By JP Flaum, Green Peak, and Jeff Warren, Russell Reynolds
New CEOs often come into portfolio companies with guns blazing, ready to change the world. But here’s one thing they typically don’t do fast enough: fire people.
We recently interviewed 25 leaders at premier private equity firms in the U.S. and Europe, including Bain Capital, Carlyle Group and KKR, as well as 15 successful portfolio-company CEOs.
When we asked about the most important actions CEOs should take within their first six months, 97 percent cited “assessing and upgrading the executive team” as the top priority, ahead of executing strategy and communicating the vision.
Yet in practice, first-time CEOs nearly always linger over assessments of top players, reluctant to lose their institutional knowledge and the goodwill associated with retaining them.
Even PE investors often don’t push hard enough for speedy change: Several we interviewed were willing to give a new CEO up to 24 months to form a new executive team.
In our experience, deciding who stays and who goes within just three months typically yields the best results, allowing time to initiate the necessary searches and complete a first-rate team before tackling major operational changes.
The best CEOs get to know their direct reports ahead of taking the role, narrowing the timeline further.
As one CEO said, “Being fast on people decisions is the hardest thing I had to do, but it is also the biggest determinant of whether a CEO is going to succeed or fail.”
He changed 85 percent of his staff within his first 15 months at a portfolio company. While it wasn’t the only factor, his company ultimately sold to a strategic buyer for $2 billion and a 30-plus percent IRR.
One motivation to move quickly is to capitalize on a new CEO’s fresh perspective. Over time, familiarity often clouds the picture, even for the best leaders.
A talented CEO we work with replaced the majority of the senior team soon after joining a PE-backed company. But when Green Peak conducted a review three years later, he realized that he had developed blind spots about senior colleagues as they became friends.
Thanks to this external feedback, he let go an additional two people.
It can also be as simple as the need for a quick path to a new culture.
“You are trying to change the trajectory of the business in a big way, and that means you need to make some people changes,” one investor noted.
New CEOs often “go in optimistic about giving everyone a chance, but once they hire one true A player, they reset the bar so much higher,” said another.
Making big people decisions within just three months poses some risk. Nobody wants to be the inexperienced leader who cuts muscle with fat or trades valuable employees for B players.
Trouble is not making those decisions usually carries even more disastrous consequences. Nearly every CEO who waits acknowledges, “I should have done it sooner.”
How can new CEOs evaluate their teams rapidly yet rigorously? A key tactic is one-on-one interviews with each direct report – and many from the level below – within the first 30 days.
Promise and uphold confidentiality but probe deep on the strengths and weaknesses of each function and then its leader to get the information people hesitate to volunteer.
With those interviews and careful observation, the majority of CEOs can confidently make hard choices within three months and avoid future regrets.
Just don’t make the other newbie mistake: leaving investors in the dark. Excessive patience may be forgiven, but bringing the PE firm late into the hiring process? “A complete killer,” according to one managing director.
JP Flaum is founder and CEO of Green Peak, the leadership and human capital acceleration firm for private equity. Reach JP at +1 303-550-0057 or [email protected].
Jeff Warren is a leader in the global private equity and private markets group as well as the financial services sector at Russell Reynolds Associates, the New York-based global search and leadership advisory firm. Reach Jeff at +1 310-775-8950 or [email protected].