I am a part of a London-based investor that works with European tech companies looking to expand.
When meeting entrepreneurs I’m regularly asked “what makes a good CEO?” and “how do you identify one?”
A key part of our investment decision is the calibre of the team in general and of the CEO in particular.
The right CEO can make or break a business. So, how best to come to the right view? Is there even such a thing as a ‘good’ CEO?
Be clear on what the business needs from its CEO
The first part in understanding the CEO role is to be clear on the needs of the business and the shareholders’ objectives.
Agree these across the stakeholders and write them down. Assess where the business is today and work out the key gaps.
These are the building blocks that the business needs to focus on – and where the CEO needs to lead.
In my experience, the best CEOs are able to lead this process and identify the key steps to get there. Without these agreed, nothing else will really work.
This exercise sets what the CEO needs to deliver. Once everyone understands the goals, investors and the board can work with the CEO to prioritise objectives, mentor their next steps, and provide support to make things happen.
In the early stages of a startup, founders and CEOs are often performing all the functional roles in the business.
They might be doing everything from managing finances, to sorting office IT, to acting as head of sales. As the company matures, CEOs need to be able to delegate these tasks to more specialised managers.
Objectives may change but CEO characteristics are constant
As the business grows, the objectives will change. Yet some things are consistent.
Specifically, the key areas for a CEO to focus on are to hire great people and develop them into a high-performance leadership team; provide and allocate resources and capital to support the plan; and position the business strategically to partners.
A CEO must be able to do these things. Research also shows that the most successful venture and private equity-backed CEOs share a number of consistent characteristics.
A 2012 Kaplan study showed talent was measurable across thirty key characteristics. The study showed that CEOs with high execution skills were likely to perform better than those with good interpersonal skills.
While the best CEOs had strengths in both, those that indexed highest on execution skills are likely to perform better. It is those attributes that we look for in CEOs.
We look for CEOs that are bold, responsible, open to feedback, and can handle the independent nature of being the CEO of a rapidly growing company.
To put it simply, we need a CEO that can take input, be challenged, make decisions, and enact them.
How do you identify if you have the right CEO?
Research shows that in many cases, the assessment of CEOs lacks rigour.
Often people rely on unstructured discussions and their ‘gut’ instinct, followed by post-decision confirmatory referencing. I believe this simply doesn’t work.
Relying on this means that investors and companies don’t get the best CEOs; and for potential CEOs the process doesn’t provide any characteristics they can develop or enhance.
Our experience, which is supported by several studies, is that the most successful techniques for identifying winning CEOs are formal and well-thought-out competency-based interviews.
References provided by candidates should be supplemented with independent references and performed in a clear and structured way to identify strengths and weaknesses.
While asking the question of what makes a “good CEO”, it is also important to recognise that there is no such thing as a “perfect CEO”.
CEOs need to develop and benefit from feedback and support. This is most likely to come from the Board, the Chairman, or an involved expert investor.
Support may also come from external mentors, professionals or peers. So “good” is most likely to be a simplification.
All investors will have different approaches to evaluating what makes the right CEO in a given situation.
Overall, in my experience, a more structured approach to the question leads to a better outcome for individuals, companies and investors.