Got what it Takes to be a SpinCo CEO?

In an age of increasingly aggressive shareholder activism, corporate spin-offs are all the rage. And that’s presenting new challenges for CEOs tasked with overseeing assets that have often been cast off by companies seeking higher returns elsewhere.

The pressure on so-called SpinCo CEOs was perhaps demonstrated yesterday, when Klaus Kleinfeld suddenly resigned as head of Arconic, which was separated from aluminum producer Alcoa only last year. Apparently Kleinfeld had written a letter to activist investor Elliot Management without the board’s permission, which Elliot claimed “read as a threat to intimidate or extort a senior officer” at the firm.

Some other recent big spin-offs include HP from Hewlett-Packard, PayPal from eBay, Phillips66 from ConocoPhillips, News Corp. from 21st Century Fox and South32 from BHP Billiton—with each fresh incarnation managed to varying degrees of success.

The justification for such deals can vary, though they’re usually predicated on the idea that the sum of a companies’ parts is greater than the whole. More often than not, though, spin-offs occur when management wants to place a greater focus on the things they do best, leaving someone else to make the most of the rest.

And that someone faces a unique set of challenges that require special skills, according to a new study by recruitment firm Russell Reynolds based on interviews with a dozen CEOs, CHROs and investors in the healthcare sector.

Because SpinCo CEOs are under immense pressure to hit the ground running, they typically have deep industry experience, often coming from inside the company from which they are created. Whether internal appointments or not, though, respondents said SpinCo CEOs must be resilient leaders who can handle uncertainty—and get back on the horse should things go wrong.

“Understand that whatever they tell you in the management presentation or what the seller represents, right or wrong, is the best-case scenario,” said Martin Madaus, CEO of Ortho Clinical Diagnostics. “Assume you will find other things that were known or were not known that will be worse than what your assumption was going in. In general, that’s just how spin-offs work.”

SpinCo leaders also were found to be diligent and hands-on workers, willing to take on mundane project-management tasks and accept full accountability for performance targets.

Asked what they would have done better, many of the study’s respondents said they had underestimated the importance of filling senior executive roles for three key functions: IT, finance and human resources.

“Information systems are really challenging,” said Ron Labrum, former CEO of Fenwal. “Building your set of requirements for the extraction is costly and extremely difficult. You need a CIO who has done this before, and there are not many of them.”

Many CEOs said they also would have given more attention to investor relations and corporate communication, given the challenges associated with putting a positive spin on SpinCo’s new story and evolution.

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