When potential investors look at a company, the CEO is often a selling point. At a time when leaders are expected to be more than just the guardian of the bottom line, there are abilities that set the successful ones apart and, in a rapidly changing business environment, these skills have evolved over recent years. So what are the top five CEO traits that investors are looking for?
1. Considered decisiveness
Successful CEOs know that a wrong decision can be better than no decision at all. The CEO Genome Project, a ten-year study by leadership advisory firm ghSmart, found that decisive CEOs don’t wait for perfect information. Instead they look for a sufficient amount together with feedback from a carefully chosen group of advisers who don’t varnish their opinions.
Stephen Gorman, former CEO of Greyhound who took the bus operator through a turnaround, says: “A bad decision was better than a lack of direction. Most decisions can be undone, but you have to learn to move with the right amount of speed.”
And what if decisions flop? The Genome research found that when CEOs were fired over their decision-making abilities, only one third lost their jobs as a result of bad calls. Meanwhile, two thirds were ousted for being indecisive.
When David Coombs, head of multi-asset investments at Rathbones, meets with CEOs to make investment decisions, he looks for “the discipline to react to information quickly”. He cites Coca-Cola chief James Quincey, who is “quick to cut a product if it doesn’t have good resales within six to twelve weeks”.
Jenny Tooth, chief executive of the UK Business Angels Association, regularly meets with founders who seek investment. She says: “You’re looking for someone who can take an idea to commercial success. Decisiveness means being clear about the steps they need to take and that is fundamental, but I absolutely have to marry that with flexibility.”
Ms Tooth argues that before the 2008 financial crisis, “words like decisiveness and vision were important”, but now leaders are equally expected to react to financial, social and political uncertainty. “It’s about being able to pivot,” she says.
2. Empowering others
Once CEOs set a course for their business, how do they engage those around them? CEOs of global companies could, for example, set the tone for culture and processes centrally, expecting senior management simply to take orders.
“I’m much more attracted to CEOs who delegate to other senior management,” says Rathbones’ Mr Coombs. “As a CEO of a global company operating in 60 countries, you should allow the CEOs in those companies to run their businesses as they see fit, which ensures relevance to their country.”
The ability to engage and empower other people is key to creating a fruitful company culture. “It feeds down to how they treat employees. I don’t want a CEO who just talks about shareholder value, but one who talks about customers and employees, and is sensitive to those around them,” says Mr Coombs.
When it comes to engaging those around them, the CEO Genome Project found those who have the ability to handle clashing viewpoints tend to advance to the CEO’s post sooner.
3. Adjusting to rapid change
When headhunters look for CEO candidates, “leading transformation is an essential quality, rather than a nice-to-have”, says Richard Champion, UK deputy chief information officer at Canaccord Genuity Wealth Management. “We are living in a period of flux, when changing consumer trends, questions about the environment and sustainability and burgeoning regulation mean change is part of the average day for most CEOs.”
The last decade has brought social and environmental issues to the fore. Consumer behaviour is changing accordingly. “You need a CEO who’s sensitive to that and can adjust to not only comply with it but embrace it and use it to create an edge to their company,” says Mr Coombs at Rathbones. “You will not adjust to rapid change with a ‘we are who we are’ attitude; humility rather than arrogance is needed.”
When industries change to a company’s disadvantage, CEOs need to react. Chris Beckett, head of research at Quilter Cheviot, says: “Sometimes this requires acquisitions to obtain new technologies and capabilities, but sometimes disruption is so great that the best course is to divest a business while it still has some value. Good CEOs should not fall in love with all of their business.”
4. Social responsibility
Luke Davis, CEO and founder of IW Capital, says: “More important than almost anything else is self-awareness. For CEOs this includes being open about their weaknesses. No one is an expert at everything and there’s no point trying to present yourself as someone who is. If you are not an expert on the finances, it’s better to be upfront about that, but make it clear you have someone who is.”
Mr Coombs at Rathbones adds: “Ten years ago, people wanted personalities like Steve Jobs; it was more about vision and strength. But people are looking for team players now. There has been a step-change in the last five years in relation to climate change, social responsibility and looking after your staff.”
When deciding whose company to invest in, Mr Coombs looks for someone “who doesn’t take credit for performance that has been bolstered by eternal factors; call it honesty or reliability” and also “someone who has realistic expectation around remuneration”.
5. Long-term thinking
About five years ago, angel investors largely focused on the startup journey, says Ms Tooth at the UK Business Angels Association. “Now we will ask founders far more specifically about how they’re going to build and scale their business globally,” she says. Angel investors provide patient capital and, in the long run, a founder’s “plan for scaling and really understanding their market opportunity becomes important to us”.
Long-term thinking is a matter of strategy. “I’m not interested if a CEO just maintains the current dividend and margins, with the rapid changes we’re seeing; that’s not good enough, it’s a minimum,” says Rathbones’ Mr Coombs. Instead, he wants the CEO to know how will this company still be relevant in five years’ time? How will they grow their market share?
While all CEOs divide their attention between short, medium and long-term thinking, the CEO Genome Project found adaptable CEOs spend as much as 50 per cent of their time thinking about the long term. Other executives only devoted some 30 per cent to long-term thinking.
I’ve noticed an interesting trend among investors I follow and many of my own firm’s savviest clients: More than ever, they’re asking to invest in companies whose top managers are themselves heavily invested in the company’s future.
Every CEO, of course, holds some equity in his or her company. It’s often equity that was granted as opposed to an actual investment, though. Our clients want companies where the boss has pushed all in, where his or her wealth is deeply tied to the company’s fortunes.
It makes sense to align the incentives of the CEO with those of the company’s investors. And yet it’s surprising how often those things often run askew of each other. Most CEOs garner a large paycheck regardless of stock performance. That’s why many of the world’s best investors, like Warren Buffett, have to diligently search for opportunities where the incentives of shareholders and executives hew to the same line. (Buffett himself, by the way, is no hypocrite. He wouldn’t be worth much if Berkshire Hathaway went bust.)
Similarly, most private equity firms now seek out investments where the CEO’s risk mimics that of the institutional fund — where the CEO loses real wealth right along with shareholders if things go sour. It’s not easy for small investors to mimic the actions of their big-money peers, but in this case, it’s possible: You can get better, steadier returns by investing with an executive whose net worth and risk profile track that of shareholders.
The level of CEO investment is something my colleagues and I track on investments we explore for our clients. How much equity does he or she own? What percentage of the boss’s personal wealth do we think it represents? Did management have to buy any of this stock with cash, or did they get these shares for free? Studying this can take time. For publicly traded firms, start by looking closely at form DEF 14A — the proxy statement. And the 10K. Yes, for Pete’s sake, read the footnotes.
Can you force a CEO to better align his or her interests with those of shareholders? Well, small investors may not be able to exert the same pressures on a company’s executives as a big activist hedge fund can, but that’s changing. One example: This year's proxy vote by Citigroup shareholders contains a proposal to divert a significant amount of executive compensation to a pool that could pay penalties to regulators if legal violations were to surface in the future. The proposal advocates that the money be locked up for 10 years — reasonable given the time that some investigations take. Bartlett Naylor, an advocate with the nonprofit watchdog Public Citizen, composed the proposal after Citigroup agreed to pay the Justice Department $7 billion for misdeeds related to mortgages spanning back nearly a decade. That's $7 billion in costs borne by shareholders who had nothing to do with the triggering transgressions.
Even if shareholders vote yes on the Citigroup proposal, the company isn't obligated to implement it — and it likely won't. Public company executives aren't prone to taking measures that introduce more risk into their compensation. To be fair, no executive is. But most people aren't shepherding other people’s retirements and savings, either. So when you find a boss who is willing to risk his skin by concentrating his wealth in his company’s stock, sit up and take notice.
What about options, though? You’ve probably heard companies insist that since their executives have options in hand, the incentives of shareholders and the C-suite are in line. And sure, options are worth much more if the price of the common stock rises. The problem is human nature. We tend to be ruled not by what we could potentially gain in any situation but rather by what we’re afraid to lose.
So unlike an entrepreneur whose net worth largely (if not entirely) resides in her business, a CEO of a public company often has only a fraction of his wealth invested — and usually those shares were granted to him rather than purchased with his own cash. And would you believe even the threat of losing a great income doesn’t help? Last summer FORBES wrote about new research that showed CEOs with the highest incomes tended to perform especially poorly at their jobs.
Public companies often have equity holding requirements that say C-suite execs must hold two to five times their base salary in company stock. And, again, the held stock is almost always granted to executives as part of compensation. Equity holding requirements don’t align with shareholder incentives, and they were never meant to. They were created to keep executives from selling their granted stock awards all at once.
Anyway, that two-to-five-times salary measure isn’t a large enough multiplier to create the wealth risk necessary to make executives see the world as shareholders do. It's a matter of scale. Many CEOs, when hired on by large public companies, have likely held similar roles elsewhere and have already accumulated significant wealth. To a man with $50 million in assets he accumulated in his previous two jobs, a $6 million option grant isn't likely to dictate his behavior. If the company underperforms, his options may become worthless, but his net worth holds up just fine. Not if he wasn’t required to put any of that $50 million in assets at risk in his new job.
Now consider how private equity shops approach this dilemma. Many demand that their portfolio CEOs invest a sizable percentage of their net worth into the fund. This practice goes back to a fund’s own sales process. One of the first questions every fund manager gets when raising money: “How much of your own money is invested?” By having a sizable percentage of one’s net worth — for many entrepreneurs, it can be 100% — the tolerance for risk is weighed along with appetite for growth at a ratio that squares with shareholders’ own preferences.
When the largest part of executives' compensation comes in the form of a monetary bonus based on the past year's or quarter's earnings, it encourages the kind of behavior that wiped out shareholders at Bear Stearns and Lehman Brothers. With that in mind, public company boards should consider implementing compensation rules similar to those at private equity firms. The Citigroup proxy vote shifts the momentum in that direction — and it comes on the heels of Warren Buffett, as the largest single shareholder in Coca-Cola, successfully pressuring the company to scale back its executive compensation packages in late 2014, after he called them “excessive.”
Such measures might have altered the tactics of operators such as Robert Nardelli, who, upon being named CEO at Home Depot in 2000, slashed costs in an effort to increase margins and the stock price. Nardelli chased short-term bumps for six years this way and failed to increase Home Depot's share price even a penny. The stock for its main competitor, Lowe's, however, more than tripled — all while Home Depot paid Nardelli a total of more than $400 million. Nardelli, with this illogical and nearly guaranteed windfall, faced no downside risk when deciding how to run Home Depot.
Goldman Sachs CEO Lloyd Blankfein famously chopped his compensation in 2009 to only his base $600,000 salary plus perks, rather spartan for the lead banker at the top American bank. But was it really all that painful? Consider the gesture in light of Blankfein’s previous earnings: more than $100 million in the preceding two years, plus $13 million for 2010. Goldman's stock lost more than 50% of its value during that time. Blankfein didn't experience the same pain his shareholders did.
George Gilder, in the 2012 rerelease of his book “Wealth and Poverty,” well encapsulated the spirit that investors should seek out in their executives:
“As Bill Gates once put it during his entrepreneurial heyday, already a paper decibillionaire, ‘I am tied to the mast of Microsoft.’ David Rockefeller devoted a lifetime of sixty-hour weeks to his own enterprises. Younger members of the family wanted to get at the wealth and forced the sale of Rockefeller Center to Mitsubishi. But they will discover that they can keep it only to the extent that they serve it, and thereby serve others, rather than themselves.”