For small-cap companies and SMEs pursuing growth, the need to recruit the right CEO is imperative and requires a multifaceted approach. By Peter Tulau

Meet Bob Jones, chairman of a national professional industry association. In 2006, Jones faced a dilemma. Having enjoyed the stability of a long-serving CEO, he had come to the realisation that the business was no longer as commercially astute as it needed to be. Membership was waning, product offerings were no longer leading-edge, and as a result the credibility of the business was diminishing.

Seeing the writing on the wall, the CEO decided to exit and, in the absence of a successor, Jones needed to source the replacement externally. He had a clear idea of what he wanted: someone with a record of business transformation, who could act decisively and inject income into the organisation.

So Jones did what many others in his position would do: he surveyed his network and identified a potential new CEO with these characteristics. The candidate came with a solid CV, was widely known in business networks and interviewed very well.

In the first six months of the new CEO's tenure, while cashflow improved, four members of the senior executive team quit. In the second six months, the pipeline of potential new members appeared solid, but the board received notice of a complaint and planned relationship withdrawal from a long-term industry partner.

In the final six months of the CEO's 18-month tenure, the board assumed control of the day-to-day running of the business and Jones, who had championed the new CEO, was on shaky ground.

This story is fictional. However, in my experience it is representative of the experiences of many Australian organisations. Each year, numerous businesses, particularly small-to-medium enterprises (SMEs) and small-cap public companies, are thrown into disarray due to incorrect hiring decisions.

It remains too tempting for boards and owners to utilise informal methods to identify a new CEO. This is especially true of organisations that are not large enough to sustain a senior management team to cushion the blow if things go wrong.

The small-cap experience

Reviewing the most recent BRW Fast 100 – a guide to the fastest-growing enterprises in Australia – it is obvious that the increasing requirements demanded of leaders of SMEs and small-cap public companies make the right leadership choice more imperative than it has ever been. Consider the following:

• the more direct impact of the CEO on organisational culture
• the role of the CEO in attracting external funding interest via brokers or direct investors
• the increased need for the CEO to be the company's face to media, shareholders, board members and staff
• the requirement for the CEO to be the driver of change and growth, focusing on the longer-term enterprise success, rather than simply the shorter-term dollars in the door
• the onus on the CEO to uphold corporate ethics.

In larger enterprises these responsibilities may be shared or divested among a broader leadership team. But CEOs of smaller organisations do not have this luxury and so must display both the technical capability and the behavioural characteristics to lead, shape and add value to organisational culture while achieving solid commercial success.

As more small companies see the path to growth through a public listing or some form of private equity investment, the choice of leader becomes a matter for public scrutiny.

While the founder or incumbent may understand industry dynamics and have established a reputation for being commercially astute within their own business circle, the equity market may take a different position and not view the founder as the right leader for the next phase of growth.

Moreover, it takes more than being commercially astute to be an effective leader of a fast-growing company; those factors that distinguish high-performing CEOs in this environment are often the hardest to measure using informal or traditional hiring methods.

Alignment is critical

The critical element of a CEO placement is ensuring alignment between the temperament, capabilities and expectations required of the CEO and the risk profile of the recruiting board or equity investor.

Traditional recruitment methodologies, including CV analysis and interview, must be enhanced by psychometric assessments and evaluating the candidate by a balanced-scorecard approach for:

• business-development capability
• innovation and vision
• financial management
• operational acumen
• leadership, planning and communication.

It adds up to a sophisticated analysis, one that injects greater objectivity into hiring and enables the evaluation of critical personal behaviours and values.
In turn, this facilitates the evaluation of any potential CEO for their ability to manage stakeholders and communicate the organisational vision to employees and investors. It may also help identify any potential problem behaviours.

Multifaceted approach

Finding a CEO is easy. Finding one who will be a strong fit with the SME's values, culture and strategy is more difficult.

The best approach accurately translates the client's needs into a recruitment blueprint covering strategic, operational and behavioural elements. This helps ensure a client and appointee match based not just on knowledge and skill components, but importantly on values, culture and operating style.

This may be achieved through a variety of methodologies such as executive search (confidential, research driven, specific), and newspaper advertising (broad reaching, defined time frames, procedural rigour); alternatively, there's advertisement search, which combines the focus of the former with the reach of the latter.

The risks of failure for a new CEO in high-growth SMEs are too great to leave recruitment to informal, ad hoc practices. A disciplined and rigorous process that aligns the CEO to the business values, culture, strategy and board expectations will deliver longer-term security and value for the business and shareholders.