“Putin on the Fritz” was the Mueller report's conclusion with respect to conspiracy. Leadership selection, monitoring and its retention are constant challenges in government and in investing. In 1786, Nathaniel Gorham, President of the Continental Congress, suggested to Alexander Hamilton that Prince Henry of Prussia become King or President of the United States. Had that nomination not been rescinded, Seattle might be located in the State of Hank. This early attempt at executive recruiting failed, but attention to leadership selection is a top priority in private equity investing.
During my first week in the investment business, I was asked to attend a meeting of the trustees of our firm. During the discussions of an investment, it was clear that one of the trustees really disliked the industry in which that business operated. A supporter of the investment pointed out the skills of management, to which the unhappy trustee replied “When you wed great management with a bad business, the reputation of the business will survive.” There are no supportable examples where by dint of skills or of personality, a CEO has converted a poor business into a good one. However, as one moves along the continuum from a poor business to a poorly managed one, the impact of a skilled CEO on the performance of business is seen frequently. The metamorphosis of Chrysler from a poor quality laughingstock to a viable competitor under Lee Iaccoca is a vivid example of a corporate transformation.
In the middle market, the effect a skilled CEO can have on the business is profound as management teams are not as deep as they were at Chrysler and the companies can pivot more rapidly than those in the Fortune 500. The loss or the temporary absence of a CEO can be seriously debilitating to a middle market company. Planning for succession is important, but nothing focuses the plan like the sudden absence of a key executive, nor does anything test the succession plan better than having the successor parachute into the seat with no notice.
The circumstances under which a CEO leaves his or her position are widely varied. Planned retirement is the most common and easiest to plan. A number of other situations have resulted in the exits of middle market CEOs. Retiring while employed is not uncommon. These executives often have cashed out on a prior sale of the company or may simply be weary. Paper-free desktops and an abundance of charity golf photos on their walls are early symptoms. Cupidity-Stupidity has claimed many executives: This is a pheromone-driven phenomenon in which a CEO falls in love with a member of his team, often starts to show favoritism and convinces himself that no one is aware. Symptoms range from new hair transplants to other members of his staff calling the Board members from burner phones. Martinet syndrome is another frequent pathology leading to CEO banishment. The syndrome usually occurs in the wake of consecutive financial quarters of poor performance. The CEO develops Nixon-like beliefs that they have all the answers and that the team is out to subvert them. Symptoms include frequent yelling, impulsive firing and sarcastic, embarrassing comments about employees made in front of others. Finally, there is the loss of CEO by hex. A dark cloud has settled over the company or the executive leading to his or her accidental absence. Two of the more vivid recent hexes were as follows. A CEO was seated at a professional baseball game along the third base line chatting with the CFO; a foul ball line drive struck him in the face, rendering him unconscious. He was confined to a dark room for several weeks to recover from the concussion. Another CEO pole planted off a mogul while skiing and vectored into a low hanging pine limb, which knocked him unconscious and led to migraines that kept him out of the office for three months.
Each of these exits requires leadership, at the Board and company level, to immediately step into the breach. In the PE world, the successor, an interim CEO or a PE partner well known to the management team, assumes the post and rapidly communicates the plan to the team. No matter which choice is made, the PE sponsor needs to be widely visible at the company explaining the changes, the plan for the future and offering reassurances to existing employees that a steady hand is on the tiller.
I’m Rob Morris and I approved this blog.