The CEO of your portfolio company is resisting change. How do you navigate this challenge in Private Equity?

When a portfolio company faces CEO resistance to change, a structured approach to change management is key. Start with a clear diagnosis of the causes of resistance: lack of understanding, threats to personal power, or ineffective communications. From there, develop a strategy that includes clear goals, an implementation plan, and supporting initiatives. Ensure that the CEO and key employees understand the benefits of change and its impact on the long-term value of the company. Use data and examples of successful cases to support your arguments. It is also important to ensure that the CEO is actively involved in the process and has the support needed to successfully implement the change.

Private Equity is a tough business. PE firms are smart and understand what it takes for a business to thrive. They also see the potential, or they would not have invested in it or done the deal. CEO operating the portfolio company is key to make the investment return a satisfactory ROI. Help him understand that growing the business and making it more valuable will lead to better incentives and opportunities for him while increasing the valuation for the PE firm. Ultimately, PE firms are in the business of growing and increasing value but obviously having to exit in a reasonable time frame to realize their ROI and give returns to their Limited and General Partners. Some Operating CEO's don't see this nuance. Help them understand the picture

Understanding the root causes of a CEO's resistance to change is crucial. Engage in open dialogue to uncover their concerns and perspectives. Resistance often arises from fear of the unknown, perceived loss of control, or a strong commitment to the current path. By empathizing with their position, you can start to dismantle barriers and build trust, essential for facilitating necessary changes.

To navigate a CEO's resistance to change in Private Equity, follow these steps: 1) Present data-driven evidence showing the benefits of the proposed changes, focusing on 2-3 key metrics, 2) Engage in 1-on-1 discussions to understand the CEO's concerns and align the change with their vision, 3) Highlight quick wins by implementing 1-2 small changes that yield immediate positive results, 4) Involve key stakeholders to build consensus, and 5) Set a timeline for gradual implementation, ensuring changes are manageable and monitored closely.

Building a strong, respectful relationship with the CEO is crucial. Regular communication, showing genuine interest in their vision, and acknowledging their past successes help establish rapport. This foundation of trust turns you from an external force into a trusted ally, making change easier to digest.

From a governance perspective, the quote "show me the incentive and I'll show you the outcome" by Charlie Munger tends to be my favorite summary about the importance of thoughtful governance. Once it's understood where the resistance is coming from, tackling it with helpful incentives is how to move from knowledge into action.

Aligning the interests of the CEO with those of the Private Equity firm is essential for progress. Clarify how proposed changes benefit both the company and the CEO personally, whether through long-term goals, financial incentives, or professional development opportunities. When interests are aligned, resistance often turns into cooperation.