The most perilous decision for the loneliest CEO, part 2

Last week’s Word on the Street lead article—“The Most Perilous Decision for the Loneliest CEO,” a fable about a CEO trying, and failing, to sell her successful, employee-owned AE firm—struck a chord with many of our readers. The topic seemed to hit home particularly with CEOs, soon-to-be-CEOs, and ex-CEOs (collectively known as the CEO-trifecta) of employee-owned firms.

The article prompted a mini flurry of emails, texts, and voicemails (people still leave those?) with questions and comments. Some of these were so insightful (and funny) that we’ve selected, compiled, and edited a number of them to allow for a deeper dive on some of the perils faced by the CEOs of employee-owned firms when pursuing “external” strategic options in today’s market environment.

1. Is the message from last week’s story to avoid seeking a sale until a majority of shareholders are willing to move forward? By its nature, a firm sale or recapitalization process needs to be as confidential as possible to maximize the chances of success. You don’t want your clients, competitors, or employees getting wind of things—“loose lips sink ships” and all that. So typically, when it comes to these matters, CEOs rely on a “circle of trust” that extends only as far as the board of directors—thus excluding many (most) of their employee shareholders. And while the board may approve the exploration of an external sale or recapitalization and also be an informed advocate for any proposed deal that results from said exploration, they may not necessarily—depending on the firm’s corporate by-laws—be the ultimate decision-makers. Oftentimes a firm sale or recapitalization requires either a super- or simple majority of all shareholders for approval. In such cases, there is always the risk that the CEO is unable to secure enough shareholder votes to move forward with the transaction. More than a few good CEOs have found themselves in this “no-man’s land” and failed to make it through. Unable to win the support of enough shareholders, those CEOs saw their deals head south, leaving them to pick up the pieces.

2. In the fable, the board gave the CEO the “OK” to pursue the sale/recap: Why then did the younger board members renege on that commitment and sink the deal? This narrative device is rooted in (a) actual, real-life experience in helping boards and leadership teams work through the strategic options selection process and (b) our forensic work helping teams heal and rebuild after a failed firm sale or recapitalization process. There are two critical success factors in this type of strategic decision-making. Get them right, and the chances of a successful deal are high. Screw up either one, and your CEO is likely going to be wondering why he or she ever took the job. The first success factor is the quality/competency of the decision-makers. Some of them are either unable or unwilling to voice their concerns or say “no” during the strategic deliberations—mostly out of fear (reference The Five Dysfunctions of a Team). They don’t want to be seen as “naysayers” or “devil’s advocates” (even though that’s actually their super-power). And so, when she gets the “yay, please proceed with exploring a sale or recapitalization,” the CEO erroneously believes that the board has her back, only to find out when it’s too late that they are not all on the same page after all. The second success factor is key individuals putting what’s best for the firm ahead of self-interest. This happens when key shareholders (in the case of last week’s article the younger board members) trade off their individual pros (generally economic) with their individual perceived cons (generally a surrender of individual autonomy and what they consider to be onerous terms of transaction-related employment agreements or non-competes). While the deal may be excellent for the overall firm, they feel it “doesn’t work for me.” And so, at the 11^th hour, they can cause the deal to be killed—by voting against it and influencing others to do so, too. I’ve seen it happen more than a handful of times. It takes a resilient, Solomon-like CEO to recover from this as he or she is dealing with a team that no longer trusts each other.

3. So, are the perils facing CEOs exclusively internally generated? Not at all. While the article painted the picture of a board schism as the contributing factor to the deal going south, it’s equally plausible—even in the current market environment with record M&A multiples and favorable terms—that the “right” external strategic option, a sale to a strategic acquirer or recapitalization, may not actually be available. More than one CEO has overplayed their hand in negotiations over the past three years only to find potential investors walking away, leaving them holding the bag. An even more perilous—but equally realistic—scenario is the CEO “getting the call” from a buyer saying “the deal is off” for some reason or other. This is particularly perilous if the call comes AFTER the CEO has announced the deal is pending to employees.

4. For the employee-owned firm CEO, what is success? The article caused more than one reader to explore what success means for the CEO of an employee-owned firm. Is it defined by their legacy? Or is it what they set the firm up to achieve after their departure—be it voluntary or forced, planned or a surprise? Is it unfair to place the burden of “perpetual employee ownership” on the shoulders of the CEO? The struggle to successfully transfer from one generation to the next was a recurring theme in the comments we received, with an emphasis on just how difficult it is to pull this off today.

5. The greatest peril of all – perceived betrayal: The CEO of an employee-owned firm is charged with the same firm capitalization responsibilities as his publicly traded and private-equity-backed peers – ensure the firm has the right capital model to support what it “aspires to do” (vision) and what it “has to do” (meet short-term and long-term obligations). However, the CEO of an employee-owned firm, particularly one in its second, third, or fourth generation of employee ownership, must also consider the significance of that generational legacy. And for many of those CEOs, this concern is what keeps them up at night. They wrestle with how they will be perceived. For instance, how will the prior CEO – the one who “entrusted the firm” to them to run – view them? How will their employee-owners feel about their decision? Will a decision to trade employee ownership for another model be seen as betrayal? As failure? “Uneasy lies the head that wears a crown.”

In our advisory and strategy work we constantly see the unique set of capitalization decisions that the CEOs of employee-owned firms face compared to those CEOs who run publicly traded or private equity-backed firms. All three must consider a range of capitalization options to help drive their firms forward on their chosen strategic trajectories. However, the CEO of an employee-owned firm must also weigh the importance of that legacy in their consideration of strategic options. And for many, this is what keeps them up at night.

Original content can be found at www.morrisseygoodale.com.

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