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Private Equity Insights Q1 2024

Q1 2024

After decades of globalisation shaping the world order, businesses are now forced to accept a new reality. Organisations are increasingly focused on mitigating risks from non-linear, disruptive events stemming from bleeding-edge innovation, political uncertainty, new and emerging technologies, and geopolitical tensions and potential conflicts.

Enabling change is critical for success. Given this complex environment, innovation and transformation are imperative. Leaders play a crucial role in driving change in the organisation, including fostering vital new mindsets and behaviors. In an era when access to top talent and high-performing teams represent important competitive advantages, executive tone at the top remains critical.

In our latest issue of Private Equity Insights, we take a close look at how leaders can affect change. Our new Global Board Governance Survey provides insights regarding the board’s priorities, performance and governance practices from the different perspectives of directors and C-suite leaders, including those in private equity organisations. We also consider AI opportunities and risks, why boards should care about geopolitical risks, and the importance of executives committing to setting the right tone at the top and driving change in the organisation.

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Realising AI’s opportunities, along with measuring and balancing benefits against risk and then managing that risk, becomes extremely difficult unless there are appropriate and effective guardrails in place.

Why it matters to private equity: As companies progress on the journey toward digital transformation, AI is a key element that promises to deliver critical insights leading to accelerated innovation and success while protecting critical business assets.

By the numbers: According to an IBM study, executives are eager to capitalise on GenAI, with more than 6 in 10 planning to pilot or operate in some way by 2024.

Bottom line: In this paper, we share some best practices for aligning AI efforts with the foundational elements of a strong AI governance program, starting with forming an advisory board and defining use cases.

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In the race toward innovation and transformation, it can be easy for leadership to overlook their crucial role in driving change in the organisation, including fostering vital new mindsets and behaviors.

Why it matters to private equity: Executive engagement is a critical component to enable change. It’s important to make the distinction that leaders and managers don’t “manage” change; they “enable” change.

By the numbers: According to research from multiple consulting firms and based on our own experience, more than 70% of major change initiatives (including digital transformation) experience some level of failure.

Key point: In our work, we’ve seen a notable link between leadership self-awareness of change management-related shortcomings and change enablement success.

Bottom line: Executives need to align on their views and approaches with regard to setting the right tone at the top for change. They need to:

  • Communicate clearly and effectively with the workforce.
  • Ensure there is two-way communication in place so that important feedback is gathered from employees on the most effective change management best practices as well as actions to avoid.
  • Model the very behaviors they want to see in their employees.

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This study — developed by Protiviti, BoardProspects and Broadridge — is, we believe, the first of its kind. It offers insights regarding the board’s priorities, performance and governance practices from the different perspectives of more than 1,000 directors and C-suite leaders.

By the numbers: 95% of directors believe the board is constructively engaged during meetings and asks probing questions — versus 80% of C-suite executives.

Good news: Boards and C-suite leaders are on the same page regarding the board’s priorities. Strategic planning and execution rates as the top board priority. Risk management oversight, CEO and management succession planning, digital transformation and integration of emerging technologies, and R&D/innovation are other top priorities.

More good news: Most director and C-suite respondents “agree” or “strongly agree” that board members provide input into, and approve, corporate strategy and major policy decisions; represent the interests of shareholders and appropriate stakeholders; place the interests of the company ahead of their own interests; and devote sufficient time to fulfilling their fiduciary responsibilities.

Governance call to action: Based on the key takeaways from this research, we have summarised a call to action that addresses obstacles to organisational growth, sharpens the board’s focus on several key areas, enhances director engagement and drives an ongoing emphasis on continuous improvement of the board’s oversight.

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Geopolitical risk seems higher than at any point in recent memory. Managing this risk effectively should be a core competency for all businesses — and the board should lead the way.

Why it matters to private equity: The reason geopolitical risk is so important is simple: Companies operate in a hyper-digital world and global markets are incredibly nuanced and complex.

What you should know: The primary objective of evaluating geopolitical risk is to give decision-makers time advantage and options to allocate capital, sustain investment returns and protect company assets. The board has an important role to play in these deliberations.

Bottom line: The effects of geopolitical risk include profound human and societal consequences, as well as broad commercial impacts. The steps outlined in our Board Perspectives issue enable critical thinking in the cool of the day regarding a company’s options — both before and during either an anticipated scenario or a simultaneous occurrence of multiple intertwined scenarios.

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The big picture: ChatGPT is among numerous large language models that will transform industries, corporate functions, the global economy and other realms. These models also pose something of an innovation litmus test for finance leaders.

Many CFOs remain wary of GenAI applications in, and implications for, the finance group and throughout the rest of the organisation.

A key point: Leading finance groups already are putting GenAI tools through their paces to improve cash flow management, FP&A, liquidity risk management, fraud detection, workflow efficiency, scenario planning and more.

GenAI adds an entirely new layer — a narrative that explains the why behind financial analyses — to these existing capabilities.

The bottom line: There are tangible benefits associated with being a smart, early adopter when it comes to the transformational opportunities GenAI offers finance functions.

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