By Peter Tulau, Director at AltoPartners Australia

This article was first published via the AltoPartners Australia website, to view the original article click here

In today’s business world there are very few cosy little nooks where small caps can plod along and expect fruitful returns over the longer term. By their very nature, they can be easily blown of course. As such, they need to stay abreast of best practice due to continual demands for both growth and talent, increasing globalisation and cost pressures, the need for innovation, the impact of technology and increasing risk and compliance.

To compete in this environment quality small caps are generally lean, readily walk in the customers shoes and try to identify value from the customers perspective. They are flatter in decision authority and job tenure is not necessarily a feature. They are more collaborative and technologically competent. They are also more time pressured and less dependent on geography.

Features of Small Cap CEOs

There are a range of challenges particular to small-caps that make the right CEO choice even more critical. They are:

• The more direct impact of the CEO on organisational culture.
• The role of the CEO in attracting external funding interest via brokers or direct investors.
• The role of the CEO in fronting the media, shareholders, Board members and employees.
• The requirement for the CEO to be the driver of change and growth, focussing on the longer term success of the enterprise, rather than simply the short term dollars in the door.
• The role of the CEO with respect to corporate governance and the ethics which drives engagement with customers, investors and potential employees.

A Common Small Cap Approach to CEO Sourcing and Selection

Meet Bob Jones, Chairman of a small, listed engineering services business. In 2017, Bob faced a dilemma. Having enjoyed the stability and surety of a long-serving CEO, Bob had come to the realisation that the business was no longer as nimble and commercially successful as it needed to be. Seeing the writing on the wall, the CEO advised his decision to exit and in the absence of a natural successor, Bob needed to source the replacement externally.

Bob had a clear idea of what he wanted – someone with a clear track record of business transformation; someone who could act quickly and decisively and inject some new contracts into the organisation. So, Bob did what many others in his position would do – he surveyed his network and identified a potential new CEO who displayed these characteristics. The person came from a large well regarded company, was widely known in business networks and interviewed very well; seemingly a perfect fit.

For the first 6 months, cash flow improved but four members of the reporting executive team quit. In the second six months, the pipeline of potential new business appeared solid, but the Board received notice of a complaint and planned relationship withdrawal from a long-term customer. By the final six months of the CEO’s 18 month long tenure, the Board had assumed control of the day-to-day running of the business and Bob, who had championed the new CEO, was on shaky ground. All the ingredients for success seemed to be there. But very clearly, something went very wrong.

This scenario is fictional; however, it is sadly representative of the experiences of many Australian small caps. It’s all too tempting for Boards and business owners to utilise informal methods to identify and attract a new CEO. However, as we’ve seen from the Bob Jones example, the consequences of this lack of objectivity can be dire.

Best Practice Small Cap CEO Sourcing and Selection

It pays to begin with the end in mind and ask yourself these 7 crucial questions before embarking on a CEO Sourcing and Selection process.

Will my organisations culture, reputation and practices enable me to attract the best candidates?

High potential, high demand talent has many options and are highly selective. You need to be realistic about what you can achieve. Rate yourself on the above factors and carefully consider the implications for your approach to market. Ask yourself the question: Why would high quality candidates choose my organisation over others?

What is the context that created and will greet this new CEO?

CEO appointments are a cusp moment in organisational development, and they often bring opportunities for step change. On the flip side there can quite often be several strong streams running through an organisation’s culture stamped by successful executives who may be change resistant.

Consider the impact on this group in your decision making prior to this appointment. Undertake executive assessment on short listed candidates to secure the required insights to mitigate risk and focus your decision making.

Have I clearly defined the role and where will I find the best candidates?

There is no point having a sharp machete if you are in the wrong jungle. Invest plenty of time upfront defining the requirements of the role. There are good processes to get the stakeholder group involved and come to a shared understanding of the role from a leadership style and preferred impact perspective. It is sensible risk mitigation to have a role blueprint when you commence recruitment.

Am I sophisticated in terms of sourcing and engaging the best candidates?

If you recruit directly, you must be crystal clear on your capacity to play the ambassadorial role and represent your opportunity effectively. You only get one chance at the best talent and your story needs to be well thought through and compelling for its audience.

What constitutes best practice in terms of candidate assessment?

Your role blueprint ideally will have translated your business strategy into a search and selection blueprint covering strategic, operational and behavioural elements. It is the repeated examination of these elements with both objective and subjective methods that delivers excellent outcomes.

How do I align the CEO’s expectations with my expectations?

So, the business has a clear strategy and the CEO role is clearly defined. How does the business respond to market changes, unexpected challenges and its own performance? Does it reinvest cleverly to capitalise on opportunities? Does it pull back from exposed positions appropriately? Does it release people with dignity?

What should I consider when integrating the new executive?

There is not much point investing in a comprehensive process if the onboarding is not carefully constructed to address the above questions. Start with a 90 day plan, break it into 3 pieces, set some objectives and align your expectations. You do not want to lose the new CEO.

Bottom Line

Success in Small Cap CEO Sourcing and Selection will stem from:

• investing plenty of time up front defining the role and sourcing strategy.
• relentlessly assessing capability at all stages of the process.
• ensuring the onboarding process is well conceived and executed.