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Private Equity

2009 Leadership Outlook

A Global Perspective for the Private Equity Market



​Backdrop

A daunting array of economic challenges continues to ripple its way through the global financial system, creating constant change. Two critical questions are at the forefront of everyone’s mind: “How do these changes affect the leaders of the world’s organizations?” and “How do the leaders of the world’s organizations affect these changes?”

At Russell Reynolds Associates, we firmly believe that having the right leadership in place is the only bankable strategy: Leaders today must be able to comprehend both the challenges and the opportunities ahead of them, as well as act on them. This, quite literally, will make all the difference in the world. At this moment in time, we have an opportunity to look back at the last six to nine months and let that analysis inform our view of the months to come. It would be disingenuous to suggest our visibility extends beyond that; however, we find it valuable to push forward and offer a near-term outlook, particularly to share insights into the rapidly evolving trends and their implications for leadership across a range of industries, especially those driving the private equity (PE) market.

Trends in Private Equity

While not always explicitly quantifiable in terms of successes and disappointments, the private equity industry is a critical bellwether for the financial markets and the economy as a whole. With reports suggesting there is well over a half trillion dollars of “dry powder” yet to be invested and with a time horizon for investments that typically extends from two to five years, many are watching this closely held investment community to see how it responds, and, it is hoped, catalyzes activity in the investment markets. In turn, the private equity industry must look to the limited partners who fund their investments to get a read on the supply and demand for investment dollars. In short, all sides are closely watching the others.

Limited Partners

Limited partners (LP) are facing two distinct challenges: (i) addressing the much-discussed “denominator effect” (overall asset values have declined causing the percentage of assets dedicated to alternative investments to appear higher than allowed or, in some cases, prudent) and (ii) finding liquidity to continue to execute their commitments and investment strategies, as well as ensure available cash to all of their constituents as needed. With a thwarted global economy, funding flowing into PE firms from typical limited partners, such as public pensions, private pensions, sovereign wealth funds and family offices, is coming at considerably lower rates than it did in recent years. Further, net assets available to this investment class are down both from the significantly reduced PE distributions hoped for from prior investments and the market devaluation affecting all asset classes. The following mechanisms are being used by LPs to address these concerns:

  1. Increasing the stated allowable percentage of assets invested in alternatives in general and PE specifically.
  2. Encouraging general partners to proactively mark-to-market the asset value of their investments, which is expected to bring down the value of their PE holdings.
  3. Slowing the pace and scale of new commitments with both existing PE fund relationships and new fund opportunities.
  4. Communicating a high level of sensitivity to the overall PE exposure with PE funds that have obtained commitments but have not yet called them and the importance of seeing new distributions before calling further commitments.
  5. Selling their LP interests to secondary purchasers (some piecemeal and others as entire LP interests).

General Partners

General partners (GP) have seen the following trends in addition to those above that directly affect them:

  1. Investment opportunities are still limited in that sellers of companies also are adjusting to the new market valuations brought on by the decline of the overall market. Both privately and publicly held companies have had to adjust to this market-imposed devaluation, which takes time to be accepted as “real” versus a “market blip.”
  2. Debt as part of the financing structure for new investments remains very difficult to come by. The credit markets remain skittish about lending in general, and the use of leverage in buyouts remains elusive. Thus, equity has become the lion’s share of the financing structure, taking the “L” out of “LBO.”
  3. If GPs have raised a fund in the last few years, they may be in an enviable position with “dry powder” and no need to go to market, but it doesn’t solve the fundamental challenges of the fund managers cited above. Thus, investment activity has been severely limited in the last two quarters.
  4. Raising a fund now is as difficult as ever, even for the most credible of PE firms. LPs are still working through an assessment of their liquidity and remain reluctant to make commitments to new funds at this time. That said, LPs have been taking more meetings lately and are showing genuine
  5. interest in hearing market updates and, very selectively, a small cadre of new investment strategies.
  6. The GPs’ highest priority in this environment is managing existing portfolios. As companies struggle with fundamental business decisions at both the strategic and tactical levels, many need the operating insights and governance guidance that experienced board members and significant owners can bring to the table. Further, with exit alternatives dramatically different from what may have been envisioned when the investment was made, Plan B often is being implemented as PE funds face the liquidity crisis that impacts their ability to refinance and return funds to their LPs.

Further complicating the PE world is the increased level of government regulation—either promulgated, promised or merely hinted at thus far. In the United States, the implications of doing business with companies involved in PPIP1 and TALF1 are far from fully understood at this point. Those PE funds controlled by organizations that took TARP1 money are awaiting analysis as to how, if at all, their management may be affected by those restrictions on compensation, liquidity and other matters. According to one market expert, concerns about carried interest, tax implications in PE, registration requirements and FAS 1572 top the list of the most pressing and sensitive issues. Beyond regulatory effects, we are hearing the Obama administration speak very openly about public-private partnerships and strategies to use a meaningful portion of the stimulus dollars to catalyze private sector investments. In other parts of the world, similar developments are foreseeable. In short, the increasingly complex regulatory environment is changing how PE fund managers think about their strategies on the periphery, and it is unclear if there may be an even more direct impact in the future.

Finally, among the most immediate of considerations, distressed debt is having a double-edged effect on the PE market:

  • On one hand, it threatens the equity positions leveraged by investors over the last few years should covenants get violated or maturities come due where refinancing with “replacement” debt is not a viable option, regardless of the credit quality of the new paper.
  • On the other hand, funds with ready capital and the mandate to invest in this area can buy distressed debt from needy sellers at significant discounts to their issuance value. These investments could offer equity-like control attributes with current pay short-term returns.

The New Outlook

With all of this turbulence, new investment opportunities are emerging, giving way for PE firms and hedge funds to pursue new investment opportunities while they sort through the challenges imposed on their traditional business models:

  • Distressed credit investing has become very popular in the last few months.
  • Secondary investment acquisition has gotten significantly more attention in 2009 as LPs seek liquidity faster than their GPs can provide it.
  • Smaller deals requiring very little or no debt are still getting done.
  • Sector-specific funds are more in vogue, allowing LPs to participate in specific industry trends they see as counter-cyclical or defensive (e.g., energy, infrastructure, etc.).

Those fund managers who have historically relied on financial engineering as part of their return strategy are re-examining their approach to the market and are looking for new ways to get the returns they seek for their LPs. Improved earnings at traditional growth rates of 10%-15% won’t suffice alone so investors need to look to (i) operational improvements that will allow earnings to grow at considerably higher rates—a big bet to make in a recessionary economy; and (ii) exit multiple expansion typically driven by quality of earnings and an improved equity environment—which is unpredictable by all accounts. Interestingly, the traditional venture model of growth investing fits the theoretical investment strategy for PE; however, the scale of businesses and the risk associated with that type of investing aren’t compatible with the size of funds associated with PE. With fewer LP dollars available for the asset class and less liquidity than hoped for by all, this may lead to consolidation within the venture capital industry. That said, there are aspects of the venture model that are very appropriate for their bigger siblings in PE; namely, the model that uses unlevered investing to achieve market-acceptable returns. To the extent that these opportunities can be created in both the private and public markets, investment managers—whether they have traditionally been PE funds, hedge funds or other alternative investors—will be seeking the opportunity to differentiate themselves and add value for their LPs. Should they find themselves competing with each other for funds, the LPs will increasingly exercise their influence on fund strategies and investment terms. To be clear, we do not see the wholesale elimination of debt from the buyout business; however, the longer it is not in the arsenal of tools available to PE funds, the more likely we are to see structural change given the many market forces at work.

Effects on Executive Talent

In our principal search activity, we see funds seeking talent to help lead them in new directions, such as distressed credit, secondary purchases or sales, and sector-specific activity, or adding more talent like this to the teams already in place. The trend that started about five years ago to bring operating talent to PE funds continues, and PE funds will likely place an even higher value on these resources as they develop models to deploy these skills to help existing portfolio companies. A few of the middle market firms that raised money over the last couple of years are seeking to exploit turmoil in the larger funds by selectively adding talent. In addition, as the bold prepare for marketing new funds in 2010 and beyond, we are hearing about the potential need to bolster their LP marketing and relations capabilities. A few firms also are considering bringing talent management in-house and are adding executives who specialize in attracting and retaining talent for their portfolio companies, as well as their own organizations. Finally, there are a small number of innovative new funds being planned with strategies predicated on exploiting current market dislocation, although fundraising for these ventures remains highly selective.

As for PE portfolio companies, we are starting to see a significant increase in activity surrounding changing or adding to leadership teams, often at the highest levels. Frequently, boards and PE investors are concluding that the strategies and competencies needed to run their businesses in this economy are different from what was needed in the past. To the extent that the current leadership has recognized this and has adapted, these companies are well-positioned and will have a critical head start in the competitive environment. For companies that need change, delaying the decision only further distances them from success. While these are very difficult decisions at any level, boards and PE owners are coming to realize that such decisions are necessary and expected.

In the following pages, we recap what is happening in each industry sector we cover with an in-depth look at many of the subsectors that have their own nuanced influences. We gather this information by talking with you, our valued clients, and look forward to keeping this dialog open and current in our continued discussions over the next several months and quarters.

Consumer

Trends in Consumer Packaged Goods

  • Commodity pricing pressure has abated, but the real battle is forming in-store as branded products are more premium priced while retailers focus on their private label alternatives.
  • On that note, there has been a dramatic pickup in activity in the private label business as retailers respond to consumer price sensitivity and rush to capture higher margins where they can.
  • This has changed how consumer packaged goods (CPG) companies think about their channel relationships as well as how retailers think about their merchandising strategies. The competencies needed on these sides of the equation are different from before.
  • Essential consumer goods continue to sell while customer electronics and consumer durables feel the downward pressure that comes from a decline in discretionary spending.
  • There has been an increase in sustainability-driven consumption, which affects store and brand selection and drives product innovation.
  • Marketing will continue to play a key role this year. Innovation, brand equity building and customer development all are critical areas of focus. Some see the need to invest in selective core brands and increase advertising and promotion to drive brand/ portfolio growth.

Effects on Executive Talent

The CPG segment has sharpened its focus on talent associated with generating revenue as the relationship between product companies and retailers continues to evolve. Thus, channel management skills are at a premium. In addition, brand building talent remains highly valued since product differentiation in a highly competitive world is increasingly important. With ongoing competitive pressure and globalization of all aspects of CPG, broad general management skills that include a good understanding of all aspects of the business—from supply to demand—are needed in the C-suite.

Trends in Retailing

  • The impact of the credit crunch on the economy hits home first with retailers more than any other business sector. The fact that job losses and debt have overtaken the consumer’s ability to spend directly affects these businesses that represent the point of purchase.
  • As one generation gets older and lives longer, its needs and interests are markedly different from the next generation coming up behind it. These new consumers have increasing buying power with very different priorities, tastes and spending patterns from those who precede them.
  • When supply chain management shifted overseas, many retail companies began to capitalize on the growing buying power of the global community through international expansion of their sales channels. Companies now have access to a larger pool of revenue and product; however, they also have extremely complex challenges associated with managing all aspects of global business.
  • Consumers increasingly expect every aspect of a retailer's presentation, from products to communications to sales associates, to reflect the diversity in their communities. Retailers need to identify these changing trends accurately and quickly and then respond to them in a way that is consistent with their brand and value proposition.

Effects on Executive Talent

Notwithstanding the economic woes being experienced by retailers, the current environment is marked by a shortage of qualified talent, and real wages are soaring. A need to more effectively recruit, develop and retain top talent still exists in the industry. As baby boomers prepare to retire, there simply is not enough next-generation talent prepared to replace the key management positions. Generation Y already is the primary source for new talent among retailers, and the sooner organizations bring these newest workers in with clear development strategies, the better positioned they will be for future needs. Concurrently, retailers are looking to more demographically diverse leadership teams to help prepare for an evolving consumer, workforce and supplier base that shops and conducts business differently from in the past.

Trends in Leisure, Entertainment and Hospitality

  • The economic downturn and subsequent drop in consumer confidence has led to lower customer counts in all parts of the sector. This has been driven by a downturn in all major customer groups: business, leisure and everyday consumption across hotels and restaurants.
  • Consumers are increasingly looking for better value and are willing to trade down between segments of restaurants and lodging. As a result, competition is escalating on price and important than ever.
  • Margin pressure continues across all segments due to food, labor and regulatory costs. In addition, limited capital availability has curtailed plans for expansion and franchising.

Effects on Executive Talent

There is an increasing focus on operational excellence with a need to add expertise in finance, information technology (IT), human resources (HR) and supply chain from within the industry or from analogous industries to help firms improve margins and operational efficiency. There is a continued need to find business leaders who understand how to leverage the company’s brand benefits with consumers to drive increased market share. There continues to be more demand for marketing leaders who can improve the efficiency and effectiveness of marketing campaigns. As with other consumer sectors, improved consumer focus and tactical return on investment (ROI) are of paramount importance.

Healthcare

Trends in Pharmaceuticals / Biotechnology

  • Industry consolidation continues to rise as larger companies look toward patent expirations and the need to fill pipelines with innovative science.
  • The mid-cap market is shrinking as a result as these companies are the most attractive acquisition targets, with products either on or near market.
  • Venture capital and private equity firms continue to invest in strong platform technologies and innovative science that emerges from “known” entities (i.e., spin-off technologies, industry thought leaders/well-known academics).
  • Research and development as well as business partnership to advance product evolution continue to be key drivers for the overall industry.

Effects on Executive Talent

Across all functions, companies are looking for proven talent versus untried leadership. This is particularly the case in CEO searches for private equity and venture capital portfolio companies. CEOs with a track record of successful merger and acquisition activity are in particularly high demand. Due to industry consolidation, executives who have traditionally considered only mid- to large-cap opportunities now are willing to consider leadership roles in earlier-stage, private companies. Strong research and development and business development talent are in high demand.

Trends in Medical Devices

  • The medical devices sector continues to generate strong revenue and earnings, albeit at a slower pace than in the last several years.
  • Large-cap companies are focused on driving operational efficiencies and, in turn, increasing shareholder value.
  • Few blockbuster products are expected in the near- to mid-term, as a result of more onerous regulatory and clinical paths and downward reimbursement pressures.
  • The combination of large-cap companies' substantial cash balances, depressed market capitalizations and smaller R&D budgets has triggered targeted acquisitions over the past year.
  • Smaller capitalization and venture-backed companies continue to be funded but at a much slower rate.
  • Companies with clear regulatory and clinical paths continue to receive venture funding and seek talent with proven ability to get products to market.

Effects on Executive Talent

More than ever, executives who can translate key customer and economic trends into product and portfolio development are in high demand.  In addition, the ability to implement market growth strategies is a highly sought-after skill. Furthermore, there is increasing demand for executives who can navigate and grow businesses in the complex and changing regulatory, clinical and reimbursement climate. For large companies, executive competencies in supply chain, portfolio management and change leadership are becoming increasingly important. General management talent continues to be highly valued as companies look to leaders who can manage all aspects of P&L.

Trends in Health Services

  • The industry has reported increases in overall healthcare employment due to ongoing demographically driven increases in clinical staffing. Nonetheless, revenue reductions are common, owing to job and insurance loss. Medicaid cuts and significant declines in investment income.
  • In addition, anticipated reductions in payments for federal beneficiaries in the managed care segment also are serving to reduce new investments and drive administrative cost savings.
  • Healthcare reform is expected ultimately to include significant payment reform, which will require a new risk-based contracting capability on behalf of payers and providers, thus leading to increased leadership needs.

Effects on Executive Talent

Most recently, organizations have reduced their focus on senior executive recruitment to respond to the near-term staffing trends. A countervailing influence, however, is emanating from both the stimulus package—which will serve to reduce expected Medicaid losses and enhance investments in healthcare IT—and the overall potentially positive impact of pending healthcare reform.

Financial Services

Trends in Global Asset and Wealth Management

  • Unprecedented market turmoil has affected virtually all asset managers, from the largest firms to specialized boutiques.
  • A flight to quality, both in terms of capital flows and talent, has been accelerating, with many firms seeing the need to project strong business and risk management experience.
  • Increased demand to achieve operating efficiencies is evident.
  • A focus on the strategic positioning of a firm's capabilities, along with more targeted approaches to raising assets, has been evident, resulting in the need for deep product understanding.

Effects on Executive Talent

Leaders who bring relevant experience, adaptability to the current market and the ability to drive operational efficiencies are in high demand. The ability to communicate specific strategies in a complex environment also has raised the bar for the sales and marketing talent in this sector. Some firms are taking advantage of the unsettled markets and are upgrading talent and/or strengthening their benches to be well-positioned when conditions improve.

Trends in Global Banking and Markets

  • In addition to the U.S. government's bailout plans for banks, private equity firms are aggressively looking to invest in troubled banks and thrifts.
  • Regulatory constraints and concerns about future losses need to be resolved to get private equity firms off the sidelines and into investing in banks.
  • In addition to investing in institutions, there is a lot of smart money looking to buy individual assets at depressed prices.
  • Emerging equity and fixed income trading-oriented boutiques will be seeking additional capital for growth from strategic investors.

Effects on Executive Talent

Demand is high for bank CEOs who possess a track record of success in advising and conducting due diligence on troubled banking institutions to identify those institutions with growth possibilities and limit potential future losses. In some cases, the CEO will run the bank post-investment. Regulators will place a high priority on ensuring that the proper management infrastructure is in place, which will result in a high demand for talent in risk, finance and compliance. Finally, boutiques that have been mainly equity execution-oriented are expanding into fixed income, which has seen a flow of talent from large financial institutions.

Trends in Consumer Financial Services and Payments

  • Changes in technology and operations are creating challenges and opportunities in consumer financial services and payments.
  • Small is beautiful—community and regional banks that stuck to their knitting, local markets and core strengths have fared better than larger counterparts. Organizations that once were criticized for not broadening their lending and risk profile now are celebrated for their conservative strategy.
  • The future of the regulatory environment is still unknown. The uncertainty in the market is paralyzing decision making around growth strategies and hiring. Government-Sponsored Enterprises (GSEs), Federal Home Loan Banks (FHLBs), are performing much better than Fannie Mae and Freddie Mac.
  • Private equity/hedge fund investors are actively assessing distressed assets/portfolios and banks, but little action is being taken at this point in time.

Effects on Executive Talent

Well-capitalized firms are taking advantage of the market turmoil by upgrading talent and/or strengthening their benches to be well-positioned when conditions improve, with foreign competitors and non-TARP banks viewed as attractive employers. Leadership that brings relevant experience, adaptability to the current market and the ability to drive operational efficiencies is in demand and commands a premium. As in asset and wealth management, the ability to communicate specific strategies in a complex environment has raised the bar for general management, as well as for sales and marketing talent.

Trends in Insurance

  • Less market turmoil than asset and wealth management and banking but decline in investment income has affected all life and property and casualty (P&C) carriers. All P&C carrier and brokers are being affected by a soft market, perpetuated via desperate measures and pricing by AIG, et al.
  • The long-term nature of the industry and current slate mean that many see value in going private versus being public. Mutuals remain attractive to both clients and talent.
  • Increased demand to achieve operating efficiencies, especially through technology, is evident across all segments of the industry.
  • Increased federal oversight of insurance is inevitable and will require new roles and competencies around compliance and enterprise risk management.

Effects on Executive Talent

Adaptive leadership, which brings deep industry knowledge and focus on the bottom line, combined with effective risk management are in demand. The industry has suffered historically from a dearth of talent when compared with the broader financial services sector and now has the opportunity to upgrade from the outside, balanced with an assessment on the long-term likelihood of individual “stickiness.” The risk-averse nature of the industry results in greater personal inertia and cautiousness in moving to new roles.

Trends in Real Estate

  • While the distress in the market has created a tremendous opportunity for investment, legacy issues are preventing most firms from focusing on growth. Investors in real estate, public or private, are forced to focus on existing portfolios. Asset management and, in many cases, workouts of troubled assets are at the center of activity for most firms.
  • Given the difficulties of the commercial real estate market, pension funds and their consultants are becoming more aggressive in their oversight of fund and asset level investments.
  • As a result, an unprecedented level of transparency and communication with investors is required for retention of relationships over the mid- and long-term.
  • Adjunct to this, any current or future fundraising efforts will become more arduous and time consuming than ever, including for those with long-standing track records.

Effects on Executive Talent

Depending on the firm and its existing personnel and resources, sought-after talent ranges from mid-level communications and analytical talent to field incoming inquiries from existing clients to rainmakers with deep pension fund and consultant relationships. While there has been an insignificant amount of movement thus far, a period of repositioning is anticipated among senior players seeking viable and diversified investment platforms. While voids in asset management personnel have been addressed in some cases by underutilized investment professionals, there has been a significant increase in demand for workout and operating talent. Of most significance, those with workout experience from the early 1990s are in tremendous demand, particularly sought after by special servicing and restructuring firms. Finally, regardless of asset class, owners and third-party providers now are seeking best-in-class operating talent to more effectively run portfolios.

Industrial

Trends in Chemical and Process Industries

  • With the severe downturn in the economy, particularly in the segments that fuel so much of the demand for chemicals and plastics, the chemicals industry has moved back to the basics by focusing on productivity and asset rationalizations.
  • For companies that have made significant acquisitions in the last two years, the story is even more troublesome as many find themselves too highly leveraged and at risk of breaking debt covenants.
  • The hope is that de-stocking of supplies is nearing an end, and some modest growth in demand will begin in the second half of the year.
  • Organizational restructuring is common as companies seek increased efficiencies and respond to challenging market conditions.

Effects on Executive Talent

Short of needs specific to a given organization, the addition of new executive talent has generally been put on hold while industry challenges created by the current economic cycle are being addressed. In the midst of workforce reduction across the industry, retaining the right skills—such as product development and innovation—to deliver long-term business growth is essential, and companies that cut back too far now may struggle when the economy recovers. Growing companies in emerging markets may capitalize on headcount reduction in developed countries as they look for more global professionals to add to their ranks.

Trends in Capital and Electrical Equipment

  • In the teeth of this difficult recession, all companies are scrambling to cut costs although not at the expense of talent retention.
  • The companies with foresight recognized the cost benefits of upgrading their supply chain capabilities over the last few years, an area that is particularly important in the heavily manufacturing-oriented industrial sector.
  • Those companies that invested in Lean Manufacturing and Six Sigma programs to achieve more sophisticated manufacturing processes and developed comprehensive SAP-like software systems for their worldwide operations currently have an important competitive advantage.
  • When managing work capital, companies are able to better control and minimize inventories to generate additional cash flow.

Effects on Executive Talent

Retaining the strongest executives continues to be a priority in the industry. Greater emphasis has been placed recently on recruiting manufacturing talent that is knowledgeable in information technology in order to properly implement these new manufacturing systems and realize maximum benefits more quickly.

Trends in Global Energy

  • The slowdown in the global economy has resulted in the deterioration of oil and gas commodity prices.
  • An increased government focus on carbon-emission legislation and smart grid technology is driving the investment priorities for utilities.
  • There is an increased application of technology to energy exploration, development, generation and consumption activities.
  • Currently, there is a growing interest in alternative and renewable energy, driven by the Obama administration and supported by the stimulus bill. However, the pace of investment has been dampened by current credit crunch.
  • An aging workforce and a lakc of viable succession talent at the executive level within exploration and production (E&P) and utilities are impacting the global energy industry. There also is an increased globalization of E&P company workforces.
  • There is a greater focus on compliance with global laws, rules and regulations (e.g., carbon emissions).

Effects on Executive Talent

The global energy arena is seeing increased demand for technologically savvy and globally minded executives who can strike the right balance between regulatory, operational and financial priorities. These executives will need to address environmental considerations as they develop their strategies and prioritize their investments. Due to the succession gap within certain segments of the energy industry, there is greater willingness to consider recruiting talent from outside the industry for key senior functional roles.

Trends in Infrastructure

  • Addressing the aging infrastructure, the general consensus is that we are entering a second era of big projects to upgrade/ replace/expand infrastructure constructed during post-war decades as well as respond to demands of the modern economy.
  • This is reinforced by economic stimulus packages that see massive government spending on infrastructure at all levels and across all asset classes (e.g., California High-Speed Rail at $45 billion, NextGen Air Traffic Control at $15 billion-$22 billion, power transmission grid build-outs, rural broadband networks, hospital systems, etc.).
  • Public-Private Partnerships: There is an anticipated acceleration of mixed ownership structures frequently involving long-term leases/concessions to private sector operators, albeit with ongoing government oversight. Outright privatization of government-owned infrastructure assets also is expected.
  • This has become a global priority with infrastructure players such as funds, developers, operators and advisors increasingly global in reach, although many are frequently joint venturing with local partners.

Effects on Executive Talent

There is increased demand generally for executives with experience in relevant asset classes—and while massive job creation is expected in the long term, this will take time. Executives with meaningful development/project management experience and ROI orientation will be in especially high demand due to a scarcity of this talent because of relatively limited activity in the sector over the preceding decades. All functional areas will benefit, and there will be a new demand for competencies in the areas of government relations/multi-stakeholder management and cultural sensitivity. Global leaders will be needed, particularly those with multi-jurisdictional experience.

Technology

Trends in Software, Hardware and Communications

  • The technology sector has been impacted by the overall economic and financing environment, with a pullback in enterprise IT spending, hiring freezes at many of the larger technology companies and ongoing consolidation as larger,  cash-rich companies such as Oracle capitalize on more  attractive valuations.
  • Investment areas that continue to be most active include BPO, clean tech, SaaS and vertical market solutions.
  • New investment activity in the technology industry has been impacted by the overall liquidity crunch and downturn in the technology marketplace, and private investors are focusing mostly on their existing portfolio companies.

Effects on Executive Talent

The strongest companies requiring additional talent are getting support from their boards to move forward, including changes at the CEO level if needed. Companies in need of turnaround talent are actively recruiting, using the difficult environment as a catalyst to bring in change management when needed. We expect the market to rebound with a modest increase in overall hiring and search activity levels in the second half of 2009.

Trends in Clean Tech and Sustainability

  • Clean tech/sustainability (also referred to as green companies, alternative energy and similar nomenclature) is an evolving business segment at the convergence of innovative technologies, efficient natural resource utilization and environmental responsibility.
  • With substantial risk still associated with model efficiency, technological development, market acceptance and commercialization, the question for clean tech is focused on when and which—not whether—large markets coalesce.
  • Established enterprises, emerging growth companies, the investment community, nonprofit organizations and governmental agencies have been placing big bets in search of long-term success, but recent global economic conditions have made operating and investment conditions quite challenging in the short run.
  • The challenge for this emerging industry is around how sustainable the investment will be until the returns start to prove out the business model with no compromises.

Effects on Executive Talent

Clean tech and sustainability organizations require proven, entrepreneurial executives who can navigate uncertain markets while leading the development and commercialization of new technologies and business models. As a young market, there is an evolving cadre of early leaders in the generation (wind, solar, geothermal, biofuel), transmission, energy efficiency, water and renewables markets. While this is a growth area, the recent economic slowdown has taken some of the wind out of their sails; however, all indications are that this is a temporary condition.

Trends in Financial Officers

  • Corporate governance issues are continuing to change financial officers’ operating relationships with boards, regulators and shareholders, and this has contributed to the level of turnover in the market.
  • The pre-recession trend toward higher turnover was across sectors and geographies. CFOs of Fortune 500 companies have left their positions at a rate of 13%-19% over the last three years.
  • Strong accounting, control and compliance orientation significant requirement with increasing demand brought on by high regulatory requirements and a dip in accounting graduates in the late 1990s.

Effects on Executive Talent

The most talented financial officers are very selective when looking at new career opportunities. The lessons of the previous economic peak and the corporate governance issues that resulted have conditioned candidates to fully explore the strength of a company’s finance and accounting condition, business proposition, management team and staying power. Competition for financial talent continues to be high even with the general slowdown caused by the economy. Public and private companies are competing for a limited talent pool. Thus, there is an increased focus on talent development, which will aid organizations as they rely increasingly on their leadership in a difficult economy and their desire to secure their roles as they come out of the economic downturn.

Corporate Officers

Trends in Human Resources Officers

  • CEO expectations for HR executives have dramatically increased over the last several years, primarily because a new generation of high-performing CEOs sees talent management as a critical component to company success.
  • HR executives must work effectively with their board on a host of issues, particularly executive compensation and succession planning at the senior levels. Boards are becoming increasingly involved in significant human capital decisions.
  • Demographics of executive and employee populations, in many companies, will be causing a swell of retirements over the coming several years. HR executives, therefore, have succession planning and leadership development on the top of their agenda in order to minimize “brain drain” with the exit of this talent.
  • HR executives are increasingly looked to be CEOs as key confidants and trusted advisors on an array of business issues, requiring a broad knowledge base on both business strategy and human capital areas.

Effects on Executive Talent

There is a significant perceived gap between demand and supply for outstanding, broad-capability HR executives of the type described above. While the economic downturn has created an increased flow of senior HR executives in the market, those considered top tier typically have been retained by their companies and still are in high demand. HR executives tend to be more risk averse than their fellow functional leads, implying that most will consider company stability an important criteria in their personal career decision making. There is a perceived shortage of HR talent in the mid-to-lower levels in the organization, causing some companies to rotate top talent out of other line functions into HR, either as a rotational assignment or for the longer term.

Trends in Legal and Compliance Officers

  • The economic turbulence has underscored the need for organizations to look to their general counsel as trusted advisor to the CEO and C-suite team.
  • The areas where legal and compliance to extend their reach encompass a wide range of legal, business, regulatory and risk management issues.
  • Increased government scrutiny, globalization of business activity and greater shareholder activism are among the many drivers of increased demands on organizations from a legal and compliance perspective.
  • The economic downturn has forced organizaitons to assess the benefit/cost decisions of using in-house versus external resources.

Effects on Executive Talent

Business consolidation and the economic conditions, combined with unprecedented headcount reductions by major law firms, have markedly increased the ranks of available legal talent. There is a general sentiment that as the environment improves, in-house positions may offer a higher level of stability and career progression even if they come at the cost of short-term earnings potential.

A Strategic Approach to Today’s Leadership Challenges

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1 Acronyms defined: PPIP (Public-Private Investment Program) is the Treasury program establishing a public-private partnership to buy toxic assets; TALF is the Federal Reserve’s term for Asset-Backed Securities Lending Facility for small businesses and consumers; TARP is the Troubled Assets Relief Program.

2 FAS 157, the new fair value market accounting standard, lays out guidelines for how companies should go about coming up with market values on difficult-to-value investments.

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2009 Leadership Outlook