Rethinking The Myth, ‘If It Ain’t Broke, Don’t Fix It’

Sometimes boards have to make the tough decision to replace a CEO who has led successfully thus far—in order to set the company up for a successful future.

Removing a CEO is not to be taken lightly and it is not typically an approach we take at General Atlantic. We like to back strong founders and CEOs and support them to grow their businesses and realize our investment objectives—but with Hemnet, a major website in Sweden for real estate listings & a portfolio company of ours, we arrived at the difficult conclusion that their current CEO was not the right leader to bring the company to the next level and recommended replacing him.

Not surprisingly, after our announcement, there was immediate pushback. We had a thoughtful and well-reasoned discussion with GA partner Chris Caulkin and two board members over dinner. As a group, we reviewed positive developments at Hemnet. Revenue was growing. Relations with the broker community had improved. And this was not a broken company with dire needs. It was successful.

We unpacked the drivers of past performance and discussed the building blocks that needed to be put in place for the company to hit its strategic goals. One driver from the past had been an increase in listing fees to grow revenues rather than the introduction of new products or other market innovations, or business process updates and margin improvements. But as we looked ahead, different challenges needed to be addressed. These included developing new product lines, improving the website’s performance on mobile devices, and a strategy for tackling “technical debt,” meaning fixing issues left over from technological upgrades that were important to the sustainability of Hemnet’s technology platform but that had been deferred. We needed the organization to be firing on all cylinders to reach its full potential, which would require stronger leadership, clear priorities, and the application of performance management tools. As we wrestled through all this in our conversation, it became obvious that while the CEO, whom I’ll call John, had been overseeing a successful business, he was not well-suited to take the business to the next level of growth.

The board members then asked how we would replace John and what the chances were of finding a good candidate in Sweden, given the relatively small size of the country and talent pool. We acknowledged that finding an experienced consumer technology executive with CEO experience from within Sweden was not going to be easy.

But this was also something that we could not afford to get wrong. Based on our experience at GA involving dozens of companies over several decades, the evidence shows that investment returns are strongly affected by when you change the CEO, and how many times you make such a change. On average, the internal rate of return (IRR) was 15.7 percent when a single CEO change was made, meaning that the selection was successful and did not need to be reconsidered. When the CEO was changed two or more times, the IRR dropped to 2.8 percent on average. Perhaps even more important, the average IRR jumped to 36.1 percent when the CEO change, if called for, was made within a year of the closing of the investment, compared with 5.5 percent when the change in CEO was made after the first year.

The message could not be clearer. The data reinforces the insight that it is critical to move with speed and solid judgment when contemplating the need to bring in a new CEO at a portfolio company. Decisive, thoughtful action makes an enormous difference in creating value. Based on this research, we knew that we needed to move quickly with Hemnet and to make the right selection the first time.

The board members then asked, if we moved forward and replaced John, would it be better to let him go immediately and conduct an open search after appointing an interim CEO, or should we leave him in place while starting a confidential search? One board member worried that Hemnet might seem rudderless if we removed the CEO immediately and felt that it might be safer to leave John in charge while we searched. But, after analyzing this further, we agreed that, given the lack of clear priorities and the number of high-level vacancies, we needed to act with urgency and let the management know we were clear on our approach.

Hemnet had a dominant market position, and it was ripe for monetization. The potential was huge, but it would be realized only if we moved quickly. I also warned that if we waited and tried searching secretly with the CEO in place, the cumbersome process would slow things dramatically.

We wrestled with the choices as it stretched past midnight. The discussion grew heated at times, but there were no politics at play. By the time the night concluded, we had decided to remove the CEO immediately, appoint the CTO as the interim CEO, and begin a search. The next step was to explain our proposal to the broader board and let the directors vote. When they met, not long after, they had a spirited discussion and carefully reviewed my findings. They voted to support our plan.

We moved swiftly to select a qualified search firm and develop a search strategy. We interviewed two firms, and decided to work with Russell Reynolds. We also partnered with a consultant who lived in Sweden and understood the talent landscape in the country, as well as the challenges of finding the right person.

Critical, of course, was developing the candidate criteria. We needed to build alignment between the Board and GA. We especially needed to agree on which qualities were non-negotiable and which ones we might, if necessary, compromise on.

We decided our new leader should bring the following experience and competencies:

• Track record of growing a consumer tech business 3x or 4x over four to six years, while simultaneously expanding margins;

• Track record developing and launching new products and lines of business;

• Track record of hiring and building a strong leadership team;

• Proven experience leading a culture transformation to enhance innovation and results orientation; and

• Preferably a Swede or someone with strong knowledge of the Swedish market and culture.

Our list went through four iterations before we finalized our thinking. Our bullseye candidate was or had been a CEO and had experience growing a company. But, if necessary, we would remain open to a first time CEO who had experience running a business line as a General Manager. The non-negotiables were prior consumer tech and digital marketing experience, as well as proven ability to drive culture transformation.

We moved quickly, and Russell Reynolds came back in about ten days with an initial slate of candidates. Moving forward, Chris quarterbacked the search efforts, and we maintained a weekly cadence to review progress. Part of my focus was working closely with and supporting Chris, who had not directly led a CEO search previously. He had questions about best approaches in interviews and I shared my experience in using a careful, data-driven approach to obtain the best insights.

Within a few weeks, I was meeting those who made it to the shortlist. We eventually narrowed it down to three candidates, two external and one internal—our interim CEO, Hemnet’s CTO. We invited the two external candidates to participate in a case study, which would allow us to see them in action. Based on those performances, we found ourselves gravitating toward a highly capable candidate, Cecilia Beck-Friis.

Cecilia was not a sitting CEO, but she had an impressive track record of performance at TV4, a Swedish television network. At TV4, she had successfully grown digital advertising revenues and the subscriber base and led digital product development for the company. She had inherited a dysfunctional team and made a lot of hard personnel decisions. We liked that she moved quickly and decisively in her past roles. She had been promoted multiple times, but eventually left TV4 to set up a virtual reality business.

Everything was heading in the right direction until, just before we planned to make an offer, Chris received a call from Cecilia. She said she had decided to back out of the process and wanted to be removed from consideration. It was a shock, but she said that, having given it more thought, it was not completely clear to her that she would be fully empowered and given the necessary resources by the Board to run Hemnet as she saw fit and to achieve success. She was also torn, she said, about leaving the virtual reality business she was building from scratch. It did not help that the search, which was rigorous to ensure accuracy of hire, was also tedious, leaving her concerned about decision-making at the company.

At this point, we had full conviction that she was the right person to lead Hemnet and we were not prepared to throw in the towel. To alleviate her concerns, we arranged for Bill Ford, the CEO of General Atlantic, to call her directly to better understand her concerns and to assure her that she would have the support and executive powers that she was seeking. Bill also assured her that the Hemnet investment was a priority for General Atlantic and that the team had full confidence in her ability to lead the company. This call seemed to have an immediate positive impact, and Cecilia accepted the offer. The process took 100 days.

Cecilia has turned out to be an outstanding CEO. She has built a strong team and helped the business expand its product portfolio. Hemnet has more than doubled its revenues and profits in just three years. In April 2021, Hemnet successfully completed an IPO on NASDAQ Stockholm. The stock closed on its first day of trading up 54 percent, implying a market capitalization of $2.1 billion, a greater than 10Å~ increase from when General Atlantic first invested. This result was supported by an extremely strong consumer brand, a scarcity of local growth technology assets, and public investor perception that this is the highest quality public classifieds asset globally (trading at a significant multiple premium to all peers) with a strong and diverse management team.

Key Learnings

“If it ain’t broke, don’t fix it.” This has been the worst wisdom for centuries. Hemnet was not “broken” when GA invested, so many might have said it needed no repairs. This would have been an error. It faced some great opportunities, but, to seize them, it needed some fixes.

• While a company may be doing well currently, it does not mean you have the right leader in place for the future. On paper, the CEO was strong with relevant, global experience, but the company’s culture was underperforming. It is important to note the extent to which Anish Batlaw, General Atlantic’s operating partner, was engaged. He completed an in-depth career walkthrough, getting granular details around what the CEO had done and how he had done it. He also spoke with over ten other executives and board members to get a better understanding of how the CEO showed up as a leader and if they had the confidence that he could take the company forward. Ultimately, Anish came to the conclusion that John was a high-quality executive, but wasn’t right for the situation.

• Throughout this story, it is notable how Chris Caulkin, the lead deal partner at GA, approached the situation. He sensed that something was not right, and he had the conviction to trust his instinct and engage Anish. He trusted the data that Anish presented to him and eventually made the tough decision to agree to replace the CEO. This took incredible courage, as he had to go back to the Investment Committee just after completing the deal and tell them the company needed a new CEO. You have to make tough decisions at times. Too often, leaders hang on to talent for too long because they are loyal or have performed well in the past. The loyalty needs to be to the business. The company comes first.

• Running an executive search, especially a CEO search, is not easy. The talent pool was limited in a smaller market like Sweden. The team had invested a lot of time making sure that Cecelia was the right candidate, only to be told that she did not want the job. However, Chris had spent the time building the relationship with her throughout the process. They even brought in Bill Ford to get on a call to understand why she was saying no, what concerns she had, and ultimately satisfying those concerns. This perseverance and determination exemplify General Atlantic’s commitment and belief that getting the right talent in place is crucial to their investment strategy.

Reprinted from Talent: The Market Cap Multiplier with permission from Ideapress Publishing.


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