Balancing Demand and Reward: The New Portfolio Company Chair

In the face of sustained economic and geopolitical headwinds, existential business environment shifts, climate change concerns, and digitisation opportunities, the role of the portfolio chairman is not what it once was.

In Q1 of 2023, Russell Reynolds Associates invited 20 portfolio company (PortCo) chairmen from the UK and Europe to discuss how their role has changed since 2020 and how they expect it to continue evolving. Through this series of discussions, some universal trends emerged: the role has become more multi-faceted, requiring more time, skills, and the ability to balance a diverse group of stakeholders. These factors are compounded by an uncertain business context, higher expectations, and potentially lower financial returns. This led us to ask:

Is the portfolio chairman role losing its appeal at a time when demand for their skills is growing? If so, how can we amplify the available and qualified pool of future PortCo chairs?

Where PortCo chairs spend their time—and why

Overall, portfolio chairs are spending far more time on each portfolio company than they did prior to the Covid-19 pandemic. Even experienced, highly efficient chairs generally spend up to two days a week on each portfolio company. Multiple chairs said they felt that their role now required them to wear multiple hats, including:

Chair as coach: First and foremost, chairs are functioning as coaches to the CEO and the executive team. After more than a decade of growth with cheap capital, most of our correspondents indicated that portfolio CEOs have never had to deal with the significant, simultaneous, and diverse challenges that businesses had dealt with over the last three years. This is understandable—we haven’t seen interest rates and inflation this high since the 2008 financial crisis. Additionally, while a pandemic may have been on the risk register for some companies, it certainly wasn’t something they were actively planning for prior to March of 2020.

Chair as stakeholder manager: Secondly, stakeholder management has become more complex and intense. Chairs shared that the stakeholder group is both broader—comprised of sponsors, executive teams, employees, competitors, and the community—and more vocal. As businesses are pressured to accelerate performance to compensate for Covid setbacks and the high cost of capital, whilst also adapting to newly digitised working patterns and operating models and incorporating sustainability standards, expectations from stakeholder constituents are at an all-time high.

Chair as objective advisor: Finally, chairs provide an industry-informed perspective to help the executive team pivot the business to new operating practices and/or business models in response to macro-factors, including Covid-19 and high inflation. In some cases, this strategic guidance involves aligning sponsors and the executive team around new KPIs, expectations on timelines and returns, and financial rewards.

However, many chairmen noted that this heightened activity and engagement is putting many portfolio chairs right up at the line of “nose in, fingers out.” Although these chairs are not strictly independent (as most have some level of financial investment in the asset), various stakeholder groups look to them to provide an objective perspective, maintain constructive relations, deliver tough messages when necessary, and to be a neutral arbiter while advancing the business towards its strategic goals. In the words of one chair, “Never stop contributing good ideas, but always stop short of doing.” Even for the chairs that firmly maintain this boundary, there’s no denying that their responsibilities are growing.

A more demanding job with higher expectations and potentially lower financial return

RRA research shows that the portfolio company chair role is increasingly demanding and requires multi-dimensional skills. Deal flow and the capital markets have been subdued, and while there have been a few notable exits, the situation is not expected to materially improve before the end of 2023. Between continued higher costs of capital and Covid-elongated investment horizons, it is reasonable to expect that financial returns will be subdued in the short to medium term. This context makes the job of portfolio chair more challenging and potentially less rewarding on a financial level.

Which factors are testing the supply of PortCo chairs?

• Sitting chairs are choosing to serve on fewer boards, due to increased time commitments.
• The increase in private companies has driven demand for more PortCo chairs, further tightening the pool.
• Historically, the criteria to be considered for chair is quite prescriptive (e.g., 90% of our correspondents had been a CEO), therefore limiting the number of potential candidates.
• Additionally, there are limited available seats—and, by extension, opportunities—to train NEDs on portfolio boards. (Interestingly, all but one of the chairs we spoke to felt that a non-executive chair and one additional non-executive director—typically an audit chair—provided adequate governance, bandwidth, and balance to the board.)
• Finally, low turnover further limits the number of former CEO in the chair candidate pool. FTSE 350 CEO turnover peaked in 2022, but averaged only 31 CEO changes per year across all sectors. Clearly, this doesn’t create a sufficient supply of PortCo chair candidates.

Growing the pool of portfolio chairs to meet future demand

Let’s return to our initial question: is the portfolio chair role losing its appeal?

In short: No. The portfolio chair role is still highly appealing for those that enjoy the interesting challenges private companies are tackling and the “heat of the kitchen.” The role’s non-financial opportunities are highly compelling to leaders: working with a high-quality sponsor; coaching a great executive team; making use of their experience, networks, and knowledge; and making a direct impact without execution responsibility. Chairs are increasingly careful about which portfolios they join and have a very strong preference for being involved with an organisation pre-deal. This gives them a clear view of what the role specifically entails, as they’re involved with shaping it from the start.

That said, portfolios should take steps to address the factors limiting future chair candidate pools. As more companies are expected to go private and sitting PortCo chairs are already hard-pressed to add more boards to their portfolio, it’s crucial to expand the portfolio chair candidate pool and cultivate the next generation of portfolio chairs. To bring more interested and diverse talent into the hiring process, sponsors should consider the following:

• Cultivate relationships to rise above the competition: Given the portfolio chair’s breadth of responsibility, lower financial returns, and the time commitment required to adequately support each portfolio company, chairs may restrict themselves to two seats as part of their broader board commitments. Therefore, sponsors should expect tough competition when searching for chairs. When choosing which boards to join, chairs will put a higher degree of emphasis on the sponsor and CEO, and may prioritize portfolio companies offering more promising financial returns. To rise above in this highly competitive landscape, sponsors should cultivate relationships with multiple PortCo chair candidates, making efforts to understand their specific motivators and how the role’s rewards will align, as well as creating the right environment to achieve optimal performance.
  
  
• Place equal emphasis on style and substance: By considering stylistic traits (including behaviour, characteristics, and psychology) alongside substantive capabilities (business acumen, sector experience, growth record, CEO experience), sponsors can identify chairs who are a good cultural fit for their portfolio companies and are motivated by the job’s rewarding aspects, while still bringing the necessary skillset to the table. The portfolio chairs we spoke to said that the most effective chairs bring courage, flexibility, creativity, patience, curiosity, and candour to their organisations. (For more on what contributes to a strong board culture, see our 2022 RRA Global Board Culture and Director Behaviors Study.)
  
  
• Improve gender diversity by broadening background requirements: In reviewing the portfolio chair population in the UK and EMEA, we estimated that the percentage of women portfolio chairs is 3-5%. This is likely tied to the fact that, in 2022, only 6% of the FTSE 350 CEOs were women¹, and sponsors often look for former CEOs to fill the PortCo chair role.
• While this significant disparity requires its own set of structural improvements, it also represents an opportunity to grow the future PortCo chair candidate pool by meaningfully improving diversity at the top of the house. To do this, organisations should consider widening their criterion beyond former CEOs to roles that bring equivalent financial acumen—the CFO, for example—while also allowing for a larger candidate pool that includes more women.
  
  
• Consider adding an additional INED to the portfolio company board: Given the role’s increased time commitments, adding another INED could improve time constraints on the chair, improve candidate pool diversity, and expand the succession pipeline. Of course, sponsors must be confident that the resulting accretive value exceeds any perceived negatives, like cost or agility. The key is balancing a lean board with a robust pipeline that looks toward the next generation of portfolio company chairs.

Author

• Caroline Raggett is a senior member of Russell Reynolds Associates’ Board and CEO practice. She is based in London.

Contributors

The author would like to thank her RRA colleagues whose interviews and market insights made this paper possible.

• Emma Combe is a senior member of Russell Reynolds Associates’ Board and CEO practice. She is based in London.
• Clare Gumbley is a member of Russell Reynolds Associates’ Board and CEO & Healthcare practices. She is based in London.
• Tom Handcock leads Russell Reynolds Associates’ Center for Leadership Insight. He is based in London.
• Kerynne Metherell is a member of Russell Reynolds Associates’ Board and CEO practices. She is based in London.
• Nanaz Mohtashami leads Russell Reynolds Associates’ Med Tech, Devices & Diagnostics practice. She is based in London and New York.
• Josh O’Connor is a member of Russell Reynolds Associates’ Industrial & Natural Resources industry. He is based in London.
• Sean Roberts is a senior member of Russell Reynolds Associates’ Technology industry. He is based in London.
• Laura Sanderson leads Russell Reynolds Associates’ Board and CEO practice in Europe. She is based in London.
• Abigail Skerrett is a member of Russell Reynolds Associates’ Industrial & Natural Resources industry and co-leads the energy transition practice. She is based in London.
• Alex Watson is a member of Russell Reynolds Associates’ Technology industry and leads the Business and Professional Services Practice in the UK. She is based in London.

_{¹ D. Clark, “Share of female held leadership positions in FTSE companies in the United Kingdom in 2022,” Statista. May 10,2023. https://www.statista.com/statistics/685195/share-of-female-ceo-positions-in-ftse-companies-uk/}