Jim Collins Shares Some Useful Advice For CEOs of PE-Backed Companies

Editor’s Note: Driving a PE-backed company has some very particular challenges. In December, we’re convening our annual workshop on leading the PE-backed company in New York. It’s a great event, focused on the challenges of the coming year. Please join us > 

Bestselling author Jim Collins is all about teaching business leaders to take long-term, holistic approaches to their jobs. The famous precepts of the author of Good To Great and Built To Last include constructing a corporate “flywheel” of perpetually reinforcing attributes that powers companies to extended greatness, and embarking on “20-mile marches” that force CEOs to pursue their goals rigorously through adversity with a focus on, as he says, the quarter century, not the quarter.

So where does that leave Collins in a world that’s being eaten by private equity? How does he advise chiefs of companies owned by private-equity firms that almost by definition have imposed short time horizons on these executives so that the PE investors can re-sell the company on a schedule they believe will maximize their financial returns?

Collins was asked exactly that recently during a Q&A session at Chief Executive’s annual Leadership Summit in Denver, which he keynoted.

His answer: “Your responsibility as a CEO is to be building [the company] in such a way that you’re building it for who will be the next suppliers of capital, not for those who have the privilege of investing in your flywheel now.” In other words, manage it so the company is worthy of presentation on a silver platter to the next owner, and you’ll be doing the right thing for your bosses who are the current owner as well.

“People who built great companies [in the past] were leading through tumultuous times,” too, Collins noted. “But they managed for the quarter-century. How does that fit with the questions of the pressures of capital and PE and so forth? There are two camps in the world: built to last, and built to flip. You have to decide which camp you’re in.”

Collins explained that he hosted about 20 CEOs of PE-backed companies recently at his headquarters in Boulder, Colo, and “this very question came up.” He told them, “The more the world is turbulent and changing, the more your goals need to be long-term. [Your commitment] isn’t to your current owners. It’s not to them. It’s not to the people who are going to sell — it’s to the people who are going to buy.”

He continued, “If you’re building the company in such a way that the next one who buys it will be so happy they did it, because of the flywheel momentum that you have, you’re a responsible, Level 5 leader,” alluding to the most highly-actuated type of CEO that Collins describes.

“If for every cycle of capital, you’re building for the next owners, the next providers of capital, then that keeps you on the front end of the cycle of the flywheel. If you do that, anyone who’s going to transfer capital to another owner will be better served by that because you’ll have created something of such great intrinsic value.”

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