In your executive search, you will surely encounter many dashing candidates with impressive track records. Faced with their disarming charisma, it’s important to understand what raises a red flag, so you can dig deeper or disqualify the candidate.
To this end, you should watch out for the following 5 areas that would raise immediate red flags:
- A CEO stating their performance results in EBIDTA: When asked about their financial performance, a CEO who has great results will generally refer to net profit or operating profit. If they speak in terms of EBIDTA, it’s probably because they have overleveraged their business and are carrying expensive assets. For example, a CEO who has invested in a factory and borrowed a hefty loan to buy new equipment. The interest expense is high and the depreciation is even higher. Using EBIDTA as a metric allows the CEO to take these expenses off the radar by thinking that once the debt is paid off, they will be making money. That is often not the case, and the CEO most likely should never have bought the factory or taken the loan. The bottom line is when you hear EBITDA in an interview get ready to dig into the numbers and double-check if your CEO is able to deliver profits or if you have a dud on your hands.
- A CEO who does not know the profitability of their business unit: When you ask your candidate “Which is your most costly unit, and which is your least? Tell me the insights you have gained from the way you are monitoring costs in your business”. Their answer will reveal whether they know or do not know the profitability of each department. It becomes an area of concern if the CEO is not interested in which department or business unit is most profitable. It can also be a sign that they may be applying “the peanut butter approach” of costing, spreading costs across the whole company in an effort to hide losses of a particular department.
Some CEOs will take the profit from their most lucrative departments to balance out ones that are at a deficit. For example, the CEO of a hospital which was a client of mine got board approval to invest in building a new eye clinic. The cost was significant and the department was haemorrhaging money. To make matters worse two of the world’s best eye hospital brands had opened locations within two blocks of the hospital. In no way could the CEO compete with a specialised eye hospital, and it was clear that the strategy was flawed from the outset and the project was doomed to fail.
Rather than fess up to wasting millions of dollars, the CEO presented the board with an aggregated P&L, which showed a healthy double-digit net profit to the Board, all the time hiding the losses of the eye clinic and allowing the other more profitable departments, such as Cardiac Surgery, to absorb the losses. Meanwhile, he was desperately interviewing for a new job and would soon exit the business as a hero only to place the blame on his replacement when the losses are discovered.
The bottom line is that CEOs who are driving net profit will be keen to know where their profits are coming from, and which departments are eating their profits. A CEO who does not know this is a big red flag.
- A CEO and a CFO who leave their jobs at the same time: Look at the historic performance of a CEO, and look out for CEOs who have left their posts at the same time that the company’s CFO left theirs. This constitutes a major red flag because the board would want to avoid losing the top seniors at the same time, at all costs, which often only happens when questionable transactions take place (possibly fraud). This is clearly a sign for you to dig deeply into that organization, search for the P&L, find out whether they had a forensic audit, whether they had issues with reporting or legal issues, etc.
- A CEO who cannot provide you with details: A CEO who is leading a business will be excited to talk about their wins, and will be able to do so in detail. For example, when interviewing a CEO who accepted a post to restructure a company, you can take note of the extreme detail they can share with you such as when the debt restructuring was significant. I asked such a candidate: “What was it like going in to see the banker for the first time? What was he or she like?”. The CEO will be able to go into extreme detail as to what the day was like, what time of day it was, what the personality of the banker was like, how the conversation went and how the CEO was able to convince him to extend more credit to them in such a dire situation.
By contrast, when interviewing CEOs who have been part of restructuring teams but were, in fact, not involved in the debt restructuring, they will get frustrated and agitated when you ask them such pointed questions; they can’t provide the detail because they were not there.
- A CEO who left a business within 2 years of starting it: If you are dealing with a CEO who created a business or launched a new product line, then left it within 2 years, ask them: “How was the business unit that you ran, and how is it doing now?” If they answer “when I was there, we were really profitable, but I left and I haven’t kept tabs, I don’t know how they’re doing now”, this is a major red flag.
Nobody goes through the emotional experience of creating a product, creating a brand, launching it, and then leaving. Moreover, there is no way they aren’t aware of what happened in their old company because they are in the market, and everyone knows what’s going on with competitor organizations. It’s important to remember that anybody can blow a budget on creating a new product, but only a real guru can understand the gaps in the market and make a product that is a sustainable winner.
What probably happened was that the CEO realized that they had not provisioned for inventory losses, customers not paying invoices, customers returning products, cash not coming in, etc. They realized that the ceiling was starting to cave in and exited before the board could realize how dire the situation was, jumping to a new ship before the noose could be placed around their necks – a quick escape to avoid being tarred and feathered by the shareholders.
Looking for more questions to ask a CEO? Read “CEO Assessment and Selection” to learn more about the 7 universal success factors for the Chief Executive Officer and unlock over 450 fail-safe questions that allow you to recruit top performers. Get more free CEO Assessment tips at https://tpgleadership.com/ceo-assessment-selection-book/ .
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