August 24, 2020
It’s tough out there. Market conditions are beginning to loosen slightly as lockdown eases, but the size and shape of the economic contraction that 2020 has undergone is enough to scar any private equity backed organisation.
The question that I’ve increasingly been asked is that of a business’s ability to recover from the immediate crash and move onto more value creating pastures. The successful navigation of these choppy waters is no trivial skill however, and the reputations of senior leaders across the marketplace will be forged in 2020, by their response to this recession.
Who then are the leaders that will prosper through this period? Can we anticipate the leadership teams that will most successfully see their businesses through to the other side?
Anticipating the ability of leaders to respond to a crisis positively is no easy feat, but our research indicates that there may be some critical factors which increase the likelihood of success. Firstly, prior experience of going through similar market conditions may prove key.
If we look at the current suite of CEOs in private equity, an absolute majority of them were not Chief Executives during the last crash (2007-2009). For 61% of current CEOs, there is therefore a very limited frame of reference and previous leadership experience for them to call upon. One of the key pieces of research for drxDATA right now, and one of the most interesting results of our work this year, will be understanding the extent to whether these businesses achieve a better or worse outcome than the 39% of companies whose CEOs led a business through the last financial crisis.
Prior experience of the market downturn, however, is not the only variety of experience to consider when evaluating the fortunes of leaders through this marketplace. For example, our research also demonstrates that only 19% of CEOs in private equity were at their current company (either as CEO or some other role) in 2007-2009. Given the significance of understanding one’s marketplace (domain experience) within the typical CEO profile, our modelling indicates that those CEOs may be better equipped to see a business through this market than those coming from out-of-sector to lead an organisation through a downturn.
The question, at this point, is largely unknowable. In so many ways, this is an economic downturn unlike no other. However, there is an enormous opportunity to unpick the secrets of successful leadership through a crisis like this one.
drxDATA’s Leadership Success Propensity Modelling clearly shows that for CEOs, the most common experience that leaders possess is domain experience, but that situational experience is the real differentiator. If leadership through a downturn is therefore reliant on the same experience as a benign market, we would expect this to hold true. However, it is certainly reasonable to suppose the requirements of leaders and therefore the relevant experience they rely upon shifts markedly through a period such as this.
If I were a betting man, I would expect to see a shift through this period towards domain experience becoming, in some ways, a stronger pre-requisite for successful leadership teams. Either way, drxDATA will be continuing the work to unpick the secret to successful value creation through leadership, in good times and bad.
Director, Head of drxDATA