the business. We then synthesize our findings and help the CEO develop and execute a talent and organization strategy aligned with the deal thesis. This has become a core process for GA.

One of the most challenging variables in our talent methodology is identifying executives who have the ability to build and manage the business for far bigger and more complex than its current dimensions. Perhaps the most difficult aspect of this part of the process is being willing to part ways with leaders who may be performing well, who may be loyal and well-liked, but who are considered to not have the necessary skills and leadership to take the business through the next stage of its journey.

Growth CEOs often “instinctively know they have people on the team who have been successful in the first chapter but who aren’t equipped to support the company through its next phase of growth,” Bill said. “It’s the hardest part, especially when those same individuals were by your side and instrumental in getting you through the challenging early years of starting a business. They are often loyal, hardworking, and capable, but if they are not equipped for the next phase, you have to act in the best interest of the company and elevate the team to set the company up for success.”

“Even as a Board Director, it’s an uncomfortable feeling to watch this happen,” Bill continued. “But these leaders placed the mission of the company and where they wanted to take the business above that loyalty. It’s a hard decision. However, if you don’t make those changes, you will start to stunt your growth.”

He added, “The great growth CEOs are willing to make changes to the organization even while they’re going 50 to 60 miles an hour, and make very difficult decisions about talent.”

Ultimately, Bill emphasized, the greatest strength he seeks in a growth leader is not just having a farsighted vision and a strategy for obtaining it, but also having the ability to build an exceptional team equipped to manage increased scale and complexity and drive execution.

“The great ones are leaders, not managers, in the sense that leaders take people to places they can’t even imagine are possible. Managers effectively manage resources and advance a company in a very positive way. True leaders don’t have irrational goals—they’re rational, even when they seem unattainable.”

Another key initiative to advance our talent agenda was building a database of proven, high-performing executives that we know and can turn to when needs arise across the portfolio. We call it our Talent Bank. Our function follows a disciplined process for seeking out talented executives in the marketplace, inviting them to engage with us in conversations on their backgrounds and goals even before there is a need in the portfolio. Our partners actively contribute to the Talent Bank.

Maintaining the Talent Bank is time-consuming and challenging—we track over 4,000 executives—but the payoff is significant. We have found that working with a search firm for a key senior hire typically takes from 150 to 160 days. When we can turn to our network through the Talent Bank and other avenues, we can make a key hire in as few as ten days, having already been well-acquainted with the candidates. This strategy has also allowed us to build a pipeline of diverse leaders and has contributed to a 50 percent increase in female executive hires across the portfolio from 2018 to 2020. We have also been able to help our Boards add diverse talent. As of the end of Q2 2021, 52 percent of Independent Directors on our US Boards were diverse.

The impact of this engine is proving dramatic, especially in a highly competitive talent market. After launching the Talent Bank in 2015, we sourced 30 percent of placements across the portfolio from our network just three years later. In the first quarter of 2021 alone, 62 percent of hires came from our Talent Bank. Additionally, the time required to hire CXO and Board Directors has dropped from 162 days on average in 2014 to fewer than eighty days on average in the first quarter of 2021.

“We needed an accelerant to our process, and the Talent Bank is the accelerant,” Bill said in our interview. “It changed the game, and it’s become a real competitive advantage for the firm.”

Our partners have bought into the process. “What Anish has done is to create a lot of believers among the Managing Director group,” Bill said. “Before they might have said, ‘Look, the hard part is finding the investment and paying the right price, structuring it right, getting to an exit.’ But I think we’ve elevated talent to be just as important as those things. And I think it’s the most important part of the added value that we bring to the companies.”

GA is itself also a growth company, like the companies we invest in. Under Bill’s leadership, the firm has grown enormously—as...