Value and Values and Values

Interview with Chip Baird 
Founder and Managing Director, North Castle Partners
Leaders Speak Series

North Castle Partners is a leading private equity firm headquartered in Greenwich, Connecticut, committed to creating extraordinary value for its companies, employees, investors, and communities.

Charles (Chip) Baird, Jr., North Castle’s Managing Director, founded the firm in 1997. From 1989 to 1997, Baird served as a Managing Director of AEA Investors LLC. From 1978 to 1989, Baird was Executive Vice President at Bain & Company, an international consulting firm. From 1975 to 1977, he worked at The First Boston Corporation. Chip received an A.B. from Harvard College and an M.B.A. from Harvard Business School.

Chip Baird, Founder and Managing Director, North Castle Partners

Here are excerpts of our interview with Chip Baird for our book, Triple Crown Leadership:

What is North Castle Partners’ approach to private equity?

Baird: North Castle thinks of its mission as “value & values”: how can we be a successful private equity firm and accomplish that goal consistent with our own set of values? We operate in a competitive arena where there aren’t a lot of people living by a set of values we would be proud of. The recent meltdown of the financial services industry gives you some sense of what happens on Wall Street and in the private equity business.

Our values have to do with both how we act and how we invest. The product that our investors are looking for is a rate of return on the money they’ve invested. Most investors don’t want to know about how you do what you do. They just don’t want to be embarrassed by a front page Wall Street Journal story. They care much more about the value than the values. At North Castle, we believe in the “genius of the &” and care both about the value and values.

We do not want to become social engineers of the cultures of different companies, because those cultures are inculcated deeply in those businesses. But, on the other hand, we would definitely not invest in a business where we saw violations of North Castle’s values.

What are North Castle’s values?

Baird: We went through a process about nine months into our history. I had thought a lot about how one creates a performance-driven, values-based organization. I took out 3 x 5 cards and wrote down the values that I wanted to inculcate into this company that I was starting before I hired the first person. But I understood I couldn’t come down from mountaintop and say, “Here are our values.” That would be silly, and those values would not be authentic to or embedded in the organization.

So, the values became ingrained in North Castle by the selection of the people who joined the firm. Ultimately, people who were hired into North Castle were people for whom “value & values” resonated, for whom things like integrity, or respect, and support for people were important, in addition to people who could do deals to finance companies and have good business judgment.

Then that team of about fifteen people worked together for a period of time before we went to a five-day retreat in 1999. We went through a series of exercises ultimately creating a set of operating principles and then the values that were underneath those operating principles. Those values were almost the same as those I wrote down before North Castle started. It was a process of taking a team through an identification of those values. Words like “integrity” are just words unless they are deeply embedded in the group.

Our values are Integrity, Balance, Excellence, Partnership, Respect, and Development (both individually and organizationally). Each of those had a lot of thinking and discussions go into them before there was buy in. We actually have white papers on what each of those values means.

How would you describe the organization’s leadership approach?

Baird: Leadership has lots of components. The coefficients of each of those components differ by person and by circumstance. The fundamental responsibility of the leader first is being a custodian of the organization’s purpose and values. Everything starts from those two foundation stones: First, a sense of purpose: “What are we here for beyond just making money?” When I talk about purpose, I’m speaking to that core ideology of something beyond making money. And second are values that provide the guardrails that keep behavior on track as you pursue your vision.

We’re trying to do something quite unusual in the private equity business, which is to be successful while caring about something beyond just value. If you ask me, the most fundamental responsibility of leadership is to make sure that people understand down to their bones the values and purpose of the organization.

What does that mean for you personally?

Baird: Most importantly, you have to be authentic to those values. They can’t be words on a plaque. You have to live and breathe those in everything you do all the time. People very quickly see through someone who talks a good talk but doesn’t make decisions that way. People are watching all the time whether your values mean something and whether you lead and manage consistently with the values.

Have you ever had one of your colleagues call you on something that was not consistent with your values?

Baird: Things like being open, honest and direct, respect and support for people, those are operating principles that emanate from the values. The organization’s ability to live within a set of values is all about how they treat breakdowns of values and operating principles.

We have a culture where people are constantly calling others on any breakdowns in our values or operating principles. If you don’t have a culture where people are able to call each other, including me, on a breakdown, you quickly devolve to hypocritical values on the wall.

One example that comes to mind was a situation in which we wanted to replace a CEO of one of our portfolio companies. I had a thoughtful and appropriate idea of how I wanted to do that. Then the press of business got in the way, and ultimately I let the CEO go in a fashion that I would say in retrospect was clearly not consistent with our partnership values. This person had sold his business to us partly because of our values. He called me on it and said “What you’ve done here may or may not be the right thing, but it certainly wasn’t done in a way that was consistent with your partnership values.”

What was he objecting to?

Baird: It was in too compressed a timeframe, driven by the logistics of the day. In the original conception, there had been a process long enough to appropriately explain the reasoning, the process forward, his participation, his new role, and it just was truncated by a whole series of extraneous events. It was more, “We have to make a change.”

What did you do?

Baird: I acknowledged it. I said he was exactly right. I said I was sorry. I said that over the course of time I would make sure that he believed that North Castle didn’t sacrifice its values and that he would respect us for making this change, if not how we made the change.

Then I came back at our next staff meeting, and I described it as a rather thoughtless, crude breakdown of our partnership values. The group acknowledged the mistake. They all thought about what I’d said.

A big part of values leadership is being able to talk about your own mistakes so that everybody can learn from them and avoid making them in the future.

It’s only the openness with which you can talk about them that makes an organization feel that it’s okay to talk about mistakes and have everybody learn from them. Part of the job of leadership is to get people to talk about those mistakes, and then talk about alternatives and to talk about what one could have done differently. There is a part of leadership that requires vulnerability.

How would you describe North Castle’s culture?

Baird: We have a values-driven culture. “Value & values” is the way we think about what we do. It is not something that anybody here takes lightly. It is woven through the way we do everything at the firm, from strategic planning to compensation to performance reviews. The value side of the equation is very much on a par with the values side of the equation. Our performance reviews are as much about values and operating principles as they are about value. I think everyone here would describe us as a performance driven, values-based organization.

Even people who’ve been here and left feel the same way, that this is an extraordinary place and the sorts of people who are attracted to it and stick it out here are committed to the way North Castle operates.

How was that culture set?

Baird: It came from me, but I think it was all about ultimately who was brought into this organization. And not everyone initially hired worked out, and why people flushed out, as much as anything, was because their values weren’t consistent with ours.

Values at North Castle became inculcated by the screen used to hire people. And with some yield loss from that group, you then get a group of people who totally buy into an approach to this business. It’s not just the partners; it is the entire organization.

Values start from the top. You live those, and people watch. If you’ve hired the right people in, it’s a self-reinforcing positive loop. It’s very important to create mechanisms that identify breakdowns in an environment where people can talk about those.

You have to put in place mechanisms that focus on values so they don’t become stale. Over the course of the year, the principals and partners will score each other, and then we’ll sit down as a group, or sometimes I’ll sit down with people individually, and just talk about what those results were. Or, I’ll ask people who clearly have some issues around values or operating principles to sit down and talk through those issues. You don’t take values for granted. You are forever working on them.

It sounds like there was a need to replace some people?

Baird: Yes, we’ve taken casualties on both the value and values side. You can create a 2 x 2 matrix of positive and negative along those two dimensions. And someone who’s operating totally consistent with your values but isn’t particularly effective may be better than someone who’s creating a lot of value but violating every principle you have along the way. The easy one to let go is the person who’s neither affective nor effective. The people you want to keep are people who have high scores along both those two dimensions.

Over the course of time, we’ve lost people from all four quadrants. The only ones that hurt are losing people who leave for greener pastures, who are both capable and committed to North Castle’s values.

How does this then translate into the screens that you do of portfolio investments?

Baird: You do your due diligence. The culture of an organization is part of how you evaluate a prospective investment. Culture and values aren’t things you come in and say, “Okay, we have a new set of values, everybody read this page.” It starts with the CEO of that organization, what our partnership relationship is with that person, what our joint vision is of what this company can become.

If you have those things right, then go back to what we talked about with North Castle. It’s which people are on the bus, and which people are in what seats. You go through the same sort of screen around value and values that we did around North Castle. I would say in the companies that we invested in over the course of time, we’ve replaced probably 50% of the senior management either for issues of values or capability. Values are something that can’t be talked about outside of the people. It starts with the CEO and works its way down.

How do you monitor that on an ongoing basis in the portfolio companies?

Baird: The good CEOs are doing that on their own and are talking to us about what the results are. If what you’re focused on with the CEO is quarterly earnings, gross margins, and operating expenses, and that’s all you talk about, then you’re not setting the example you’d like.

Most of the CEOs we hire or develop powerful partnerships with are people who understand this conversation. So, it is as much us supporting them as anything. That doesn’t mean every one of our companies has the same balance as North Castle. There are businesses that we’ve invested in whose culture we would find a little inconsistent with the conversation we’ve had. Some are top-down, command and control, not vision- and values-based, and it takes a long time to change that. We don’t manage these businesses. We make investments in them.

We develop partnerships with CEOs. We make sure the right teams and incentives are in place. But in terms of day-to-day operations, we don’t tell a CEO how to run his businesses. And that means there certainly are businesses that we would give a low score to. We wouldn’t say they’re unethical; we’d say they perhaps don’t quite have the respect for the people in the organization. They’re not spending enough time on long-term investment and human capital.

Cultures don’t get changed overnight, and our investment horizon is three to five years. We’re not the last investor or owner of these businesses, so we try to make progress. But I wouldn’t say we get everybody to the goal line.

How successful has North Castle Partners been with this approach, and what metrics do you use to evaluate success?

Baird: It’s a good question. It’s a lot easier to measure the value side of the equation than the values side of the equation. On the value side, ours is a business where you can measure internal rate of return to the third decimal point. You can quantify multiples of money returned to investors down to the penny. What you can’t measure as well is the commitment to values, integrity, people, and the community.

For us, one important metric is ultimately who appreciates what we’ve built. We buy entrepreneurial businesses. We help and partner with managements to transform them into professionally managed organizations. And then typically we sell those businesses at the next stage of their development when we’re really reaching levels where the incremental rate of return doesn’t justify us owning them. We sell them to strategic buyers. And for us the metric of the business that we built is whom we sell it to.

We have over time sold businesses to a lot of the most respected companies in the country. So, we sold Naked Juice to Pepsi. We sold EAS to Abbott Labs. We sold DDF to Proctor & Gamble. We sold a company to Nature’s Bounty and a company to Hain. In their industries, they’re the most respected firms, and selling to them gives us a small indication that we’ve invested in and helped build something of quality.

How about the rates of return for your investors versus the nominal averages of private equity firms?

Baird: Over my career, the rates of return have been extraordinary, rates of return far superior to public markets. The rates of return keep me committed to trying to operate in a way in which value and values are both important, and keep our limited partners, our investors, coming back to us.

But we’re not perfect. I look back on 2000-2001 and the dot-com era, and we made some shortsighted investments. So, I don’t think a values-based organization is a guarantee of superior results. That’s just not possible. Like everyone else, we learn from our mistakes.

So, why do you do it then? Why is your mission “value & values”?

Baird: Because I think we’re playing for something beyond just the numbers. We’re playing to show that it can be done that over the long term the results are there on both value and values. I think we’re an example of how that’s borne out. For our firm, values and value both coming together drive results. But it’s not a panacea. There are many things in our business you have to get right. Just saying you’re a values-based organization is an important foundation, but there are an enormous number of technical skills and judgments that you have to make, and the environment has to be in your favor. There are things that are exogenous to your business that can impact you.

It is easier in the short term to achieve results in our business without thinking a lot about integrity, without thinking a lot about people and values, cutting the corners around a bidding process, putting in place a leveraged structure which is way beyond what is responsible.

And the hallmark of the boom and busts on Wall Street is the decoupling of risk from return. I would say irresponsible risk is directly related to a breakdown in values. Take 1988-1989, take 1998-1999, take 2007-2008: those are periods where people pushed the envelope playing games with other people’s money.

I don’t do this because I think everyone’s going to come over to this way of thinking. I do it because I believe it’s the right way to operate, and I believe ultimately it will lead, and has led, to superior rates of return.

But there are people who may do better over some time frame by throwing integrity to the wind, and there are many examples of that in Wall Street and the buy-out business.

Do you see more private equity firms moving in this direction, or do you think North Castle is unique?

Baird: Well, I wouldn’t use the word unique. I would say that most private equity firms’ coefficient in front of value is dramatically higher than the coefficient in front of values. The extent to which people will cut corners differs across firms, but I believe there are a lot of extraordinary people in this industry, and a lot of them are committed to acting ethically. Right now, there are a lot of people retrenching and thinking about some of these issues.

But in our world there are large institutional investors who give money to the private equity business. Our product is internal rate of return and multiples of money. That’s the way they see us. They don’t want to know about the “how.” When the industry will turn is when there’s much more time spent by our customers on these sorts of issues. The manager at that institution doesn’t have in her/his performance review, I’m guessing, a boss who spends a lot of time on the values of the people with whom (s)he’s invested the money. Probably they are told, “Your portfolio was up 300 basis points above the average, therefore your bonus this year is this much.” And as long as that’s the world they live in, their attitude towards values is not going to change.

Do your managers exercise leadership versatility depending on the situation?

Baird: Yes, the concept of situational leadership is a really important one. The effective leader looks at the situation, the shot, and like a good golfer pulls out a different club appropriate for what they’re trying to do. Sometimes it’s driven by the situation, but since leadership is so much about people, it’s often driven by what’s the appropriate way to encourage a course of action by an individual.

Leaders have dominant genetics. They can lead with people skills, technical skills, or formal authority—sometimes ordering, sometimes inspiring, sometimes cajoling, sometimes placating. I think an effective leader has to be able to use all those skills, regardless of what their core leadership genetic is.

Is the leadership in North Castle widely distributed or concentrated in the hands of a few people?

Baird: Well, there are four partners and two principals that comprise the leadership of the firm. The values leadership and the decision-making are spread across all six of us. On the values issues, everybody can make a comment and call a breakdown, and that’s a strength of the firm.

Who have been the most important influences on your personal leadership over the years?

Baird: People from parents to teachers to bosses to consultant-mentors, who each in their own way fed my appetite to learn and understand about leadership. That’s a journey that’s far from over. I learn things every day.

There was one thing my dad taught me that I remember quite well. I was nine years old. We had just moved to Paris, and every day my dad and I would go out to walk the dog. He was just so incredibly nice to the doorman. I said to him, “Dad why are you so nice to the doorman?” He said, “Because you can learn something from everyone.” Those words have always struck a chord with me.

I don’t think there’s one person who is the ultimate teacher on these sorts of issues. I think there’s something you can learn from everybody.

What is great leadership in a few words?

Baird: I think great leadership has to do with both attributes and results. We really haven’t talked about those in the same balance, but I don’t think you can talk about all these wonderful attributes of leadership and such things as inculcating values or leadership style without also talking about results, because ultimately leadership has to be about both.

The ultimate responsibility of a leader has to do with values and establishing the guardrails of values they put on an organization. Then it has to do with the vision that compels people to move forward. Then it has to do with the iterative process and the situational leadership, the rebooting, not of values, but sometimes of vision and most often of strategy and tactics.

But the thing that is immutable is the values, those guardrails. You can change the vision and where an organization is going, or how you’re going to get there in terms of strategy and tactics, or even the team. But the thing that I think is the primary responsibility of leadership is values.

The people around here, 24 hours a day, they’re acting on their own, and if they are not doing it within the boundaries of a set of values, who knows where this organization would go?

Have you ever experienced the great leadership of a high-performance organization in your career? If so, what did it feel like?

Baird: The highest performing organization in terms of value and values that I’ve participated in is North Castle. The experience I have of North Castle as it developed this approach is exhilarating both on the doing good and doing well spectrum.

You feel liberated every day to come to work. You feel that you are proselytizing your approach to the rest of the world. You’re getting positive feedback in terms of results. And you’re doing this within a community that has an incredibly supportive, powerful culture.

When you don’t have this, you go to work every day complaining about one thing or another, feeling powerless to change things. There are fissures in the organization and an enormous amount of time is spent moving sideways and backward as opposed to forward.

Any final thoughts?

Baird: Part of leadership is the concept of continuous improvement. In our organization, that’s development, personal and organizational, which keeps us going forward and morphing but always consistent with our values.

Successful organizations have entrepreneurs or leaders who put in place the building blocks that get an organization on the right path. That’s necessary but not sufficient.

What you need to have are other individuals who take up the mantle of leadership, the responsibility to the broader groups to continue moving the organization forward.

As a leader that’s perhaps the most exciting piece of it: the idea that others have taken up this mantle that you started.


Gregg Vanourek is a writer, teacher, facilitator, and speaker on leadership and personal development. He is co-author of three books, including LIFE Entrepreneurs: Ordinary People Creating Extraordinary Lives (a manifesto for integrating our life and work with purpose and passion) and Triple Crown Leadership: Building Excellent, Ethical, and Enduring Organizations (called “the best book on leadership since Good to Great”). Take his Leadership Derailers Assessment or his Traps Test (Common Traps of Living), sign up for his newsletter, or check out his TEDx talk. and Values

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