In a recent post, we dug into the differing priorities of Boards and CEOs cited in the Boston Consulting Group’s “Private Equity and the CEO, Partners in the Quest for Value”. Following is a more focused analysis of two of that report’s findings on the competing priorities of Boards and CEOs. Among other questions, BCG asked investors and CEOs about the following:
- Operational vs. Strategic focus: more private equity investors responded that CEOs should primarily take on an operational focus while more CEOs responded that strategic focus was the priority;
- Big picture vs. Detail orientation: more private equity wanted CEOs to balance details with the big picture while more CEOs stated they should primarily have a big picture orientation.
Lost in Translation
During the recruitment phase, CEOs and Boards typically agree on the importance of being operationally oriented and minding the details. However, much is lost in translation due to a lack of mutual understanding.
The CEO Perspective
In my experience, many CEOs (especially first-time private equity-backed CEOs) don’t fully understand the extent to which private equity Boards need them to be operationally focused and detail oriented…essentially, hands on. Many CEOs believe they understand the needs of private equity only to find that they are out of alignment once in the seat.
Understandably, many CEOs are excited about the opportunity to leverage their strategic skills. Many successful CEOs have also developed a habit of delegating and then trusting their teams to execute. Unfortunately, the above two perspectives will usually result in a poor relationship between the CEO and the private equity Board.
The Reality of Most Private Equity-Backed CEO Roles
Private equity investors buy a company with a clear investment thesis in mind. They then refine that thesis with a strategic planning process that, in many cases, can take place prior to the arrival of a CEO (depending on the timing of the search within the hold period). As a result, CEOs need to understand, buy-in and confirm the extent to which they can (or cannot) refine the Board’s strategy. While maintaining a strategic perspective, CEOs need to be deeply rooted in operational initiatives (execution) while remaining completely aware of the details of their portfolio companies.
Private equity CEO assignments are serious and require truly outstanding, detail-oriented execution. In my experience, private equity wants execution-oriented operators with a strategic value add. They typically do NOT want strategists with an execution value-add.
This means that CEOs must:
- Possess a deeply-rooted President/COO mentality that stays fixated on execution;
- Be quasi-micro managers. Private equity CEOs must trust AND verify while living in the detail weeds.
The Intellectual Honesty Question
The best private equity CEOs love the asset class for the challenge, the opportunity to grow, the accountability tied to creating value for investors and the chance to create wealth for themselves. However, they also understand these CEO roles are not sexy, strategic, high-flying assignments.
Instead, the best leaders realize these mandates are exceedingly difficult, require heavy-lifting and continuous focus on execution while maintaining a command of the details. A private equity Board meeting is no place for an overly strategic, hands-off leader who lacks detailed insight into her/his portfolio company. CEOs and Boards must help one another candidly and accurately assess the fit on these issues during the interview process or face a high risk of derailment.