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Blog February 2017

The Altitude Interviews: Supporting the business of management - when the founders' founder

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Stephen Edwards, serial non-executive and keen businessman, is a member of this unique and invaluable group. Currently a Board Chairman at James Tobias and at Gradwell Communications, Stephen has a wealth of experience in working alongside private equity- backed management teams.

Stephen’s heritage is in technology-led organisations, mainly US corporations, including Unisys and Dun and Bradstreet Software where he was VP Europe. Following the NASDAQ listing of SeeBeyond, he gravitated towards a pluralist non-executive existence, one that even he would agree, was not exactly planned. After a successful early entry into the world of private equity through a BIMBO, Stephen was asked to help at BigHand, following which a number of other opportunities started to come his way.

Talking to Stephen he clearly understands that his role can be quite varied, but the focus in all situations is in helping private equity investors and respective management teams with the governance of a Boardroom and, most importantly, with the development of the businesses.

In small and mid-market private equity one of the most oft quoted mantras is the sentiment of ‘backing management’ and it is here that Stephen paints a slightly different picture. It is not that he fundamentally disagrees with the thought but his experience and focus has developed a more business-centric view. Fundamentally he is ‘backing the business’ and all that entails.

He does not see his role as the investors friend, nor the CEO’s consigliere but as someone who must protect the development of the business for all of the shareholders and employees. The business comes first and a good non-executive understands that the Boardroom steers the ship and therefore must do so for the benefit of the business. If this is done correctly then everyone involved in the business benefits.

Equally Stephen has clear views on both the skills required and the type of individual able to become a successful non-executive. For instance he is clear that not everyone is suited to the role. As he says: “One thing that doesn’t necessarily qualify you is success in one particular business. Equally coming from a PE background doesn’t always make you a good non-executive.”

In both instances Stephen’s point is clear. Success in their own business doesn’t necessarily provide the founder or entrepreneur with skills which are transferable into another business. The ‘well it worked there’ argument isn’t always applicable.  For those coming from PE there is a distinct shift. Investors are generally on a Board as the protector of the investment capital, they are not invited and, in some cases, after a few Board meetings they are not welcome, as they are not offering value to that business.

It is here where he believes Altitude has the balance right. As Stephen says: “I would have no hesitation at all in saying to anybody who was looking for an investor…you should speak to these guys because they are a pleasure to work with. They won’t try and run your business for you but will give you sensible advice.” It is at this level that a good private equity partner adds value, and experience at both an investor and business level can provide the most rounded advice. Simon White and Jonathan Simm have been on both sides of the investor fence which makes their support more palatable. Stephen puts this more succinctly: “They’ve lived in the real world so bring a lot of experience to a business. They are a good combination and people will listen to them.”

On a similar point Stephen observes that poor investors generally take ‘knee-jerk reactions’ to problems, be it at a people or operational level. Good investors (and he thinks Altitude fall into that category) will ‘…act in a humane and sensible way towards business’, will “…be fair even in difficult management situations…but will act if necessary to help the business.”

He goes on to believe that people “…underestimate the damage they do by behaving brutally…as people will never forget.” Such an observation is interesting in an industry that has a reputation for cutthroat behaviour, sometimes a little thought and consideration will produce better results over the long term than short term callousness.

In Stephen’s view there are a number of things that make a good non-executive and it invariably involves a combination of sector/market knowledge (which is considered a mandatory element), some level of financial acumen (depending upon the specific role), and soft skills. The latter is of most importance.

Sector knowledge is an interesting point. It is one area Stephen feels the UK has the balance slightly wrong: “You’d rarely, if ever, find a German or the US business leader without market knowledge, yet in Britain we seem content to employ people in key Boardroom positions who know nothing about an industry.”

In terms of soft skills there is a direct correlation between those individuals with soft skills and the ability to influence and negotiate change. This is the same for all walks of life and in business it is no different. As Stephen states: “Soft skills are important when working with strong, focused people in order to get them to think about positions, changes and actions they wouldn’t necessarily want to do. The easy answer is not always the right answer.” Persuasion as opposed to dictation is invariably more powerful and lasting.

What a non-executive should never do in Stephen’s opinion is stick around on a Board when they’ve clearly got the wrong skillset, cannot work with key management personnel (CFO, CEO, CTO etc.) or fundamentally disagree with the investor/business strategy. In such situations no value is added at any level.

Interestingly Stephen believes that being in big business is a good grounding for an NED as it is in such organisations that personnel receive formal training and skills development, and also have to learn the art of positioning and persuasion. Very few executives succeed without being able to voice a clear rationale behind an idea. The trick as he points out “…is being able to adapt those skills to smaller organisations understanding that retaining ‘the big picture’ is important even when undertaking operational actions.” Not everyone can do this and it is why they fail to become effective non-executives.

On this point one nuance that Stephen highlights in the non-executive environment is the celebrity hire which in broad terms means recruiting individuals based upon their perceived influence and contacts. In simple terms he believes that “…Taking somebody on because of their contacts is largely nonsense…” because it often means that the skillset required to complement the Board has been overlooked. Such actions don’t help a business especially one that is on a growth trajectory when different skills are required.

Stephen’s roles at Altitude investments James Tobias and Gradwell Communications mirror many of these observations. Throughout his tenure on both Boards, although his rules for participation at James Tobias go slightly against the norm in that his sector knowledge was limited, he has had to bring a full range of skills in order to support both exciting businesses.

At James Tobias his role as a mentor and supporter of the Board is of most importance, as it was a relatively inexperienced Board when he joined the investment. He is a firm believer that this business has a bright future and as a high quality provider with a first class manufacturing operation has a good platform for success. Their delivery in the commercial and education marketplace is of particular interest.

Gradwell Communications on the other hand is firmly in Stephen’s sweet spot from a technology sense, and his previous experience in and around the IT sector provides knowledgeable support for this business. He is equally positive about the future of this business and its prospects for the future, especially as they remain on the cutting edge of VOIP and cloud-based communications. The decisions here will be on product-market placement in the coming years especially as the sector moves at such a pace.

The art of working with and alongside a management team is certainly not learnt overnight. As Stephen points out “…non-executives don’t have mentors and many either learn on the job or through the experience of doing the job over a number of years.” Following on from this it is therefore essential to find the right non-executive to support a business that has plans to grow, and this is even more so when external investors are in place.

This is in fact quite an interesting area of discussion and one many investors really don’t like to talk about…the abilities of a management team. And it comes back to the mantra of backing management, a mantra that in many private equity-backed businesses falls at the first hurdle. A survey of any randomly selected PE backed businesses would find that there has been at least one management change during the course of the investment…and sometimes more. This makes the role of the non-executive even more important.

It is often the non-executive that provides the long term glue for a business but even more than that it is the non-executive that can help a management team without the necessary experience to get over the growth pains experienced following external investment. Stephen paints this picture in a very clear way: “At a certain point in the growth of a business and it is normally around the £6-8m mark the founders begin to founder. It is here that a good non-executive is needed to help them grow into the role that is now needed or indeed transition them into a role that is better for the business.”

Good investments are those where the relationship is right during both the good and bad times. It is here where Stephen feels Altitude has got the balance right. He feels that with every investment decision both Jonathan and Simon “…personally have to feel comfortable both at an intellectual level and through simple ‘gut feel’. They are not institutional investors but have a direct personal interest in every investment they make.” Stephen goes on to say that Moortec is a perfect example of this as they trust the leadership and capabilities within the business, beyond the belief that the model and product are backable. And this goes both ways…Moortec like them and trust them and critically will listen to them.

So the business of management is certainly not straightforward but when the ‘founders’ founder’ it is worth knowing that your business has a plan B in the form of a support structure that includes a non-executive with the requisite skills. As Stephen points out “…make sure you have someone who represents every single stakeholder through a clear focus upon the business.” A good non-executive can be the difference between success and failure.

Blog | June 2014

The Altitude Interviews : Phil Jones from James Tobias Limited

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