The latest episode of Deal Volume, McKinsey’s podcast on private markets, featured a discussion on the concept of “CEO alpha” – a term coined by McKinsey to describe companies that outperform due to an exceptional CEO. Sacha Ghai, a senior partner at McKinsey, highlights the importance of CEO upskilling and the nuances of leading in the private sector. The conversation underscores the significance of strategic leadership development for superior organizational performance.
- “CEO alpha” refers to companies that outperform because of extraordinary leadership by their CEOs. It’s been empirically observed in public companies, but its existence and influence in private equity firms are also significant.
- Differences between the public and private sectors influence the type of leadership needed. These factors include performance focus, board dynamics, compensation packages, and governance structures, which all impact decision-making and resource allocation.
- CEOs in private equity firms are often underprepared for their roles, and there is a high turnover rate, with 75% of private company CEOs in the U.S. replaced within the private equity holding period.
- CEO development and upskilling are crucial for cultivating “CEO alpha”. McKinsey recommends a customized approach to skill development based on the individual CEO’s background and the company’s investment thesis.
- Private equity firms and institutional investors need to consider how they grow and develop talent in their portfolio companies. This involves creating an ecosystem to attract and retain high-quality talent, as well as fostering capability-building programs for future leaders.