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APRIL 23, 2007
By Jack and Suzy Welch The New Brain Drain It's not just the lure of fat paychecks that has top talent flocking to private equity Do the "best and brightest" actually lead American business? — Bruce Frohman, Modesto, Calif. It depends on what you mean by business. If your definition includes hedge funds, private equity, and investment banking, then the answer is a flat yes. If by business, you're referring to the industrial and consumer companies at the core of our economy, the answer is: less and less so. And therein lies a problem. O.K., so maybe it's not a big problem yet, but there is definitely a worrisome trend emerging as a growing number of talented senior executives leave publicly traded businesses for privately held concerns. Dave Calhoun's departure from GE (GE ) to run Nielsen and Mark Frissora's leap from Tenneco (TEN ) to Hertz (HTZ ) are just two of the more publicized cases. But as a seasoned executive-search consultant we know recently put it: "The shift is real, and it's gaining momentum. You can almost feel a landslide coming." And not only in the upper echelons—it's happening in middle management and at business schools as well. True, investment banking has long drawn 10% to 20% of the graduates at most highly regarded MBA programs. But today an increasing number of MBAs, particularly those in the top tier of their classes, are answering the siren song of private equity and hedge funds. In 2006 almost 25% of Harvard Business School grads took jobs in those two industries. At Dartmouth's Tuck School, 10% did—but only because the supply of private equity and hedge fund jobs wasn't higher. ONE REASON, OF COURSE, IS MONEY. Compensation for senior managers in public companies doesn't compare with the heaps routinely handed out by private equity and financial firms. And it would be very hard to name an industrial or consumer company where an MBA could start by earning $289,000 in base and bonus, the average HBS graduate's take-home pay in private equity last year. But we'd make the case that this trend is not totally about pay. There's a sociological phenomenon at work here. It's about people who love business wanting to get out of the crosshairs of people who despise it, or at least seriously distrust it. Everyone knows that American companies are being maligned these days. So-called shareholder activists have put the vast majority of corporate boards on the defensive, draining their attention away from growth initiatives, mergers and acquisitions, globalization, or anything even vaguely risky that involves building for the future. Meanwhile, CEOs face persistent scrutiny in a guilty-until-proven-innocent media environment. So when private equity firms or hedge funds call, what business enthusiast, young or old, wouldn't consider answering? Who wouldn't want to do business with the kind of "cover" those outfits offer? The same goes for investment banking. Yes, most of the big investment banks are now public, but for some reason—perhaps because the industry has long been known for gargantuan bonuses—its compensation levels do not garner routine shock and awe. Now make no mistake. We're not endorsing this nascent trend. We're only saying we get it, and we fear it. Because "regular" American business needs the best and brightest in order to thrive in the global marketplace. We can't have all the big brains flocking to corners of the economy. We need them front and center. Moreover, we need them there in 30 years. Hedge funds, private equity, and investment banking are not like consulting, where talented managers and MBAs often spend three- or five-year stints before returning to industry, wiser and richer. No, once people enter the Brave New World we're talking about, few will leave. The money will be too good, and the ability to do business without widespread scorn too gratifying. What can be done? The solution can only lie with boards, which must pull themselves out of bunker mode to address this problem before it's too far gone. Even in the current environment, they have to work up the courage to create compensation packages that link outsize pay to outsize performance—and make sure those packages reach well below the top five executives who generate all the media and activist hue and cry. Moreover, boards must remember that for the best and brightest, the biggest career turn-on is not money. It's impact. Companies need to be offering exciting, challenging jobs with real decision-making authority to senior executives and MBAs alike. Of course, those two measures won't halt the flow of great people away from industry, but they could slow it to a trickle. And since great people are the whole game, that's a dam worth building.  Jack and Suzy Welch look forward to answering your questions about business, company, or career challenges. Please e-mail them at thewelchway@BusinessWeek.com For their podcast discussion of this column, go to www.businessweek.com/search/podcasting.htm
BW MALL
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