Why Do Vultures Exist? Let’s Look at Private Equity Firms and Executive Leadership

Over the past week, much attention in the political media has focused on Mitt Romney’s role at Bain Capital, a private equity firm. Opponents have characterized Bain and other private equity firms as “vultures.” Politics aside, why do vultures exist? And what are the lessons for leaders?

Vultures, while perhaps grotesque, serve a vital purpose in the ecosystems of the world. Vital, as in, necessary for life. These birds do not kill. They simply eat the remains of an animal that is already deceased. Did they cause the animal to die? No. The animal is dead because of age, disease, starvation, or predators. Vultures evolved to occupy a particular niche which enables the dead to give life by returning their biomass to the ecosystem.

Much has been written in the past week to clarify what private equity firms actually do, so here’s a quick summary.

Private equity firms raise money from institutions like pension funds and invest this money in struggling companies. Then they institute changes in strategy to turn the company around. These changes in strategy generally involve exiting underperforming businesses and selling off non-core assets. By saying “no more” to these businesses, the private equity investors enable the company to focus on the core opportunities to grow profitably. Since the firm is already struggling, this is a high risk investment that is likely to fail and the company may still go under. Yet if it does succeed and the company is restored to health, the payoffs are substantial, as the company can be later sold or taken public at a much higher price. Further, the private equity firms are investing in equity, meaning they are last in line to get paid. High risk, high reward.

It is easy and politically convenient to demonize private equity firms as “vultures” for causing layoffs. These decisions imposed by private equity investors to exit underperforming businesses inevitably impact workers who bear the brunt of these decisions through layoffs when plants or stores are closed or sold.

But we must ask what is causing the underperformance and impending death in the first place? Not the private equity firm. VULTURES DO NOT CAUSE DEATH. LACK OF LEADERSHIP CAUSES DEATH.

Specifically, a lack of leadership that must counteract elements of human nature. Here’s what I mean. Human beings start business enterprises with a positive intention to serve customers and create wealth. Yet humans, while possessing tremendous intellectual abilities, are not able to forecast the future with any kind of accuracy or precision. We cannot possibly know all of the changes among customers, competitors and technology occurring around us much less predict exactly how these changes will impact our business. We are also fallible. Even if we could forecast perfectly, we would still make mistakes in execution. We are frequently blind to changes around us through the powerful force of denial. And we are often driven based on a psychological need for the approval of others. In organizations, just like families, we often do what is necessary to get along rather than speaking the truth and requiring change.

In businesses without strong leadership, these forces of human nature, combined with relentless competition and technological change, will accumulate until the organization is not sustainable – think Blockbuster, Borders, IBM before Lou Gerstner, or the Big Three US automakers. Organizations become more focused on sustaining their existing businesses and internal structures than on adapting to meet the needs of external customers. Competitors attack their good businesses. And the natural tendency of human beings in organizations is to go into denial and approval seeking such that important changes are avoided and resisted. So now the company is on a path towards death. Death is just a matter of time and the only question is who will bail out first. Customers are always the first to go, followed by key employees and then investors who pull the plug.

Enter the private equity firm to one of these failing business. While often portrayed as cold-hearted and ruthless, the private equity firm actually brings two primary attributes that give them the possibility of turning this situation around: they are not in denial and they are not seeking the approval of others. So they can come in from the outside and impose necessary changes. They are willing to say “NO.” They are willing to stop funding underperforming businesses and marginal projects. The point is that resulting layoffs are an effect, not a cause. The cause is the existing weak leadership at the top that has been unable or unwilling to overcome denial and their own need for approval as the company is floundering. This leadership has said “YES” to everything and “NO” to nothing.

I am currently coaching a client on preventing and overcoming exactly these types of issues in his company. Just as an exercise, we’ve taken a private equity lens to look at the business. We stand around a whiteboard and contemplate what would happen if a private equity firm came in from the outside with no attachment. What would they do? Not to say that it is what this company should do, but it does provide a helpful perspective. This process has helped illuminate what really needs to happen to move the company forward. The company must be willing to say no to certain projects that are not going to be successful and say yes to those that will.

A strong leader must understand that these forces are at work inside every organization and it is your job to overcome them. The hard part of leadership is persevering to overcome the organizational culture that will resist these decisions. To get right to the heart of it, you must be willing and able to look your colleagues, direct reports, and associates in the eye and tell them what must be done and why, even as they resist. You must be willing to say NO and not care about their approval.

This reality means that the psychological health and capacity of the CEO is the ultimate determinant of long-term company performance and its ability to navigate changing conditions. The CEO must continually address the root causes of sustainable high performance. Be the kind of leader that never needs to entertain the possibility of bringing in private equity investors. For more on specifically how to do that, check out Aligned Action: Key to CEO Effectiveness.

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Have you ever faced a leadership challenge where you had to overcome organizational denial or the risk the disapproval of others? How did you handle it?

If a private equity firm were to examine your company, what adjective would they use to describe it? Why?

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