CEO Q&A: Exploring the Role of a CEO in a Middle Market Business
This is the second in a series of interviews with leading middle market executives across the nation. We explore what helped them achieve success, what best practices they live by, and their thoughts on building highly effective teams.
Stephen Mance is the CEO of Defiance Metal Products, a private equity-owned metal stamper, fabricator and painter of medium volume components and assemblies for the military vehicle, commercial vehicle, construction equipment and agricultural equipment OE Market. Prior to leading Defiance Metal Products, Steve spent a number of years with Bendix Commercial Vehicle Systems. His breadth of experience set the stage for an insightful conversation about the role of the CEO in a middle market business.
Q. What are the most critical considerations for a CEO moving from a larger organization to the middle market?
Stephen: There are multiple things to consider, as the difference between the two is significant. Mid-market CEOs must fulfill a very active role with a working knowledge of managing a P&L. It’s a role with a much greater degree of freedom than within a large company; it’s a high-performance role in which you must learn how to manage the Board. In fact, the relationship dynamics between the Board and the CEO is one of the biggest hurdles for someone new to this role.
Q. How does an incoming CEO go about managing the Board?
Stephen: Understanding the role and responsibilities of the Board is the vital first step for an incoming CEO, and there are eight key criteria. First, the Board is responsible for determining the leadership of the company. They should be appointing highly qualified A players into the positions of CEO and CFO. Secondly, the Board should be working closely with the CEO to ensure the right organizational structure is in place. This is followed by the responsibility of formally evaluating the CEO. Too many boards run an evaluation by the seat of their pants without having a formal structure in place to ensure consistency. Fourth, the Board needs to establish a compensation committee for benchmarking and salary planning. The fifth responsibility is to work alongside the CEO to define and develop the organization’s overall strategy. Six, a subset of that is to establish the mergers and acquisitions strategy for the business, which leads into point seven, to determine the company’s ideal debt to EBITDA ratio. From there, number eight is the Board’s duty to look at the financials and investments in relation to the business plan. Ultimately, from the standpoint of communications, the Board must establish credibility and connect the dots. It’s this final underlying obligation that a lot of people struggle with.
Q. Are there any other struggles related to the Board?
Stephen: Our own experience tells us that many Boards do not vigorously go through these eight criteria. Subsequently, without an active Board, the CEO is left shot in the wing with no solid foundation from which to lead the company. Even with a diligent Board, however, the CEO must be aware of the board members’ expectations. Many bring in a CEO and simply expect them to drive everything, but a skilled CEO recognizes that a partnership between themselves and the Board is foundational to an organization’s success. In successfully managing the Board, the CEO will occasionally recognize the need to change out a board member. It’s a huge risk, but a leader must have the right Board, even if that means putting their job on the line. If people aren’t providing true value, it’s up to the CEO to make the necessary changes.
Q. Looking back on your career, what contributed to your success at Defiance?
Stephen: Attaining the balance of having the right leadership and the right people in place has led to my own success as CEO at Defiance. Likewise, my specific career path of coming up through operations really provided the necessary P&L knowledge as well as a definitive comprehension of what factors affect the bottom line. That background is essential to anyone looking to successfully run a company and understand its true needs.
Q. In building your team at Defiance, what were some of the things you looked for in your team members?
Stephen: Hiring the best team members to support the business plan requires finding people who know how to drive operational performance. They’re the people who will bring best practices with them, who have many years of experience with great companies. For example, hiring a CFO with previous general management experience provides a balanced expert with real knowledge of both sides of the coin.
Q. What advice would you give someone interested in a middle market industrial opportunity?
Stephen: Talk to someone who’s been in that role first. Take them to dinner to pick their brain and ask them about the pitfalls. There are a lot of people who don’t last very long in this role, and it’s because they don’t find out everything they need to know first. You have to know how and where to look for a company’s skeletons; you have to look under the hood and find people who can tell you something that the people on the frontlines can’t tell you. Finally, take an honest look at your own values and integrity. If your values aren’t impeccable, your leadership team will see right through you.
Q. Do you have any guidance on the relationship between a CEO and a private equity firm?
Stephen: Ultimately, it comes down to communication. If the company you’re leading is PE-owned, you have to make sure that the person you’re reporting to has your back. Furthermore, for a successful relationship, you’ll need experience managing a lot of outside entities like banks, audit firms, insurance, legal, and more.
Steve’s experience provides an excellent perspective on what it takes to be a successful CEO in a middle market business and the importance a board of directors plays in the success of the CEO and company.
A board of directors can play a significant part in the success of a middle market company and its CEO. Often times we see boards consisting of industry and/or subject matter experts capable of assisting with commercial or operational opportunities. As Steve suggests, the CEO needs board members who assist in the strategic plans for the business that include partnering with the CEO to develop the proper organizational structure, create a working strategic plan, hire A players, develop appropriate compensation plans and assure proper financial controls are in place. The CEO and his/her team should be capable and effective in driving operational and commercial success; it’s what they get paid to do.
A board needs to partner with the CEO at the strategic level and put the company on the right track toward success.