Would it be better to be a general manager who reports to Steve Schwarzman rather than to Nelson Peltz? Schwarzman is the founder of private equity juggernaut Blackstone which has made a name for itself taking companies private in leveraged buyouts. Peltz’s Trian Partners, meanwhile, is known for its activist campaigns at public companies. More recently, Peltz pushed for change at Disney where CEO Bob Iger is now cutting 7,000 jobs amid $5.5 billion in annual cost cuts.
A recent academic paper explored the differences in how CEOs are selected in public and private companies. THE study, by Paul Gompers, Steven Kaplan and Vladimir Mukharlyamov, noted that a previous article found that 72% of S&P 500 CEOs surveyed between 1993 and 2012 were promotions from within. For a recent example, watch Amazon veteran Andy Jassy replacing Jeff Bezos in 2021.
But in private equity buyouts, the recent paper found a very different labor market. In nearly 200 deals between 2010 and 2016 worth more than $1 billion, private equity firms fired the existing CEO 70% of the time. And among successor CEOs, more than 70% were external hires who were new to the company, although they generally came from the same industry.
Perhaps most interestingly, the study found that CEO compensation for private equity-backed companies was highly lucrative, including the usual 2-4 percentage points of company capital.
The authors estimate, including these capital allocations, that a private equity CEO could earn between $9 million and $17 million per year. A CEO of a mid-cap public company was making around $6-7 million. (However, it is perhaps unsurprising that private CEOs, in companies with leveraged capital structures, have done better in an era of rising valuations.)
The study concludes that the market for CEOs of private companies is extremely dynamic. And with heightened investor activism in public companies — even legendary executives like Salesforce’s Bob Iger and Marc Benioff are no longer immune to Peltz — working on behalf of a private equity firm could be an attractive, if less visible, place to run a business. .
A large, prominent public company is a unique perch where there are quarterly earnings calls and headline-grabbing investor conferences. Iger was successful enough in his first stint as Disney chief to write a best-selling memoir. Benioff is a star on the thought leadership circuit after founding Salesforce.com.
But with profile come pressures. One of the most often cited is the request to hit a quarterly profit target figure to the penny in order to satisfy institutional equity funds. Oil baron Harold Hamm took his drilling company, Continental Resources, private in 2022 after concluding that his preference for more exploration and production instead of dividends and buyouts would not be tolerated by public shareholders.
Some CEOs prefer to cater to a private equity owner with a single vision for a company backed by an active board. The flip side is that a private equity boss can be ruthless and impatient. But a boss who stayed with a company that left the public market as part of an LBO told me that he was delighted to work with a board that was tougher and more committed than usual with a public company where often directors from varied professional backgrounds would meet only four times a year.
A longtime investment banker noted that corporate governance of public companies often feels like a tick-box exercise. “I guess most CEOs will tell you that board meetings are 90% a process and generally worthless.”
The study’s authors hypothesized that S&P 500 companies partly preferred to hire primarily from within, either because their businesses were complex or because they believed there was little to be gained in the process. outsourcing.
It is also true that external hires can involve risks, cultural and otherwise. Promoted insiders may also have longer-term return horizons than aggressive private equity firms.
As for talented executives, successful stints in a public company can lead to unique notoriety. Soaring stock prices at large corporations have rendered the cult figures of Iger and Benioff in a way that is hard to replicate in a private company. But the headache of being scrutinized by obnoxious investors, politicians and activists makes the job much more taxing these days. The good news for them is that a private equity firm could very well call them soon enough.
This article has been edited to correct the spelling of Steve Schwarzman in one place