Leadership is one of the most overlooked factors in creating value. Whilst it is widely recognised that there is a premium associated with effective leadership, the ability of a founder or an entrepreneur to recognise gaps in their own management team is rare. In fact, leadership itself is proven to have a 10 to 15% impact on financial performance and a 25 to 30% impact on market valuation. This, coupled with an increasing focus of investors on an organisations Human Capital potential, means more entrepreneurs should be asking themselves how they can maximise the potential of their management team.
This requirement is amplified by the fact that one of the key scale-up challenges faced by entrepreneurs is recognising when it is the right time to take a step back or bring in other leaders to help you reach your growth ambitions. This becomes even more pressing when formulating an exit strategy, whether it be through IPO or a trade sale when your leadership team will be under more scrutiny than ever before.
In this article we outline why the right management team is so important, drawing on classic ‘tipping points’ at which ingredients that make up an effective management team may change. Using real life examples, we also highlight some of the key considerations in assessing whether your management team may be hindering your true valuation potential.
Why is the right management team so important?
We know that 50% of a firm’s value cannot be explained by its financials. Value is increasingly defined by factors that are typically considered intangibles including company leadership, talent development and organisational culture.
The most successful organisations have a diverse management team who all bring different strengths but work collectively to achieve results. Consider the parallels to a football team where each player alone could not win the match, but when all their strengths are combined, they are able to consistently outplay the competition. Now consider the football team being promoted from the first division to the premier league – do their existing players and coach have the skills needed to compete against their new rivals? Similarly, for a private company, as a business grows the management capabilities and styles must change in order to remain effective.
During the start-up phase leaders typically need to be vision oriented, focusing on idea generation and the big picture as opposed to detail. The closer an organisation is to this start-up phase the management team tends to be more homogenous, with a similar set of skills, experiences and styles. As time goes on this must shift with a greater focus on practical implementation and a need for a mixed management team that can balance big picture thinking with detail, risk management and rigour.
Using Dunbar’s number as a guide, it is widely acknowledged that when a start-up reaches 150 employees it hits a tipping point. As noted by Chris Cox, Facebook’s Chief Product Officer “I’ve talked to so many start-up CEOs that after they pass this number, weird stuff starts to happen. The weird stuff means the company needs more structure for communications and decision-making.”
Prior to this management teams are often ‘accidental’ – coming together over time in pursuit of a common goal, but not deliberately formed to ensure they contain the right mix of skills, experience and leadership styles. It is often at this tipping point that features such as a flat structure, consensus-based decision-making and an entrepreneurial culture can become challenges to achieving growth potential.
In his research into fast-growing companies Larry Greiner identified six phases of growth, each of which is made up of a period of stable growth, followed by a crisis when the organisation must change to facilitate further growth. Greiner named these 6 phases as Growth through Creativity, Direction, Delegation, Co-Ordination, Collaboration and Alliances. At each stage different leadership skills, mindsets and styles are needed to survive the crisis, and moving from one stage to another may necessitate a change in the management team. The model can be useful in preparing management teams for the next phase of growth and helping to assess whether the right team is in place to navigate the upcoming phase.
Take the example of Gymshark. The story of Gymshark’s rise to success is a well-publicised one. In brief, the sports clothing brand was founded back in 2012 by school friends Ben Francis and Lewis Morgan. The company grew rapidly and in 2020 received a $300m investment by General Atlantic for a 21% stake in the business, endowing it with the rare status as a Unicorn.
One of the key turning points in the company’s history happened as part of a reorganisation in 2017. It was at this fork in the road that it is rumoured the two founders fell out over the importance of bringing in a management team who had the right skills and experience to achieve their growth ambitions. Francis recognised the need to hand the business over to someone more experienced in managing a business at scale, with people management, operations and financial expertise, whilst Morgan was less convinced. As a result, Morgan took the decision to stand down and Francis took a step back, taking on the role of Chief Brand Director, reporting into the new CEO Steve Hewitt. Francis recognised that it allowed him to “focus on the things he excels at and allowed Steve to focus on what he excels at – putting the business first, and allowing the business to grow even more quickly”.
This example highlights the importance of being humble and being able to recognise one’s own limitations. In his personal blog explaining why he stepped down as CEO Francis stated: “I’m proud to work for Steve and would recommend to anyone else who’s in the position that I was in, to remove your ego and build the team in a way that’s truly best for your business.” In fact, in our research into critical leadership skills for the 4th Industrial Revolution identified the Humble and Inclusive Leader as one of the 4 leadership personas vital for the future.
How can you assess whether your management team is hindering your true value potential?
There are three main factors impacting the potential of a management team. The first is the individual skills and capabilities, ensuring coverage across all critical business functions. The second, which is often overlooked is the dynamics of a team when bought together as a whole; the mix of leadership styles, natural preferences and the ability to adapt at critical points in the organisations journey. The third considers the connection of the management team to all levels of the wider organisation, assessing the health of the organisation as a whole and its ability to come together to achieve growth potential.
Assessing the effectiveness and gaps in an existing management team requires a holistic approach. The teams’ current performance and future potential should be assessed from both an individual and collective perspective. Results must be considered in light of the organisations growth stage using input from employees, customers and the market to understand whether the existing management team has the potential to lead the company through investment and the next phase of growth.
Furthermore, it is critical that this assessment takes place well in advance of commencing an exit strategy. This gives the organisation time to plan and implement any changes to the management team, as well as establishing effective team dynamics. “If the company is replacing the CEO, they will need to have been in place for at least a year before the exit process begins – whatever route they’re going down,” says Peter Gray, partner, Cavendish. “When we meet with entrepreneurs a couple of years out from a sale, we tell them to envisage what their team needs to look like and work back from there.”
How can we help?
To help assess the potential of your management team and identify the gaps you need to address prior to formulating your investment or exit strategy, we provide a range of data enriched light touch and high touch offerings.
Our Management Effectiveness Assessment provides you with a customised report summarising the extent to which your current team is the right fit for your growth ambitions and recommendations for addressing any gaps. Some of the questions the assessment will consider include:
- How well aligned is the management team around the strategy and business plan?
- Does the current management team have the skills, capabilities and potential required to scale? What are the gaps?
- What is the role of the Founder/CEO today and in the future?
- What is the organisation design required for growth?
We also offer a range of services to collaborate with you to develop the effectiveness of your management team, increasing your investment potential and helping to reach your growth ambitions.
To discuss how we can help your management team fulfil your true valuation potential please contact firstname.lastname@example.org.
Wharton Business Consulting creates lasting change by supporting organisations to maximise their potential through their people. Since its inception in 2017 WhartonBC has grown a diverse and talented team which bring insight and expertise in Leadership, Organisation Transformation, Talent and Culture and Conduct. Our approach focuses on delivering sustainable outcomes by supporting clients to achieve their growth ambitions across a range of sectors.
 PE Firms Are Creating a New Role: Leadership Capital Partner, HBR, Aug 2017
 Summit Leadership Partners, The Rise of Human Capital in Private Equity, 2018: https://www.summitleadership.com/the-rise-of-human-capital-in-private-equity/
 Dunbar’s number: a suggested cognitive limit to the number of people with whom one can maintain stable social relationships
 Chris Cox said at the, Chief Product Officer, Aspen Ideas Festival 2016.
 “Evolution and Revolution as Organizations Grow” by Larry E. Greiner, May 1998.
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