For the next installment of our interview series with top directors, my colleague David Reimer, the CEO of Merryck & Co. Americas, and I sat down with Don Gogel, chairman and CEO of the private-equity firm Clayton, Dubilier & Rice. Gogel has deep experience from acquiring dozens of companies and seeing the levers that can create value. All directors, public and private, will appreciate his smart insights and frameworks.
Reimer: How has your point of view evolved on the role of the director?
Gogel: Early on, I had a far more static view of the responsibilities of a director. But over time, I’ve become much more focused on the real challenges facing the CEO and the company at any particular time. That really helps define the board’s role. And there are some very different roles that directors play to create a balanced board. For instance, I really value one iconoclast on the board. You want somebody who doesn’t just think in a linear fashion. You’ve got to be careful about what you wish for, however. You don’t want someone who’s disruptive. But a healthy amount of nonlinear thinking is important for a board.
Depending on the company’s makeup, deep expertise in a key function is another important prototype. The obvious areas are finance, sales, branding, digital marketing, and there should be someone on the board who thinks more than anybody else about the customer. Each of these individuals should have the expertise to challenge management in a constructive, collaborative way and ask probing questions. Otherwise, the board, rather than a resource, becomes opinion takers.
Reimer: What are some frameworks you use to drive discussion in board meetings?
Gogel: One of the most important questions is whether the best people are working on the most critical projects? We’ll start that discussion by asking, what are the company’s top five priorities? Who’s staffing them and to whom do they report? Companies very often will give those top-priority projects to people a few levels down in the organization because they have some time available.
But if these really are the most important projects, you’ve got to put your best people on them. Otherwise, you’re giving mixed signals to the organization. Ensuring that top talent is working on key organizational priorities is essential, and most companies simply overlook this fundamental fact.
Bryant: How do you as a director develop a fingertip feel for the culture of a company?
Gogel: Culture relates to how things get done within an organization, and you really can’t understand a culture unless you actually watch the work people do. This doesn’t happen by going to the company’s annual picnic. You’ve got to dig in. You need to understand the speed, urgency and practices of the business to determine if the culture matches the business strategy.
A good example of what I am talking about is illustrated by one of our operating partners, Jim Berges, who before joining Clayton, Dubilier & Rice had been president of Emerson Electric, with responsibility for 100 strategic business units – all hard-core manufacturing-oriented with global sourcing networks. For a variety of reasons, he was our best choice to become chairman of Sally Beauty [For a list of all of CD&R's historical investments as of December 31, 2018, please go to: https://www.cdr-inc.com/investments/historic-investments], a 3,000-outlet beauty products business selling to salons and stylists who color women’s hair.
Everybody else in the industry, as Jim observed, wore Gucci loafers while he was a steel-toed, Coleman-boot kind of guy. But Jim’s insights into things like inventory management proved to be invaluable for bringing a new perspective to the beauty supplies industry.
He understood Sally’s culture which was focused around distribution, where the worst sin was to run out of stock. And that might be the right approach for 30 percent of your products, but it can’t be right for every one of them. So maybe the bigger sin was to have $50 million tied up in excess inventory that could be redeployed to pay down debt.
The point is that you would not pick up the sense of the culture – about the importance of not running out of stock – without sitting in what they called supply-demand meetings. Unless you’re engaged in those meetings, you miss out on valuable culture cues. But when you hear something five times in an hour, you can say, “This is the cultural norm here, but is it the right one?”
Bryant: One of the most important decisions you make is to choose the CEO to run the companies you’ve acquired. What do you look for?
Gogel: First, central-casting CEOs are a false positive. We have had some people who looked absolutely perfect on paper and had real presence, but that was the point. They looked perfect for the job, and by definition you don’t see what you don’t see.
Our most successful CEOs are ones our partners have either worked with before, or they’ve worked with someone who has worked with them, so that there’s no more than one degree of separation. After that, your chances of the person matching your expectations just drops because you don’t know enough.
One of the ways we get to know them is simply by spending enough time with CEO candidates and letting them do enough homework. We’ll give them a week’s worth of work and give them all kinds of data about the company that they may run for us and then ask them what they would do in the first six months? We’re not going to hold them to those initial thoughts. We’re much more interested in how they think and their insights.
We like to ask questions about management style. We will typically have a point of view about whether a more inclusive, collaborative style is needed at the company, or in other cases, there may have been too much holding hands around the campfire and the company needs a stronger, more decisive leader. So we’ll ask some leading questions to determine whether their management style would lead us to say this person is too directive or not directive enough, or too inclusive or not inclusive enough.
Bryant: If you could only ask somebody one question and, based on their answer, decide whether to hire them, what would that question be?
Gogel: Over the course of your business career, what was the toughest business challenge that you ever faced and how did you and your team solve it from beginning to end? If they say they spent six months studying it, that’s probably not a good answer. Or if they said they knew the answer right away, that’s probably not a good answer, either. But their answer will help illustrate their problem-solving approach, and inevitably betray their inclusiveness, directiveness, and their instincts for getting outside perspectives.
Reimer: Fundamentally, your business exists because you see opportunities in companies, often because the conversations at the management and board levels haven’t been as aggressive as they could have or should have been. What are the mistakes boards make that, in effect, leave money on the table?
Gogel: Familiarity can breed, if not indifference, at least less-engaged and less-demanding investors. Part of the problem is that people are recruited to boards without that challenge mentality, and if the company’s doing reasonably well, no one asks management tough questions. But what is the appropriate standard? How high should the bar be?
Just asking about risks can make you a little bit of a rat in the boardroom. The CEO may think, “Why are you talking about the downside? We just had our best quarter in ten years. You’re just a negative person.” But you can challenge effectively without sounding like you’re negative.
Reimer: If you were speaking to a group of newly minted directors, what is your best advice to them?
Gogel: You’ve got to be informed to be effective. So do some deep dives into the business, so position yourselves to learn something about the culture and product development and the business channel. Find a way to do that.
Second, try to determine who the CEO listens to, both on the board and outside of the board. When the CEO makes decisions and takes actions, most of them act as if it just came out of their heads. It went through their heads, but what were the inputs and how are they getting it? If you’re going to be effective, you’ve got to know who and what is really influencing them. You’ve got to know how the information flow works and the influence dynamics, because otherwise you may be missing why the company’s not taking certain actions that it should be taking.
Third, try to develop an outside-in perspective of the competitive environment, because there’s typically too much emphasis on the board of “here’s what we’re doing, and here are the issues we’re addressing.” It’s all about us, us, us. But we live in a competitive environment, so how are you as a director going to insist that you get that outside perspective? You have to use those insights to pick your shots for challenging assumptions about growth or margin improvement.
Bryant: What has been your approach to scaling yourself as a leader over the years?
Gogel: Pattern recognition is an essential way of thinking about most of life. And I’ve learned a lot during my years at McKinsey, and over the course of 70 acquisitions here at CD&R. But spending time with people who can frame something slightly differently is very helpful, and we work with some of the most experienced people who have seen so many different things.
As just one example, Jack Welch has been very influential in our investment decision-making since he became a senior advisor to our funds in 2001, and he would tell you that the biggest impact he’s had on me is making me a little tougher, and to not be such a nice guy. He has said to me, “Look, Gogel, you always know what’s right and wrong and you eventually get to the right answer. You can be as tough as you need to be on people, but you need to get there faster.”
He convinced me that not getting there faster is unfair. It’s easier emotionally because you want to give a person a chance. But it’s unfair to the rest of the organization because by the time you’ve reached that conclusion, Jack said, everyone at the company knows that it’s the right answer, and no one’s quite willing to say it. As the leader, you’re in a position where you should act on it sooner rather than later because you’re not being fair to everybody else. That’s really important insight and not always the easiest to implement.