What Makes a Great CEO?

What makes a great CEO? It’s a question that bankers like us at Highland Ridge ask frequently because, when we represent our clients and their businesses to prospective investors, we want to illuminate the CEO’s important traits. From a CEO’s perspective, the value of a transaction can be maximized by demonstrating management qualities that are valued by investors. Clearly, having a strong CEO at the helm of a company makes it a more attractive investment to a debt or equity investor, or an acquirer of the business. And, although each investor values management traits differently depending on their focus, there are three broad categories that investors tell us are critical.

Strategic Focus

A CEO’s strategic focus is key to where the business has been and where it is going. Investors take interest in companies that have a vision for future growth based on a well-developed industry expertise. Note that investors value specialists, and a CEO’s strategy needs to be rooted in that industry expertise. The CEO and company must have a proven program to manage product development, customer relationships, and intellectual property, creating appropriate barriers to current and future competition. In short, the CEO and company strategy will be of primary interest to an investor.

From an equity or debt fund’s perspective, it is not difficult to assess a CEO’s focus. An executive’s business plan is the first place to start. That plan should include a description of where the company has been and where it is headed, including products and addressable markets. It should be clear to the investor how the CEO has driven the company’s success through his/her strategy. An evaluation of the company’s historic and forecast financial performance provides the true test.

Confidence

When investors first meet a CEO, they expect to hear a cohesive description of the business, it’s history, and it’s outlook. And, investors want to hear this from a confident and articulate CEO. Demonstrating passion about the business and a sense of urgency around its growth opportunities are critical. In a recent interview, Adam Bryant of the New York Times told Knowledge@Wharton that “Passion and curiosity … really refers to a deep sense of engagement with the world – a questioning mind.” Confidence can be further communicated through examples of the CEO’s historic persistence in achieving the best possible results for the company.

Many CEOs find it natural to be passionate about their business and it’s value. Their confidence, however, needs to extend to the persuasive when discussing their outlook for the business, innovation, product, and/or market. Investors are listening for this “reasoned confidence” that indicates that the business and it’s CEO are worthy of their time and investment. Of course, investors are also looking for financial results that support the CEO’s confidence.

Integrity

This term is often overused when employed as a synonym for “honesty” but, in the absence of honesty, an investor faces a risk of fraud. Fraud is one of those risks that is sometimes difficult to identify, even with the use of due diligence techniques such as background checks, personal references, and thorough financial analysis. So, honesty is a critical part of integrity, but other aspects are equally important.

For us, the trait more importantly involves applying a sense of “what’s right” in dealing with stakeholders fairly and transparently. This will include employees, customers and, broadly speaking, suppliers (including capital sources). When a CEO manages a company with integrity and demands the same from his team, the business has the ability to operate at peak efficiency under the leadership of the CEO and the culture he or she has established.

Even if the CEO leaves the organization in a merger or acquisition, the new management or investor can take comfort that the organization has an established culture of integrity. And, it’s not difficult to diligence the level of integrity in an organization, through background checks as well as interviews with both internal and external stakeholders.

Needless to say, these three general categories of characteristics are among many possessed by successful CEOs. What an investor is seeking will depend on its industry expertise and charter.