Would it be better to be a chief executive who is accountable to Steve Schwarzman instead of Nelson Peltz? Schwartzman is the founder of the private equity juggernaut Blackstone which has made its name taking companies private in leveraged buyouts. Peltz’s Trian Partners, on the other hand, is known for activist campaigns at public companies. Most recently, Peltz pushed for change at Disney where CEO Bob Iger is now slashing 7,000 jobs among $5.5bn in annual cost cuts.
A recent academic paper explored the differences in how chief executives are selected at public and private companies. The study, from Paul Gompers, Steven Kaplan and Vladimir Mukharlyamov, noted that a previous paper had found that 72 per cent of S&P 500 CEOs studied between 1993 and 2012 were internal promotions. For a recent example, look to Amazon veteran Andy Jassy replacing Jeff Bezos in 2021.
But in private equity buyouts, the recent paper found a much different labour market. In nearly 200 deals between 2010 and 2016 above $1bn in value, private equity firms sacked the existing CEO 70 per cent of the time. And among the successor CEOs, more than 70 per cent were external hires that were brand new to the company though typically came from the same industry.
Perhaps most interestingly, the study found that the pay for CEOs at PE-backed companies was highly lucrative, when including a customary 2 to 4 percentage points of company equity.
The authors estimate when including such equity allocations that a private equity CEO could earn between $9mn and $17mn annually. A CEO of a public, mid-cap company earned around $6mn to $7mn. (It may not be surprising, though, that private CEOs, at companies with leveraged capital structures, did better in an era of rising valuations.)
The study concludes that the marketplace for private company CEOs is extremely dynamic. And with public company investor activism heating up — even legendary executives like Bob Iger and Marc Benioff of Salesforce are no longer safe from the likes of Peltz — working on behalf of a private equity firm could be an attractive if less visible place to manage a business.
A big, high-profile public company is a unique perch where there are quarterly earnings calls and investor conferences to headline. Iger was successful enough in his first stint as Disney chief to write a best-selling memoir. Benioff is a star of the thought-leadership circuit after founding Salesforce.com.
But along with the profile come pressures. One oft-cited is the demand to hit a target figure in quarterly earnings to the penny in order to satisfy institutional stock funds. Oil baron Harold Hamm took his drilling company, Continental Resources, private in 2022 after he concluded that his preference for more exploration and production instead of dividends and buybacks would not be tolerated by public shareholders.
Some CEOs prefer answering to one private equity owner with a single vision for a company supported by an active board. The flipside is that a private equity boss can be ruthless and impatient. But one chief who stuck with a business that left the listed market in an LBO told me he was excited to work with a board that was more hard-charging and engaged than typical with a public company where often directors from a variety of professional backgrounds would gather just four times a year.
One longtime investment banker noted that public company corporate governance often felt like a check-the-box exercise. “I expect most CEOs will tell you board meetings are 90 per cent process and generally worthless.”
The study’s authors speculated that S&P 500 companies partly preferred hiring mostly in-house either because their businesses were complex or they thought there was little to be gained from going external.
It is true, too, that external hires can bring risks — cultural and otherwise. Promoted insiders might also have longer-term return horizons than aggressive private equity firms.
As for talented executives, successful stints in a public company can lead to a unique kind of fame. Soaring stock prices at big companies made the likes of Iger and Benioff cult figures in a way not easily replicable at a privately held business. But the headache of being scrutinised by ornery investors, politicians and activists makes the job much more taxing these days. The good news for them is a private equity firm may very well be calling them soon enough.