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The Best Person to Lead Your Company Doesn’t Work There—Yet

KNOW THAT THEY’RE GOING TO WANT TO HIRE THE BEST HORSE FOR THE RACE.”
PE firm executives tend to sit on acquired company boards and own bigger financial stakes in their portfolio companies, the researchers write. So, while the risk may appear higher, so are the financial rewards.

“In public companies, the board appoints the CEO, and most board members of public companies are professional board members. And the thing that they care about most is keeping their job,” Gompers says. “The private equity firm really just cares about improving that company’s performance and making that company work. We know that they’re going to want to hire the best horse for the race.”

What should aspiring executives do?
For executives looking to reach the top spot, a private equity move can be lucrative—and career-boosting. Researchers were able to estimate pay for 41 CEOs of those examined whose companies exited private equity ownership.

Assuming executives held 2 percent of the equity in their respective companies, private equity CEOs earned an average of $9.4 million, the researchers estimate. At stakes of 3 percent and 4 percent, PE-backed CEOs earned an estimated $13.2 million and $17.3 million, respectively. That’s more than twice the pay of CEOs of S&P 400 MidCap companies.

CEOs at private firms may have to answer to their PE owners, but they don’t have public-facing stressors like quarterly earnings expectations from Wall Street analysts and investors, the researchers note.
Public companies should ‘cast a much wider net’
For public companies, the findings offer a fresh look at a potential pool of candidates.

The authors cite Boeing CEO David Calhoun as just one prominent example. Calhoun, who became vice chairman of General Electric after running the aerospace and other divisions, left the company to run the much smaller, PE-funded Nielsen Holdings. After taking Nielsen public, he moved to a senior position at PE firm The Blackstone Group to run portfolio operations. Boeing later named him CEO.

“BOARDS NEED TO CAST A MUCH WIDER NET, TO STRONGLY CONSIDER THE BENEFITS OF BRINGING SOMEBODY WITH A FRESH SET OF PERSPECTIVES, SOMEBODY WITH PERHAPS MORE DRIVE.”
Public companies like Boeing typically hire external CEOs only after poor performance, the authors note.

“Boards need to cast a much wider net, to strongly consider the benefits of bringing somebody with a fresh set of perspectives, somebody with perhaps more drive,” Gompers says.

Reference: https://hbswk.hbs.edu/item/the-best-person-to-lead-your-company-doesnt-work-there-yet

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