When you buy a company, you need the CEO to execute and adjust the plans that will achieve your financial targets. And most investors only buy a company when they think they have someone who can run it. But many investors complain that the CEOs they have in place when they buy a company don’t perform as required. Some firms have examined the issue systematically and are surprised to see how many times they’ve had to change CEOs.
There's a simple way to see if you have a problem with CEO churn. If you do, you can take a few steps that will help you improve CEO retention.
How many CEOs do you lose, and how quickly after hiring them do they leave?
Here's an analysis you can do.
Look at completed transactions to see if the CEO you started with achieved your goal of a successful exit. For deals you have already exited:
Look at current investments to assess your current track record:
Examine your findings.
How to do better
If you discover that you are not uniformly excellent in CEO selection retention, what are the ways to avoid having to fire your CEO? (I am assuming that having a CEO you don't want to fire is a quicker route to achieving your investment goals than having a poorly performing CEO.)
Frequently, investors assume that a candidate's past performance predicts their future performance – but it doesn't. Past performance indicates little about how the person would handle new challenges, and new challenges are likely over time in any business situation. You can do better by measuring a person's psychological capacity to actively and successfully cope with challenges. Combined with other measurable characteristics, knowing this coping capacity enables a much better prediction of how the person will handle and even capitalize on unexpected challenges and opportunities.
The most important journey begins with a single step
Give me a call and I'll be happy to talk with you about doing this analysis (or sending me the necessary data so I can do it for you). Then we can see what kind of improvements might make sense.
By Leslie Pratch
Leslie S. Pratch is the founder and CEO of Pratch & Company. A clinical psychologist and MBA, she advises private equity investors and management committees and Boards of Directors of public and privately held companies whether the executives being considered to lead companies possess the psychological resources and personality strengths needed to succeed. In her recently published book, Looks Good on Paper? (Columbia University Press, 2014), she shares insights from more than twenty years of executive evaluations and offers an empirically based approach to identify executives who will be effective within organizations—and to flag those who will ultimately very likely fail—by evaluating aspects of personality and character that are hidden beneath the surface.
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