Private Eye: Portfolio executive turnover hurts; here’s how to prevent it

Executive turnover is a returns killer. What can you do to minimize it?

Unfortunately, turnover is a fact of life for private equity firms. Research from management consulting firm AlixPartners suggests that nearly three-quarters of portfolio-company CEOs don’t last during the holding period of the typical investment. And the timing of their departure is often poor.

More than half (58 percent) of PE professionals that have experienced CEO turnover said it took place more than a year after investment but before one year of exiting, according to a late 2017 survey conducted by AlixPartners and executive recruitment firm Vardis.

That is also the most disruptive time to replace a CEO, according to nearly four in 10 respondents. More than a third of investments experience unplanned CEO turnover, often with detrimental effects, the survey says.

The vast majority of respondents (83 percent) said unplanned CEO turnover lengthens holding periods. And on a related note, nearly half (46 percent) said unplanned CEO turnover worsens investment returns. According to its own analysis of the survey results, AlixPartners found that CEO turnover leads to company disruption, “causing confusion and sparking fear among managers and employees about what the change in leadership will mean for them.”

“One of the things we’ve seen over and over again: [PE firms] wait too long to replace a CEO, who may be a B player and not an A player,” said Ted Bililies, chief talent officer and managing director at AlixPartners, during a presentation of the survey results this March at Buyouts Insider’s PartnerConnect East conference in Boston.

So what is to be done? One thing is to get a better understanding of where private equity executives and CEOs don’t see eye to eye. Along with the survey of PE pros, AlixPartners and Vardis conducted a parallel survey of portfolio-company executives.

The survey asked the portfolio company executives for the “one thing that PE firms need to understand better about their portfolio company CEOs.” The top answers to the open-ended question: “business drivers and CEO motivations,” “patience and communication,” “realism and balance,” and “trust.”

But when PE professionals were asked for the one thing CEOs need to better understand about them, the top answers had a far different flavor. They were “a sense of urgency and time,” “a focus on value creation,” “alignment and communication,” and “financial targets.”

Well-structured interviews with CEO candidates can unearth misalignments like these in advance, helping to ensure that the winning candidate is a good fit for the private equity-backed company. Alix Partners also advises the following:

  • Focusing as much on the candidate’s ability to “learn and change” and “cultural fit” as on his or her track record, which may or may not predict success at the new company;
  • Making use of formal psychometric and behavioral tests;
  • Using social media and company review sites such as to get a feel for an executive’s reputation, and that of his or her company;
  • Once hired, agreeing early on goals and how performance will be measured;
  • Working with the executive team to develop a succession plan.

More advice on finding effective CEOs comes from the just-published book The CEO Next Door, by Elena Botelho, partner at leadership consulting firm ghSmart, and Kim Powell, principal of ghSmart. (Bililies was a partner at ghSmart before leaving for AlixPartners in 2013.)

Here’s a summary from the section on “What makes a great CEO?” based on a subset of the firm’s database of 17,000 assessments of executives:

  • Look for a team orientation — someone who says “we” a lot in describing their accomplishments. “We were intrigued to uncover that the CEOs who saw ‘independence’ as their defining character trait were twice as likely to underperform compared to other CEOs,” the authors write.
  • Don’t overlook introverts. More than a third of the CEOs in the dataset studied by the authors describe themselves that way, and they were “even slightly more likely to exceed boards’ expectations.”
  • Imperfections abound. Nearly half of CEO candidates (45 percent) experienced “at least one major career blowup,” yet more than three-quarters (78 percent) went on to win the position. Interestingly, “CEO candidates who talk about a blowup as a failure are half as likely to deliver strong performance as a CEO.”
  • Leave your prejudices behind. The authors found that “statistically, gender has no impact on the probability of delivering strong results as a CEO.” Yet, female CEOs lead only about 4 to 6 percent of the largest companies.
  • Take a chance on the newbie. “First-time CEOs were statistically no less likely to meet or exceed expectations than those with prior CEO experience.”
  • Match the CEO to the situation. “Many CEOs who are great at turning around a struggling company may struggle in a high-growth context and vice versa.”

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