Modern service companies invest little in machines, buildings or the company fleet. They thrive almost exclusively on the ideas of their employees, their brand name and their agility. As a result, a productive workforce is among the most important value-creating factors. Even in traditional listed companies, personnel costs are now many times higher than the cost of capital, as Boston Consulting recently found. In view of the short investment horizon, private equity portfolio companies rely heavily on the support of their Chief Human Resources Officers.
The Chief Human Resources Officer: a value driver for for private equity
Private equity firms make temporary (majority) investments in unlisted (private) companies with the aim of increasing their value. After a short period, usually three to seven years, the portfolio company is resold. During this period, the aim is to increase the portfolio company's value, which is realised as profit in the ultimate sale and then distributed to the private equity firm's investors. The Chief Human Resources Officer ('CHRO') is responsible for all personnel matters in the company. Unlike the traditional HR manager, the CHRO is a board–level appointment and reports directly to the CEO. A CHRO takes on the role of HR strategist and represents the HR department as part of management.
The duties of a CHRO
The CHRO develops and implements HR strategy, taking into account both market and HR analysis in making decisions. They focus, in particular, on trends and technology in HR, and act as an advisor to the board and senior executives. They oversee staff retention and recruitment, innovation in HR, and ensure that the implementation of HR policies in line with corporate objectives. Their tasks also include defining and developing the corporate values upon on which a corporate culture is built, together with the board and employees.
The qualities of a CHRO
The role of the CHRO is demanding and cuts across many different areas of the company. So what qualities should a CHRO have to act as a value driver in portfolio companies?
- (International) experience
To meet these high demands, the CHRO usually has prior experience in HR strategy, HR planning, change management, individual and collective labour law and HR development, as well as a strong affinity for digital processes and analytics. Leadership skills, analytical thinking as well as an innovative and creative approache are required. Soft skills such as understanding, empathy and integrity are also important for the CHRO. International experience is also in demand, and not only in companies with international operations. Looking beyond one's own back yard also opens up new perspectives for companies that (still) have substantially domestic operations.
- Economic understanding
In order to engage eye-to-eye with other board members, it is also vital that the CHRO has a comprehensive understanding of economics. By understanding the different parts of the business, from marketing to sales to finance, they can act as a mediator between staff and business goals for the board.
Talent management and communication skills
A key task in times of skills shortages is retaining existing employees and attracting new talent. This can be achieved by developing corporate values and a corporate culture that involves employees. In today's working world, many employees are looking for meaningful work at a company for which sustainability and diversity are not just buzzwords, flexible working conditions and a good work-life balance. These values should be reflected in the corporate culture in order to attract and retain motivated, productive employees. The CHRO should be able to represent them internally and externally as a strong, empathic communicator.
- A change manager
Work culture is constantly evolving and employee expectations are changing. A CHRO must be able to adapt to these changing expectations and needs. They must be able to identify trends and proactively make adjustments to drive and implement, for example, the digitalisation of work processes, flexibility of working time and location, performance-based pay and new, customised operational structures.
The CHRO has a key function, especially for private equity companies. What is required is a personality who focuses on employee recruitment and retention as well as employer branding and acts as a change manager.
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