There is a disturbing article, entitled Perform or Perish, in the November 5, 2007 issue of BusinessWeek, about the intense amount of performance pressure on CEOs of companies financed by private equity firms. The article mentioned a study being done by Steven Kaplan, a professor at University of Chicago's Graduate School of Business, of 150 CEOs running companies backed by private equity. Kaplan found that CEOs who bring "hard" qualities such as aggressiveness, persistence, insistence on high standards, and the ability to hold people accountable are more likely to succeed. Those who offer primarily "soft" skills such as listening, developing talent, being open to criticism, and treating people with respect are unlikely to work out and do better at public companies.
I find this disturbing. I completely agree that shareholder return generally is, and should be, the primary objective of companies backed by outside investors. It's the essence of capitalism. But I believe there is a duration element that must be factored in. Private equity firms and their investors have determined that maximum economic returns in a three- to five-year period, culminating with a liquidity event such as a sale or public offering, is the overriding objective. By definition, this overriding objective eliminates concern about events or conditions after that liquidity event beyond how it might affect that liquidity event. Thus, things like oppressive work environments, short-sighted strategic planning, and neglect of leadership development might all be very positive things for these companies in the shorter term, but very negative over the longer term. |
