Human Capital: A Key Ingredient to Exceptional Shareholder Returns

A Perspective from BuildRI CEO, James Lindstrom

How often do CEOs claim their company’s greatest asset is its people? As a former CEO of IES, a publicly-traded infrastructure services company, I can attest that our workforce’s “ownership mindset” was pivotal to our share price soaring over 60 times from 2011 to today. While we made significant changes in strategy, capital allocation, and governance during my tenure, these successes hinged on fostering a resilient and performance-driven culture.

In 2011, we began evaluating our 3,500-person workforce to pinpoint where we could confidently invest capital behind our best teams. This focus on human capital has proven crucial in each of my acquisitions since, showing a strong correlation with returns. In today’s competitive investment landscape, limited partners must scrutinize how private equity firms manage human capital within their operations and portfolio companies.

Beyond Traditional HR Diligence

It’s not just about legal HR diligence anymore; investors must understand the workforce’s culture. This insight is increasingly critical due to the intensifying competition for talent, shifting demographic priorities, and the evolving landscape of non-compete clauses.

Critical Areas for Investor Understanding

Voice of Leadership: The leadership’s communication style is a barometer for the firm’s overall health. Leaders who articulate a clear vision and engage openly with their teams foster a responsive and adaptable culture, crucial in navigating market fluctuations and organizational challenges.

Team tenure and turnover: A deeper look at tenure and turnover can expose the dynamics affecting the firm’s stability. Our findings at BuildRI show that a median tenure of just over three years is typical in PE firms, suggesting frequent opportunities for fresh perspectives yet potential challenges in retaining long-term institutional knowledge.

Organizational growth: A robust annual growth rate of over 6%, as identified by BuildRI, indicates healthy scaling capabilities and ample professional opportunities for top talent, essential for a firm’s longevity and competitive edge.

Cultural indicators: Employee feedback on platforms like Glassdoor offers valuable insights into satisfaction and the prevailing corporate culture, serving as a gauge for internal health and morale.

Training and development: The scope and quality of training provided are critical. Firms focusing on financial prowess and broader areas of value creation are better positioned for sustained success.

HR systems: In today’s digital age, effective human resource management involves leveraging advanced technologies beyond traditional tools like spreadsheets to enhance workforce capabilities.

Compensation structures: Competitive compensation is crucial for attracting and retaining top talent and reflects the firm’s commitment to aligning employee rewards with company success. Firms using performance-linked compensation can motivate employees to strive for higher productivity and innovation.

Ethics practices: Reviewing ethics and whistleblower activity, including even the presence of whistleblower hotlines, provides additional cultural insights.

Conclusion

These metrics illuminate a firm’s internal operations and how investment leaders prioritize and implement strategies across their portfolios. It’s imperative to determine whether a firm’s focus is purely financial or if it also emphasizes team building and sustainable growth.

Highlighted by KKR’s recent initiative on “Creating an Ownership Culture,” the industry is recognizing the value of inclusive and empowering workplace environments. This approach is ethical and strategic, fostering environments where every employee feels invested in the company’s success.

As we launch BuildRI’s Value Creation Capability Scores for over 600 private equity firms, we invite you to stay informed. This initiative will refine our insights and aid in making informed investment decisions. To learn more about our findings and how you can access additional insights, please email us.

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We look forward to deepening your understanding of how strategic human capital management can translate into significant value creation. Explore our membership and stay ahead in making knowledgeable investment decisions that yield exceptional returns.