On September 14, 2023, Kelley ICG held our first Fireside Chat. Presenters Dirk Jenter & Steven Kaplan discussed “CEO Markets: Public vs Private firms” The chat was moderated by Jun Yang.
Slides from this lecture can be found here.
A brief Q&A with Steve and Dirk can be found below.
 For the external hires from S&P into PE CEO positions how many were CEOs in S&P or are they mainly ExCo
Roughly 15% of the external hires into PE CEO positions were sitting CEOs. Only 5% were sitting public company CEOs.
 To what extent do constraints, such as non-compete agreements, limit the probabilty of true external CEO hires by public firms?
Not sure why this would be different for public firms than for private ones.
 It’d be interesting to hear more about the supply side–i.e., assuming comparable competences, who wants to be a CEO of a PE company v. a S&P 500?
One angle is that a competent candidate could get a competitive salry in PE, without the constraints of public markets (eg, compliance, public pressure, etc). If that’s correct, maybe more and more good candidates in PE, at the expense of public companies?
I believe that is correct, but it is difficult to test.
 Can the differences be explained by the types of PE-backed firms (I.e., smaller, turnaround cases)?
That does not appear to be the case. The PE-backed companies are not turnarounds.
 How does CEO compensation differ? Have you looked at CFO hiring?
The CEOs of the private equity funded companies appear to earn more money than the CEOs of similarly sized public companies. The difference comes largely from more equity incentive.
 How important is it for CEOs to have frontline working experience?
We find that almost all of the CEOs hired for private equity funded companies have both previous executive experience and previous experience in the same industry.
 How segmented are the labor markets for CEOs of public vs private firm? Do we observe flows across the two markets?
At least 67% of the private equity -funded CEOs have previous experience in a public company. At least 48% have experience in an S&P 500 company. So there is plenty of flow from public to private.
 In the current global economic turbulence, what factors besides compensation tend to influence CEO hiring?
In papers I have written with Morten Sorensen, both public and private company CEOs tend to be more talented, more execution oriented, more charismatic and more creative / strategic than other senior level executives. These qualities are similar pre- and post-GFC.
 Why are they surprised? Take-private with CEO turnover triggers a golden parachute for the target CEO.
The existing CEO may get a payoff as some kind of termination benefit – although not likely to be a golden parachute. But that does not explain why the new CEO is external not internal.
 To what extent do constraints, such as non-compete agreements, limit the probability of true external CEO hires by public firms?
Non-compete agreements can indeed create barriers against employees moving to other firms, and there is evidence from other studies that they restrict the mobility of below-CEO executives. The enforceability of non-compete agreements differs across US states, from fully enforceable to not enforceable at all. Our analysis of CEO hires by S&P 500 firms shows that internal promotions dominate even in states in which non-competes are effectively void. Moreover, the correlation between the enforceability of non-compete agreements and internal promotions across states is insignificant and of the wrong sign (i.e., we observe more internal promotions in states with weaker enforceability). Thus, the evidence suggests that non-compete agreements are not the reason why firms choose to promote insiders.
 For behavioral bias to be able to explain the difference between public and PE firms, we need to argue that the behavioral biases are stronger for public firms. Is this true?
The behavioral biases most likely to affect CEO hiring are familiarity bias, ambiguity aversion, and status quo bias. The effects of these biases are likely to differ between publicly held firms and private equity (PE) owned firms. In public firms, all three biases should make it more likely that directors promote an insider who they are familiar with, for whom there is less ambiguity about strengths and weaknesses, and who preserves the status quo. By contrast, after a PE buyout, the PE partners joining the board are unfamiliar with the firm’s executives, and the board’s status quo has already been disrupted. Thus, they should be less biased towards promoting insiders. They might, however, be biased towards hiring a CEO who they are familiar with from other settings, who in our analysis would count as an outsider.
 great studies–my experience is that public companies are under enormous investor and governance pressure to groom and promote internal CEO candidates. and public companies have a number of positions/incumbents to pick from. PE are not under that pressure and do not have a big internal bench.
It is indeed the case that publicly owned companies are under pressure from institutional investors and proxy advisors to do CEO succession planning. Moreover, this planning, despite some lip service to considering outsiders, is almost entirely focused on grooming internal candidates. Private equity (PE) owned firms do not face the same pressure and, even when comparing firms of the same size, are much more likely to hire outsiders as CEOs.
With these insights we are back to the questions that have been animating much of my discussion with Steve: Is the preference of public firms for promoting insiders the right choice? Or are institutional investors and proxy advisors making a mistake by pressuring public firms to groom internal successors, which might then bias the subsequent CEO hiring decision? I do not believe we have answered these questions yet.
 Hi, Dirk mentioned in the article that Director’s connections are the most common way of appointment for external CEOs. So what about the headhunters to go in market and find the suitable candidate? Is that would be a successful choice for S&P firms?
There is not enough research on the role of executive search firms (i.e., headhunters) in CEO hiring. Anecdotally, for S&P 500 firms, search firms are used in most CEO hires, including those that result in the promotion of an insider. When a search firm is used, they consider both internal and external candidates, and they benchmark the leading internal candidate(s) against outside alternatives. Nevertheless, S&P 500 firms end up promoting insiders in the vast majority of cases.
One contributing factor might be that the definition of “success” for a search firm is proposing a CEO candidate the board ends up choosing. Thus, search firms are incentivized to propose candidates the board is likely to be comfortable with, which is a different objective from finding the best candidate for the firm’s long-term success.
Dirk Jenter is a Professor of Finance at the London School of Economics and was previously a faculty member atStanford and MIT. He is a Research Associate of CEPR, a Research Member of ECGI, and a former Research Fellowof NBER. His research focuses on corporate governance, the selection and compensation of top executives,mergers and acquisitions, and interactions of firms with investors and capital markets. His work has beenpublished in all top finance journals, has garnered several research awards, and has been featured in, amongothers, the Financial Times, the Wall Street Journal, and the Economist. He is an Associate Editor of the Journal ofFinance and has been an Associate Editor of the Review of Financial Studies. He has an M.Phil. in Economics fromthe University of Cambridge and M.A. and Ph.D. degrees in Business Economics from Harvard University.
Steve Kaplan conducts research on private equity, venture capital, entrepreneurial finance, corporate governanceand corporate finance. He has published papers in a number of academic and business journals. Kaplan is aresearch associate at the National Bureau of Economic Research. He is the co-creator of the Kaplan-Schoar PME(Public Market Equivalent) private equity benchmarking approach. A Fortune Magazine article referred to him as”probably the foremost private equity scholar in the galaxy.” BusinessWeek named him one of the top 12 businessschool teachers in the country. Professor Kaplan co-founded the entrepreneurship program at Booth. With hisstudents, he helped start Booth’s business plan competition, the New Venture Challenge (NVC), which has includedover 800 companies that have raised almost $1 billion and created over $8 billion in value including GrubHub,Braintree/Venmo and Simple Mills. Kaplan serves on the board of Morningstar and several fund and companyadvisory boards. He received his AB, summa cum laude, in Applied Mathematics and Economics from HarvardCollege and earned a PhD in Business Economics from Harvard University.
For further information on the webinar please contact Professor Jun Yang, Director of the Institute for Corporate Governance at firstname.lastname@example.org.