The 3 Critical Roles of the CEO
The ultimate goal of the CEO is to create shareholder value. However, to achieve that goal, I’ve found that great CEOs excel in 3 key areas while capable CEOs learn to supplement any gaps they have in these areas. When these areas are being executed on well, it is nearly inevitable that shareholder value is being created – sometimes dramatically. The three critical areas are:
- Defining Strategy and Measurable Success
- Recruiting and Retaining the Best Talent
- Capital Generation and Allocation
CEO Role #1: Defining Strategy and Measurable Success
Strategy is a big word that has a variant of meanings, but I think of it simply as finding the gap in the market where a company can provide disproportionate and defensible value to a clear target customer. A gap in the market is usually an unsolved pain point or an unresolved need that is valuable to resolve. Disproportionate value means that there’s opportunity to provide a service or product experience that is a step function better than any competitors. Defensible value means the company has the capacity to create a moat so that competitors can’t easily match that value over time. And having a clear target customer means that everyone in the company knows precisely who that company exists to serve. If CEOs get those characteristics right, they are well on their way to having a well-defined strategy.
Individual goals need to be tied to departmental goals. Departmental goals need to be tied to company goals. Company goals need to be tied to realization of the strategy which achieves the primary goal of shareholder value creation.
Measurable success means having an execution plan against that strategy that clearly articulates what metrics and goals need to be achieved against that strategy that ultimately tie into creating shareholder value. Individual goals need to be tied to departmental goals. Departmental goals need to be tied to company goals. Company goals need to be tied to realization of the strategy which achieves the primary goal of shareholder value creation. Defining measurable success well means everyone in the company knows what specific goals they are trying to achieve, whether they have achieved those goals or not, and how those goals tie directly to shareholder value creation. The CEO ultimately defines the strategy and sets the standards and culture of execution which is key to the success of the company.
CEO ROLE #2: Recruiting and Retaining the Best Talent
CEOs often get the credit for building companies, but in reality, teams build great companies not individuals. Building great teams is about two key variables. The first is recruiting the best talent. This very first step can be make or break for the company. CEOs who are great at recruiting find exceptional and high capacity talent, well suited for the stage and type of their business, who are capable of scaling and leading to where the company is going, not just where it is today. Great talent expands the potential of the business. CEOs who are challenged in this area may have a greater propensity to lean on familiarity, people they know or who are like them, and functional productivity rather than exceptionality of talent with scalable capacity and capability. This approach serves to practically put a ceiling on the business and limits the excellence of execution against the strategy.
Great CEOs also retain great talent. There is not much value in recruiting great talent if you can’t keep them. Talent retention is about vision casting and inspiration, mission and culture setting, developing and growing people, and aligning roles and incentives in such a way that people feel valued. It is hard to think of any capability more linearly tied to the success of a business than the capacity to recruit and retain the best talent.
CEO Role #3: Capital Generation and Allocation
Excellence in capital allocation is the key to the kingdom. If a CEO can generate capital but allocates it imprudently, the value of that capital is lost.
The best CEOs are able to generate capital and allocate it with prudence and precision. Capital generation comes in two primary forms – raising external capital (equity and/or debt) or generating capital from the business (e.g. profits or cash flow). Capital is like oxygen for a business – it can’t function without it. CEOs can create competitive advantages for their businesses if they are skilled at capital generation, and businesses can starve absent that capability. Furthermore, elite CEOs have the toolkit to generate capital both internally and externally, and they are skilled at knowing which approach is best for the business at which time.
Excellence in capital allocation is the key to the kingdom. If a CEO can generate capital but allocates it imprudently, the value of that capital is lost. CEOs should have precision in how they allocate capital – meaning capital is utilized for the highest and best uses for shareholder value creation and capital is not wasted on initiatives that lack that potential impact. Strong capital allocators insist on a high return on capital utilized and direct linearity to strategy achievement and value creation. It requires saying no a lot, yes sometimes, and always demands focus. Weaker CEOs shun the accountability on capital allocation that can come from strong CFOs and boards which is a dynamic that can ultimately hurt the business.
These are the three key critical areas that great CEOs excel at and good CEOs supplement if an area is not an obvious strength. However, companies that create tremendous value usually find a path to excellence in all three areas.
[As always, I’d welcome your comments and thoughts on this important topic in the comment box. What did I miss? What do you agree with / disagree with? What have you seen from your experiences? If you have other questions you’d like me to address in this blog, please do email me at: email@example.com.]
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