How To Find The Perfect CEO

Who would make the ideal CEO? Our experience and research tells us the ideal profile of a CEO, especially in a portfolio company of a private equity and holding company (including family-owned groups), is situational and highly dependent on the investment thesis for a particular entity.

Value creation in a turnaround, for example, is quite different from that applied in a stable company looking to expand via new markets, products or M&A. Small cap companies typically require some transformation as they strive for growth in competitive markets.

With all of the above in mind, there appears to be some consistency in the attributes of CEOs most often identified as “must have” by our private equity and family office clients. While certainly not an exhaustive list, these more common attributes are explored below.

Know the Numbers

The CEO must know how to interpret and communicate the financial status of the business with cash-flow and balance sheet management as the mantra.

While there is no question that CEOs need an outstanding Chief Financial Officer (CFO) as a business partner, there is a preference for CEOs who can go deeper on the numbers. That does not mean the CEO needs to have grown up in the finance silo. Quite the contrary, a lot of contextual factors will dictate whether a more market-facing, finance-oriented or operations-driven CEO is appropriate for the business. Whatever the functional background of the CEO (and they all have a “spike” in terms of their functional abilities), fluency and granularity in the analysis and communications of numbers-related issues related to profit and loss is critical.

Know the Value Drivers

The CEO is must be crystal clear regarding what drives value in the business and crisp in communicating areas that require strategic and operational focus.

Research over the last 40 years has discovered that the smartest PE firms, holding companies and family owned groups focus on creating operating value within their portfolios and are doing so in a more systematic, focused and aggressive way than their competition.

Research has also revealed that the CEOs who are most successful define the full potential of the portfolio company, foster a results-oriented mindset within the company and measure the core areas that drive real value. This unique attitude is just as important as stellar professional skills and an exceptional track record.

Know the Customers

The CEO should be keenly aware of how the company and its products and services are perceived by the customer base and continually verify how the company syncs with current and ongoing customer requirements.

The CEO must develop and execute an appropriate strategy and, more importantly, effectively evolve that strategy based on a solid understanding of the company’s core offerings, be they product or service or both, through the lens of their customers.

Without an understanding of customer requirements and a concomitant focus on serving customers well, companies cannot meet their top line or bottom line growth objectives.

Great CEOs prioritise time spent with customers as well as internal functions like sales and customer service as part of their daily routine. They align customer needs with internal business operations and make measurement of the company’s effectiveness in meeting those requirements an absolute imperative.

Create Followership

The right CEO will be a superb leader and communicator who builds relationships well, sets a clear and compelling vision, and can rally the organisation from the Board down to the field staff.

Some see “charisma” as a necessary element of effective leadership, but research (Jim Collins, “Good to Great”, and others) has proven that a long-term, willful, less egocentric approach to the business yields optimum value creation for the entity.

Some dispute these findings when considering the success of technology CEOs like Steve Jobs at Apple (the product guy) and Larry Ellison at Oracle (the general). Effective leadership styles will vary based on the company’s culture, the diversity of backgrounds and nationalities and business requirements, but there is some commonality.

Great CEOs have presence and gravitas that allows them to get the attention of their people – from the chairman of the Board down to the customer service representative. They communicate key imperatives clearly and build a motivated team that can establish momentum and measurement systems that ensure the key imperatives stick. They are agile and resilient leaders who can cope with sudden changes in market conditions and uncertain geopolitical environments.

build a top team

The CEO will build and cultivate a world-class management team and act quickly and decisively if the team or its members fall short on performance.

A chief executive obviously cannot run a great company without a top-tier team and supportive board. In order to build and motivate a strong executive team, the CEO needs to have relationships with his individual lieutenants where open and constructive dialogue is established and ongoing. Likewise, the CEO creates group forums for the entire team where they can wrestle the issues facing the entire business, not just the issues facing them in their own functional silos.

Expectations are set clearly based on operational plans that align with the strategic and value creation plan. Appraisal systems are based on factual quantitative and qualitative objectives that “stretch” business performance. Poor performers are moved out quickly and respectfully.

Know the pulse

The CEO must have a finger on the pulse of the organisation, constantly assess organisational health and ensure all levels of management embrace key imperatives.

A leadership team that cannot activate mid-level management to achieve value creation goals will not succeed. Thus, it is critical that the CEO establish a methodology for measuring organisational health.

At a minimum, the CEO needs to spend time regularly in the “field” with the troops, especially those that touch the customer base most regularly. In smaller companies, this effort to be in the field on a consistent basis, listening carefully to opportunities for improvements, may be adequate. In larger companies, more structured processes may be required.

For example, McKinsey & Company has established an “Organisational Health Index” that allows a larger organisation to be surveyed periodically to see how key programmes and strategic imperatives are being embraced during change management programmes.

Think Like the Owner

The CEO must align with the private equity sponsors and shareholders, embraces the value creation plan, and thinks like an owner of the business.

Strategic resource allocation and capital expenditure is critical in any company as it makes investment decisions tied to the achievement of strategic objectives. In private equity sponsored companies, there is even less room for error when making investment decisions that affect the business. The CEO (like others on the management team) needs to align with the owners. He should have a personal ownership position in the company in addition to robust equity compensation tied to his direct efforts to meet financial metrics.

He needs to act like an owner of the business with a maniacal focus on achievement of the value creation plan. Thus, he will expect his team to do more with less and carefully assess the true benefits of spending precious resources in pursuit of growth and operational excellence.

Listen, it’s tough

CEOs, especially of portfolio companies of private equity firms, holding companies and family owned groups have a tough job. It requires a disciplined, focused and metric oriented approach.

Importantly, CEOs need to effectively balance the interests of a range of stakeholders, including investors, management, customers and, in many cases, founders and families. When CEOs think like an owner of the business driven by their equity position, and instill the same mentality throughout the organisation, true breakthrough performance can occur and all stakeholders win along the way.