In the piece “Private Equity and the CEO, Partners in the Quest for Value”, a Boston Consulting Group survey revealed instructive disconnects between PE investors and CEOs in terms of CEO success factors.
Areas of CEO and Board Alignment
The survey revealed general alignment between CEOs and PE investors on the following:
- CEOs should balance their focus on the long and short-term.
- CEOs should balance consensus building with direction setting.
- CEOs should be driven by a balance of process and ideas.
Areas of CEO and Board Disconnect
However, the survey revealed three significant disconnects that can threaten deal performance. My own experience in working with private equity Boards and CEOs supports BCG’s research here:
1. STRATEGIC PERSPECTIVE vs. OPERATIONAL PERSPECTIVE
- The most common response from CEOs is that they should be primarily strategic in their perspective
- In contrast, the most common response from PE investors was that CEOs should primarily take an operational perspective
2. BIG PICTURE vs. DETAIL ORIENTATION
- The most common response from CEOs was to focus primarily on the big picture while placing a lower priority on the details.
- In contrast, the most frequent response from PE investors was that CEOs should take a balanced approach that emphasizes details as much as the big picture.
3. RISK TAKING vs. RISK MITIGATION
- The most common CEO response was to prioritize a balanced approach between risk taking and risk mitigation
- In contrast, the most common PE investor response was the prioritize risk taking
In my experience, Boards and CEOs often fail to be intellectually honest about their differing perspectives during the interview and CEO selection process. The philosophical fit between a Board and CEO will either contribute to alignment or to friction. The latter can be dangerous for LPs, GPs and CEOs.
In upcoming posts we will address the psychology and behavioral traits that can contribute to CEO derailment in the aforementioned three buckets.
Takeaways for Boards and CEOs
- Come to terms with your own governance model and how/where past CEOs have suffered from disconnects that have led to poor performance.
- Realize that many CEO candidates have an uninformed view of private equity’s needs.
- Recognize that meaning is often lost in translation during the interview process….for example, most CEOs think they are hands-on but may not come close to PE’s definition of getting in to the details.
- Take a careful approach during CEO recruitment to conduct behavioral interviews that reveal a CEO candidate’s preferred orientation.
- Search for CEOs that are a philosophical extension of your fund.
- Avoid the cognitive bias in interviews that will lead you to see what you want vs. what is true.
- Understand that each private equity firm has a unique view of where CEOs should focus.
- Accept that you may be a great fit with one fund and a derailment statistic with another fund.
- Moreover, understand that often each deal partner represents a sub-culture within a private equity firm.
- Take time to explore a particular fund’s (and deal partner’s) needs and preferred areas of CEO focus.
- Exercise intellectual honesty to critically self-assess your fit with a particular sponsor backed role…far, far better to walk away than suffer derailment 1 or 2 years in to the role.
- Consider that, in my opinion, the single biggest predictor of your success will be the alignment (or lack thereof) you enjoy with your private equity Board.
About Rob Huxtable
Rob serves as the Managing Partner of Integis, a retained executive search firm with offices in New York, Cleveland and San Francisco that is exclusively focused on the private equity-backed, middle market. The firm’s mission is to drive multiples of invested capital (MOIC) for private equity firms by recruiting high-impact portfolio company C-Suite leaders. The firm has played a key part in helping many of its private equity clients achieve top-quartile and top-decile results. Under Rob’s leadership, Integis has been recognized as one of America’s fastest growing privately held companies by the Inc. 5000 for 2015 and 2016.