It used to be that top executives at big public companies moved right over to become board members of other big public companies once their management gigs were over. Now an increasing number are choosing to work at private equity firms. Just look at former General Electric (GE) CEO Jack Welch, who now works for buyout firm Clayton, Dubilier & Rice. Or ex-IBM (IBM) chief Lou Gerstner, who's at the Carlyle Group.
And the trend continues. On July 19, John Joyce, chief of IBM Global Services, announced he will be leaving to join private equity firm Silver Lake Partners. And there's buzz on Wall Street that Sanford "Sandy" Weill, Citigroup (C) founder and chairman, is set to launch a $5 billion private-equity fund with one of Citi's largest investors -- the Saudi Prince Alaweed Bin Talel al-Saud. Citigroup won't comment on the speculation.
What gives? BusinessWeek Associate Editor Emily Thornton recently spoke about the trend with Dennis Carey, a partner at recruiting firm Spencer Stuart who specializes in finding CEOs and corporate directors. He believes the exodus to private equity firms foreshadows a new talent drain on Corporate America. Below are edited excerpts from their conversation:
Q: Why are hot-shot executives heading for private equity firms?
A: A lot of it has to do with new restrictions related to the Sarbanes-Oxley law. Human capital is fleeing to spaces where they have more maneuvering room. Executives want to work at places without public scrutiny.
Before, it would have been unheard of for CEOs of large public companies to attach their names to this space. Now, there's a talent drain.
Q: Is there a big difference in the type of work these executives do for private investment firms, compared with the work they do as members of boards of public companies?
A: Most directors of public companies go to six meetings a year, on average. About 80% of the audit committee's time is now spent on compliance-related issues.
And it's spilling into the broader board as well. They're spending less time with issues of strategy, evaluating CEO-succession issues, and evaluating board performance. At a time when global competition is accelerating, our board rooms are spending an inordinate amount of time crossing "t"s and dotting "i"s.
By contrast, executives like Welch who work for private equity firms spend time personally with executives in the trenches. They're in a hands-on assessment role. That's very different from the role they would play at a public company. Welch's primary mission is to go out into the field, meet with the CEOs of Clayton Dubilier's portfolio companies, and dig into the numbers and the strategies.
My point is that it's a different environment. These guys have a lot more fun and feel they're adding much more value in the private equity world dealing with matters that relate with operational efficiency, execution, performance, and return on equity.
Q: How would you say their compensation compares?
A: We sometimes try to recruit these executives to public corporations. When we present our corporate numbers, the phone goes silent on the other end. There's much more financial opportunity for the high-performing executive in the private market. There's much harsher criticism of public CEOs who are being paid enormous sums of money.
You get what you pay for. And you lose executives when someone else is willing to pay more. To keep the very best, you have to be competitive. And now, the competition isn't just another public corporation.
The competition includes this burgeoning space we call private equity. And the opportunity in the private-equity world is outpacing those in public companies by orders of magnitude.
Q: Do you think this trend will continue, or is it a temporary phenomenon?
A: Interest rates hold part of the answer to that. As interest rates rise, it becomes more difficult to provide returns on equity to your limited partners. Interest rates will have a dampening influence. But I don't think [rising interest rates] will kill it. I think [they're] just likely to slow down the pace, which has been nothing short of extraordinary.
Q: What do you think this trend's long-term impact will be on Corporate America?
A: If the pendulum doesn't come back fast enough, the trend to private equity will continue to accelerate. Our free-enterprise system will be a different form. To see major funds now putting their bets on private equity, and not the major corporate players, is unprecedented. Wherever the intellectual horse-power goes, money will follow.