Insight

CEO SUCESSION PLANNING, COULD PRIVATE EQUITY BE BETTER PREPARED?

2015 VARDIS - ALIX PARTNERS CEO SUCCESSION PLANNING SURVEY. CEO tenure is averagely shorter in private equity as investment theses seek to deliver over shorter timescales to maximise returns for investors. Investors typically will not look beyond the investment cycle and there is little appetite to invest in internal succession planning and development. The significant majority of CEO candidates are recruited externally and the most important characteristic is that they should have experienced similar strategic challenges previously and delivered. We identify that CEO changes often happen too late and too little attention is paid to identifying the criteria necessary for success. Improved clarity on the profile of a prospective CEO, a finely tuned Leadership Thesis together with effective use of key assessment tools offers the best opportunity to deliver for investors. Developing a Leadership Thesis concurrently with an Investment Thesis at the outset of an investment will help to reduce the typical two year period prior to replacement of a CEO.

Vardis, the leading private equity specialist search firm and AlixPartners, the global advisory firm, have announced the findings of the AlixPartners-Vardis 2015 CEO Succession Planning Survey. The survey, based on responses from 103 senior-level executives, found that public companies and private equity firms have very different approaches to CEO succession and succession planning and value very different criteria in their leaders.

Tenure and timing

Views on ideal CEO tenure vary considerably between private equity and public companies. 65% of investment firms say 3-5 years is the ideal tenure, just 28% of public companies believe this is the ideal tenure. Some 41% of public companies believe that 6-10 years is the ideal tenure for a CEO compared to just 24% of investment firms. The private equity investor is looking for a CEO who can drive performance in the short to medium term and optimize the crystallization of value on exit, long term considerations are of less relevance.

Given shorter timescales and very often a change agenda, private equity places very little emphasis on internal succession planning. Within portfolio companies, 48% say they have no formally identified CEO successor candidates (18% amongst public companies) and amongst smaller PE portfolio companies this is even more marked with 59% of companies with revenues below $100m confirming the lack of any successor candidates.  Coupled with this the survey indicates that there is little in the way of internal development programmes: 50% of portfolio companies say they have no formal preparation for CEO successors (21% in public companies) and 67% of portfolio companies say that they have no High Potential Leadership Programmes.

The process for succession in private equity necessarily has to be different reflecting the timeframes within which the industry operates. In investment funds, in a staggering 83% of cases external CEO candidates are recruited for portfolio companies. This compares with just 51% in public companies. We are interested therefore in two things, firstly when during the lifetime of an investment are CEOs most commonly changed and secondly do investors have a blueprint of what the CEO profile should look like? The answers to these two questions were surprising and of some concern.

  • Typically in 30% of cases the CEO of a portfolio company is not replaced until 2 or more years after investment (the highest category).
  • 38% of Investment firms don’t have a defined profile for the Company’s future CEO, this compared with just 18% for public companies.  Or, put another way – 80% of public companies have a defined profile for the Company’s future CEO compared to just 58% of investment firms.

Arguably changes are made too late and often without a detailed analysis of the criteria required for a successful CEO who can deliver for an asset in a specific timeframe and meet the needs of the investment thesis. At Vardis we work with clients to define and hone a Leadership Thesis reflecting in detail the characteristics and experience that are most likely to deliver the Investment Thesis and create value.

What does the right CEO candidate look like for private equity?

Our research looked in detail at what criteria are considered most important in CEO selection. Taking the results from both public companies and private equity investors together the three key criteria were as follows:

  • People leadership skills (68%)
  • Experience with similar strategic challenges (63%)
  • Value alignment with Board / Owners (56%)

Breaking this criteria down to look at the responses given by public companies and private equity produces some interesting differentials. There was broad agreement that people leadership skills are key but private equity placed significantly more emphasis on the need to recruit people who have experienced similar strategic challenges (88%) and this far outweighed the need for specific industry experience (33%) in the view of our respondents.

This analysis supports Vardis’s view that a fundamental key to success [in private equity senior appointments] is identifying candidates who have deep experience of the challenges faced and can demonstrate an ability to deliver in a comparable environment. Having a proven skill set significantly de-risks the appointment and enhances the likelihood of success in short timescales thereby improving the return. [Over recruitment is a very valid approach in a private equity environment – knowing a candidate has “built it before and built it bigger”.]

Selection and assessment

Given the focus on high levels of performance and delivery in the private equity industry we were also surprised to identify that private equity in general does less assessment of potential CEO candidates that its public company counterparts. 63% will use interviews with external consultants, compared to 72% of public companies and just 46% utilised personality assessments compared to 69% of public companies. 29% confirmed that they use cognitive ability testing, compared to 41% of public companies. 

 

BACKGROUND INFORMATION

About the Study

The AlixPartners-Vardis 2015 CEO Succession Planning Survey analyzed common practices, procedures, and criteria used by organizations when selecting a new CEO. The study was conducted in partnership with global business advisory firm, AlixPartners, in July and August 2015. It included an online survey or interview, of 103 senior-level executives, including c-suite, board members and business owners, with 38% of respondents from publicly traded companies, 39% from portfolio companies and 23% from private equity and venture capital firms. Among the companies represented in the survey, 54% had annual revenues of $500 million or more, with 31% having revenues of $1 billion or greater.  All of the respondents said they had significant knowledge of CEO succession planning and selection within their organization.

About Vardis

Vardis is the leading private equity search specialist in North America, Europe & Asia.  It partners with investors throughout the deal cycle to help them Invest in, Grow and Exit their portfolio companies by appointing senior operating executives (CEOs and Direct Reports), Chairs and Outside Directors with PrivateEquityDNA™. For further information, please visit www.vardis.com

About AlixPartners

AlixPartners is a leading global business advisory firm of results-oriented professionals who specialize in creating value and restoring performance at every stage of the business life cycle. The firm thrives on its ability to make a difference in high-impact situations and to deliver sustainable, bottom-line results. The firm’s expertise covers a wide range of businesses and industries whether they are healthy, challenged or distressed. Since 1981, AlixPartners have taken a unique, small-team, action-oriented approach to helping corporate boards and management, law firms, investment banks, and investors to respond to crucial business issues. For more information, visit www.alixpartners.com.

 

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