CEO Positions Available: "Nice Guys" Need Not Apply

I recently attended a private business briefing where a management consultant from one of the major firms gave an extremely impressive and insightful presentation on global business trends. During the cocktail reception that followed, the speaker was asked by the co-head of a buyout firm if he did a lot of work with private equity firms. “I try not to,” the consultant said. “With due respect, most of the people in your business are real @#$holes.”

While it may be unfair to tar and feather the individuals of an entire industry in one broad stroke – trust me, I know about that first-hand being in the PR business – there’s more than a little truth to the old adage “nice guys finish last” when it comes to the leadership of companies owned by some private equity firms. Fortunately, there are exceptions. Indeed, the executive who questioned the management consultant is a former very senior executive at a Fortune 100 company whose résumé boasts an impressive litany of career accomplishments. He also happens to be one of the fairest and most decent business leaders I’ve ever met.

The cover story in last week’s issue of BusinessWeek touches on this topic. Emily Thornton’s compelling “Perform or Perish” article reports on the increased pressure LBO firms are placing on the executive management of acquired companies to generate better returns on faster timetables. To quote Ms. Thornton, “The toughest CEO jobs in America just got tougher.”

She cites work done by Steven Kaplan, a professor of finance and entrepreneurship at the University of Chicago’s Graduate School of Business, and Geoffrey H. Smart, head of a management assessment/recruiting firm, on common proficiencies and character traits found among 150 private equity CEOs:

Only the most tenacious executives can survive private equity’s rigors… Kaplan found that CEOs who bring “hard” qualities such as aggressiveness, persistence, insistence on high standards, and the ability to hold people accountable are significantly more likely to succeed. Those who offer primarily “soft” skills that are often effective at public companies – like listening, developing talent, being open to criticism, and treating people with respect – are unlikely to work out. Says Smart: “Successful private equity CEOs are cheetahs.”

Ms. Thornton laces her story with examples of the seeming callousness and unmitigated ruthlessness it takes to be a CEO these days of a portfolio company of some buyout firms. Jeff Clarke, CEO of Travelport, a travel services company owned by Blackstone Group and Technology Crossover Ventures, is one of them.

Let’s just say Mr. Clarke clearly isn’t vying to make anyone’s list of “Best Bosses to Work For.” In response to rumors that Travelport was thinking of taking its Orbitz unit public, Mr. Clarke told his staff that “private equity ownership generally is not a long-term proposition. The day will come when our [owners] will decide to take Travelport public, sell off individual businesses, spin off groups of businesses, or pursue some other exit strategy.”

Yes, there are some advantages to providing such a blunt assessment of the company’s future from a “communicating organizational change” perspective. But there is also something to be said for not destroying employee morale in the process. And what about Travelport’s customers? I’d welcome hearing the inside story as to why WestJet Airlines opted to take a $30 million writedown rather than continue developing a computer reservation system in partnership with Travelport.

Ms. Thornton also shares tales of Gerald Storch, who runs Toys ‘R’ Us for Kohlberg Kravis Roberts, Bain Capital, and Vornado Realty Trust. Seeking “to administer shock treatment” and eradicate “victim thinking” among employees who seemed to have lost their drive, Mr. Storch fired virtually all the senior managers he inherited, intentionally replacing them with outsiders. Whether out of fear or forced corporate rah-rahism, rank-and-file employees are said to now walk around with badges pledging that they’re “Playing to Win”.

While there’s no debating Mr. Storch’s quoted comment that poor performers will become store managers’ biggest problems if they don’t cut them loose, the badge-wearing idea brings to mind that “Seinfeld” episode where Kramer was hunted down for not wearing an AIDS ribbon while participating in an AIDS awareness walk. Will otherwise enthusiastic, productive employees get demerits if they refuse to wear the badge? Scott Adams, please take note!

Another CEO cited is Mary Petrovich of AxleTech, who demonstrates that gender plays no part when it comes to a list of America’s most demanding and punishing CEO taskmasters. Once in office, her first move was to slash union wages and benefits by 33% in their new contract. Managers in a quarterly review of projects in the works were expected to report that they are exceeding expectations, not just meeting them. Those who reported less than 100% success were given one minute to explain their challenge and one additional minute to say how they would overcome it. Ms. Petrovich later told Ms. Thornton they would be given just one quarter to get the project back on track.

To be fair, Messrs. Clarke and Storch and Ms. Petrovich are fighting for their own survival. An Ernst & Young study cited by BusinessWeek found that buyout firms replaced CEOs or CFOs at 17 of the 23 companies they sold or took public last year. The danger, however, is not learning from the misguided “profit-at-any-price” philosophy of executives that came before them. Remember “Chainsaw Al” Dunlap? Enron’s Jeffrey Skilling? They had similar damn-the-torpedoes approaches that came back to sink their own battleships in the end. The ever-escalating pressure to do things faster, cheaper, and with better returns all too often becomes unbearable and corners start getting cut. It’s little wonder that many CEOs are secretly grappling with suicidal depression, as Philip Burguieres has warned.

One of the major benefits of taking once-public companies private was supposedly to free top managers to focus on long-term performance rather than quarterly earnings. There are private equity firms that are adhering to that principle and creating value for their shareholders and their workers as well. But these firms typically are smaller than the Blackstones of the world and generally prefer to keep a lower profile. Instead, the public perception of private equity is driven by those who embody the values and ideals of Gordon Gecko and delight in flaunting their stratospheric wealth.

Sadly, I suspect Messrs. Clarke and Storch and Ms. Petrovich are quite proud of their BusinessWeek portrayals. I know what at least one management consultant will think of them if he reads the story.

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