CHRO is the ‘missing link’ between people and leadership strategies

Employment and business trends mean the role of people and leadership in value creation has rarely been greater and, as a result, the value of Chief HR Officers (CHROs) and Chief People Officers (CPOs) is rising amongst private equity investors. CHROs are increasingly taking on a dual role on the boards of portfolio companies; as head of people strategy and custodian of the leadership team itself. And, as our analysis shows, their behavioural profile enables them to play this unique role and fill an important gap on the board.

Until recently, CHROs have been a rarity on private equity-backed leadership teams. People heads have traditionally been limited to a functional or compliance-focused ‘HR Director’ role, while strategic people responsibility has been taken on by the CEO, or by investors themselves. People strategy tended to take a back seat to areas such as operations or finance, where the potential impact was considered greater – or at least more measurable.

That outlook is now changing as private equity adapts to labour shortages, demands for hybrid and flexible working, and a tough economy. Investors are realising that differentiated value can be created by engaging and maximizing the workforce more effectively. Just this year, leading firms including KKR, Apollo, and TPG have launched employee ownership schemes, to bring employees on the journey with them. CHROs are critical to driving that agenda.

“In some areas, there is a perception of HR as being either fluffy or focused on corporate protocol and dealing with negative issues,” comments Sam McLoughlin, HR Director at Spicerhaart, who has previously sat on the board of three private equity-backed businesses. “But private equity now sees the strategic value CHROs can bring in terms of engagement, culture, and retaining top talent, and how that ultimately contributes to a successful exit.”

Equally as important and less talked about is the CHRO’s pivotal role as custodian of the leadership team and succession planning. Our recent Leadership Capital Report 2023 found that leadership strategy is a vital lever in private equity value creation; upper-quartile businesses make more leadership change and make change sooner than those in lower quartiles.

“Leadership has become one of the key drivers of growth, and the investors I’ve worked with are proactively investing in building a more holistic leadership strategy,” says McLoughlin. “They see the importance of vision, mission, and values for uniting the business towards a common goal and are realising that without leadership alignment, you can’t promote the right employee behaviours and culture.”

A dual role: Custodian of people and the leadership team

The correlation between people and leadership means CHROs are playing a critical dual role, which demands a very particular skill set and behavioural profile. CHROs are both a functional player within the leadership team and the individual who is responsible for the state and evolution of that team through the PE journey.

The best CHROs work seamlessly across different functions, to ensure that other functional leaders have the human resources they need to achieve their strategic aims and are equipped to manage the people change that comes with rapid growth. In this capacity, they also frequently act as a ‘right-hand person’ to the CEO, becoming a strategic partner in enabling the business to achieve its priorities and objectives.

At the same time, CHROs are responsible, alongside investors, for ensuring that the leadership team itself has the right mix and balance of competencies to deliver the value creation plan. This means proactively planning for and executing leadership change at the right time and leading difficult conversations about leadership optimisation, increasingly supported by data.

“As a business evolves, so do the pressures involved and what is required from leadership,” says McLoughlin. “What worked for one stage of growth can stop working, and you need to be on the front foot and be strategic about making the right leadership change at the right time. But it’s also about understanding the ripple effect of making certain changes across the business to minimise disruption. Having a CHRO on the board makes a huge difference to doing this effectively.”

Political yet collegial – a unique behavioural profile 

To better understand how CHROs can walk the fine line between these two priorities, we carried out behavioural analysis of the typical CHRO or CPO. The results highlight how the CHRO contrasts with other roles on the leadership team and the unique value they deliver in bringing the leadership team together to drive change and achieve shared goals.

One interesting finding is that CHROs tend to score low for optimism and high for realism, which contrasts with other key roles in the team, most notably the CEO, who tends to be highly optimistic, and focused on new ideas. This trait, combined with the CHRO’s high tolerance for ambiguity and conceptual problem-solving, gives them an important role in seeing the challenges and risks of a situation, but also the path to making plans a reality through people. In a business undergoing rapid growth and change management, this is invaluable and helps to explain why CHROs often become the right-hand person to the CEO, translating their vision into action.

“Working with CEOs requires you to get an understanding of their style initially, how they like to receive information and make decisions,” says McLoughlin. “Most CEOs I’ve worked with like you to be direct to get to the point quickly. So that's the style I would adopt, providing the facts, and my proposed solution to enable fast decisions.”

Our analysis also reveals why CHROs are gifted at bringing people together around a common goal and addressing sensitive leadership issues effectively. Firstly, they tend to be highly collegial, so excel at working cooperatively with others. They also have very low psychopathy, which means they take an active concern for colleagues’ well-being. And finally, they have an empathetic approach combined with lower-than-average narcissism, meaning they seek to accommodate those with a different approach or opinion.

Perhaps most interestingly, CHROs are highly political; they are skilled at working within and navigating the politics of a business to get the best results for all, however, their score is low for Machiavellianism, which means that they don’t get any satisfaction from using their skills to manipulate situations to their advantage. This enables them to partner with other leaders in a low ego way, acting as a balancing force or a bridge between different personalities and interests on the leadership team, including highly Machiavellian leaders such as the CRO. As a result, they can be vital for helping to avoid siloes developing in the team.

“You do end up wearing multiple hats, particularly as you’re approaching an exit,” says McLoughlin. “In one role, I wasn’t just the HRD for the whole group, but I ended up taking on a COO role, working closely with the chairman and investors. The trust and relationships I had built across the business meant I was well-placed to do that.”

The missing link

CHROs are a growing presence on private equity-backed boards, but they are still by no means the norm. Our analysis demonstrates why this needs to change. As leveraging people and leadership becomes increasingly critical (and measurable) in private equity, the CHRO is the missing link to ensuring that the top team and the whole business are aligned to the value creation plan – and motivated to deliver.