How to ensure a hired CEO won't tank the business?
November 01, 2020
by an investor from New York University in St. Louis Metropolitan Area, USA
Sure, his compensation plan will reward him if the business does well and reduce his comp if it doesn't do well. However, there is very little risk to him because he doesn't have any skin in the game. If the business thrives, he will be rewarded handsomely. If the business suffers due to his mismanagement and his compensation decreases, he will just move on to greener pastures. Heads, he wins, tails, I lose. As the owner of the business, how do I protect myself against such a scenario?
A friend of my family lost one of his businesses because the CEO made a series of missteps in quick succession, then bolted. The consequences unfolded over the next several months then he lost the business. I don't want to make the same mistake. My goal is to acquire several businesses and have each one run by a CEO or GM.
from University of Colorado at Boulder in Colorado Springs, CO, USA
I've been a CEO many times, and I've also worked for some of the best CEO's out there. I say this because I believe once you are really good at something, then you can tell if someone else is. By way of example, my good friend is a Line Captain for United - being a great pilot himself, he can chat with another pilot for an hour and tell you how good they are. It's the same idea.
I've seen some of the same mistakes you have mentioned - and I've seen a ton of example cases where well qualified (at least on paper) folks run the ship aground. I think the best way to tell is to have someone that really knows how to do the work interview the person - and really check the plan.
I'm doing Columbia's 7-week Private Equity course right now and there was a case study where a well-qualified guy tanked the business. Two of us in the class were talking about it - and we both said "the minute I heard the guy's plan, I knew it was going to crash". It crashed. The bankers, lawyers and non-operators in the class didn't see it coming.... but the operators (the Entrepreneurs) did.
Get someone great at it, someone you really trust, to vet the person and their plan.
from Harvard University in San Juan, Puerto Rico
If you want to be very hands off, you have to offer equity. If you buy the right kind of business, it should be very hard to tank it quickly, which means that if you’re keeping your eye on the ball you should have plenty of time to react if things aren’t going well.