Kohlberg Kravis & Roberts is one of the oldest and most prestigious alternative asset management firms. Started back in 1976, it now has more than $60 billion of assets under management, owns more than 50 companies across nine different industries with revenues exceeding 220 billion dollars and employs more than 855,000 employees around the globe.
KKR invests money from pension funds, university endowments and other investors into companies by taking them private and has returned an average of 26 percent to its investors over its 32-plus year history. This extraordinary track record comes from understanding industry trends; very deep due diligence, financial and operational expertise; and a fundamental belief that one bets on management teams to drive value.
When I joined KKR a little more than one year ago, I was asked to work alongside the deal teams to help assess management teams and management practices of various companies. There was an understanding at KKR that, when deals went well or if they had difficulties, it was often due to the quality of the leadership.
KKR wanted to more accurately assess company culture and management practices to determine the ways they added value. In addition, the firm wanted more focus on selecting and developing best-in-industry CEOs and top teams.
If we get the top team right, much can happen -- including strong execution of company strategy with an aligned and engaged workforce. The HR systems of organizational design, talent management and total rewards are critical to making this happen.
The work during the past year has been expansive, and has included, at times, conducting CEO and top team search work to replace existing management teams consistent with a new growth-oriented direction.
We now conduct formal succession and CEO reviews for our boards, and support that work with top-team assessments and executive coaching.
We formally audit HR practices and human capital metrics to ensure we add value from what we discovered during due diligence and we align the compensation plans to reinforce our "managers as owners" philosophy by having management invest alongside us -- thus, sharing in the gains and risks with our investors.
Why does all this matter?
We know through research and experience that differences in the quality of executive leadership account for a great deal of company performance. We also know that companies with high-performance work systems and enlightened talent-management systems have, on average, higher returns on sales, investments, assets and equities (Academy of Management Journal, 2006).
During due diligence and after taking a company private, we ask some fundamental questions with respect to human capital.
We are more interested in the talent outcomes than process, per se. Answers to the following kinds of questions help us determine how the company manages its people -- who actually gets hired (not what are the hiring processes); who actually stays with the company (not what are the retention strategies); who advances (not what is the promotion philosophy); who are the high performers and how are they rewarded (not what are the compensation strategies).
We focus on outcomes and look at trends over time on what is actually happening. Looking at the facts, not statements of intent, give us a revealing picture of the way the top leadership actually manages talent.
Lastly, we have learned that selecting CEOs and senior executives in a private-equity setting requires a maniacal discipline of assessment. We dispel the notion of hiring "general athletes" and instead line up a candidate's track record of performance against the investment thesis that drove the decision to purchase the company in the first place.
Are there hidden assets in the portfolio? Do we need a growth driver? Do we need a cost cutter? How important is industry knowledge, etc?
The investment thesis matters greatly to us. We align the assessment criteria against the future strategic direction and current operating challenges to determine optimal fit.
We employ a five-part hiring protocol that encompasses:
* A deep understanding of performance history over time and in different situations;
* An assessment of potential, which for us means learning and change agility;
* A review of possible derailers, including low self awareness and arrogance
* Fit to company culture; and
* Fit to a private equity environment.
Working in a private-equity setting requires the executive to move with speed, have extraordinary financial discipline, take risks and have transparent relations with the board, to name a few.
The lessons learned so far can be summarized in the following 10 key themes that can serve as guide posts for CEOs and HR leaders in public or private settings:
* Getting the top leadership right is job No. 1 for the head of HR, CEO and board of directors.
* Disappointments in performance are often attributable to failures of management, not poor businesses.
* CEOs and boards of directors need to better understand the way talent impacts business performance over the long term by looking at results, not intentions.
* Do not separate strategy, operating and management discussions -- they are all linked and only artificially separated in management reviews.
* Bet on management teams as much as the company.
* When assessing talent, it's more about outcomes than philosophy statements.
* It is better to decide fast and fix later, than delay a change in management.
* Simplify the complex by focusing on the few critical drivers of success in the business (e.g., top line growth, cash flow, EBITDA).
* Align incentive compensation by having executives be more than "consumers" of stock value appreciation and have them share in the risks and upsides of performance.
* Enhance corporate governance by aligning directors and top management as co-investors.
Peter M. Fasolo joined KKR in 2008 and is the chief talent officer and a member of the Portfolio Review Committee of the firm. Peter works during both due diligence and post-acquisition phases to help build the management depth and diversity of the KKR North American portfolio companies. His focus is on executive assessment, selection, succession and compensation across the various industry groups for KKR. Peter has more 15 years experience in consulting and working directly in the healthcare and consumer industries, including Bristol-Myers Squibb, Johnson & Johnson and Cordis Corp. Peter earned a Ph.D. in Organizational Psychology from the University of Delaware, a M.A. in Industrial Psychology from Farleigh Dickinson University and a B.A. in Psychology from Providence College. Peter lectures and writes extensively on workplace fairness, leadership and workforce metrics.
Established in 1976, KKR is a leading global alternative asset manager. The core of the firm's franchise is sponsoring and managing funds that make private-equity investments in North America, Europe and Asia. Throughout its history, KKR has brought a long-term investment approach to portfolio companies, focusing on working in partnership with management teams and investing for future competitiveness and growth.