Why Accountability in Leadership Will Be Critical in 2023

As we welcome 2023, business leaders everywhere are evaluating organizational objectives and setting goals for the next 12 months. At private equity firms, this exercise undoubtedly includes plans to acquire new businesses and to grow existing portfolio companies so investors can achieve their anticipated ROIs within projected timeframes.

In my 35+ years of experience, which runs the gamut from operator to investor, board member, and executive recruiter, I’ve rarely seen such plans fully succeed in organizations that don’t prize accountability in leadership. Moreover, the failure to make leadership accountability a core company value further aggravates any challenging environment, which is exactly what is predicted for 2023.

The Headwinds that Could Drag Down PE Investments in 2023

Although inflation eased up slightly in late 2022, we are still experiencing the highest levels in over 20 years thanks to the war in Ukraine and the lingering effects of COVID-19. The International Monetary Fund (IMF) predicted in October that global inflation would further decline to 6.5% in 2023, but that is still two to three times higher than in the years immediately preceding the pandemic. The IMF outlook for global growth in 2023 is a dismal 2.7% compared to 6% growth in 2021 and 3.2% in 2022.

To try to ease inflation, the Federal Reserve has signaled more rate increases in 2023, which will continue to make lending more expensive. In light of these and other factors, two-thirds of economists at 23 major financial institutions recently predicted that the U.S. will experience a recession this year, according to the Wall Street Journal.

Even so, the Great Resignation persists with over 4 million people still regularly quitting their jobs each month. This continues to make the competition for job candidates fierce, especially for highly skilled or in-demand positions. In fact, the latest jobs report from the U.S. Bureau of Labor Statistics shows that the employment market remains healthy with over 10 million job openings as of November 30.

Beyond these somewhat contradictory macroeconomic conditions, individual industries will face specific headwinds. For example, healthcare companies are bracing for reimbursement and compliance challenges, while technology companies wait to see if Congress will pursue regulations that could dampen their growth.

These headwinds aren’t breaking news for PE firms, but they do make leadership accountability extremely critical to portfolio company success in 2023.

Highly Effective Executive Teams Consist of Accountable Leaders

The term accountability in leadership is discussed often in this market. In some cases, it’s just talk. But when talk becomes action, this is what it looks like:

C-suite leaders take full ownership for individual, team, and organizational goals no matter the internal and external factors at play. They are transparent and honest about challenges the company and their individual areas of responsibility face. In turn, every member of the executive team supports one another in solving problems, rather than leaving peers to navigate issues alone. Beyond that, they hold each other accountable for the commitments everyone has made to the business.

According to research by Joseph Grenny, the author of the New York Times bestselling book, Crucial Conversations, “on top performing teams peers immediately and respectfully confront one another when problems arise.” The outcome of operating this way? “Not only does this drive greater innovation, trust, and productivity, but also it frees the boss from being the playground monitor,” he says.

Based on my own experiences, I know how gratifying it is when you’re part of a leadership team in which everyone takes ownership for individual responsibilities and mutual success. In such cases, the accountability in leadership is also obvious to everyone outside of the C-suite, whether they’re employees or external observers.

The Keys to Hiring CEOs Who Personify Accountability in Leadership  

It’s equally apparent to everyone when there is a lack of leadership accountability. In portfolio companies, the root cause of this is often a CEO mismatch. After all, accountability rarely exists, much less thrives, among the C-Suite or beyond if the CEO isn’t an accountable leader by nature or can’t be accountable when circumstances materially change.

PE investors and portfolio company boards can’t wait until after the top executive is hired to emphasize accountability as a company value or to determine a CEO’s inclination toward it. Instead, they need to consider such things as part of a strategic CEO hiring process, which should include the following strategies and tactics:

The PE Guide to Hiring CEOs Who Personify Accountability in Leadership

  • Set the Right Company Tone
    • Identify accountability as an integral part of company culture by incorporating it into mission, vision, and values statements.
    • Weave accountability into the responsibilities, qualifications, and personal attributes described in all company job descriptions, including those for the CEO and other C-suite positions.
  • Conduct Extensive Due Diligence
    • Develop and ask interview questions that help you assess not only functional IQ, but also emotional intelligence and leadership accountability.
    • Consider the full range of available psychological assessment options and invest in one that is commensurate with your investment in the company.
    • Confirm candidates’ accountability history by specifically asking references about this aspect of a prospective CEO’s leadership style.
  • Think and Act Like a Team
    • Use the results of interviews and psychological assessments to narrow the field of candidates to a list of finalists.
    • Consider each finalist’s weaknesses and determine if or how existing or prospective C-suite members could compensate for these shortcomings.

In companies where the key functions of operations and/or finance play an outsized role as part of the PE value creation plan, it makes sense to apply similar strategies and tactics to the COO and CFO hiring processes.

Set Portfolio Companies Up for Success No Matter What 2023 Brings

Although it’s tempting to rush CEO hires for new and existing investments to limit the time without a company leader, it’s simply not worth the risk. More often than not, this approach ends two or three years later with the CEO leaving—voluntarily or not, because they weren’t the right fit and couldn’t or wouldn’t take accountability for their commitment to the company.

Even in economic periods conducive to growth, such CEO hiring mistakes typically set business plans back by 24 to 48 months. In 2023, a year likely to be marked by increasing economic turbulence, that setback could be far more long lasting and financially consequential. The same is true for a mismatched COO or CFO in situations where their contributions are equally important to the CEO’s.

At Focus Search Partners, we listen to clients to understand the type of CEO needed for any given investment. In identifying candidates, we fully vet the most promising ones. This includes on- and off-list reference checks to determine who represents the best cultural match and is committed to leadership accountability. Likewise, we’re experienced at finding COOs, CFOs, or other executives who naturally complement the chosen CEO to create a C-suite team capable of effectively executing our client’s investment strategy.

By Richard D’Antoni, Managing Director at Focus Search Partners

Let us help you find the portfolio company CEOs who can effectively navigate whatever 2023 brings. Contact Focus Search Partners today.