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Is the CEO Failing, or Is the Investment Thesis Wrong?
When a portfolio company misses its plan, the board usually argues about the CEO. The better first step is an EBITDA bridge that splits the miss by cause, with the sponsor’s own share on it.
By Gaurav Shah
Managing Partner, Arete Ventures
Published August 2026
Updated November 2026 · 10 min read
A missed plan, split by cause. Only one part belongs to the CEO. Illustration: Arete Ventures.
In Brief
Split the miss in dollars before judging anyone. Part of it usually belongs to the thesis, part to the market, part to the sponsor and part to the CEO.
Judge the CEO on decision lag: the weeks between the first clear signal and management acting on it. A lag that keeps repeating is stronger evidence than any single missed number.
Keep a promise ledger. If the plan assumed a CFO hire, a pricing team, a systems budget or capex the sponsor never delivered, that share of the miss is the sponsor’s.
Only the CEO’s share can be fixed by a new CEO. The thesis share needs a re-underwritten plan whoever runs the company.
As an investment committee member I have voted on the deal, and as an operating partner I spent sixteen years running the companies afterwards. From both seats, the same thing happens when a portfolio company misses its plan. The board looks at the CEO first, because the CEO is accountable and visible. Accountability, though, answers who owns the result. It does not answer what caused it, and the intervention depends on the cause.
A missed plan usually has several causes at once. Some of the assumptions that paid for the deal were too optimistic. The market moved after close. The systems and people the plan assumed were never put in place. And some decisions the CEO made, or failed to make, cost money. A new CEO fixes only the last of these. If the board replaces the CEO when most of the miss sits elsewhere, it pays for a transition and keeps the problem.
So I would not start with the CEO. I would start with the bridge.
A new CEO can only recover the part of the miss that the old CEO caused. The board should know how big that part is before it acts.
Split the Miss in Dollars
Take the gap between the underwriting case and the actual results for the year, and walk it lever by lever: volume, price, mix, cost, the add-on synergies, working capital. For each lever, ask two questions. Was the assumption achievable in the market as it turned out? And if it was, did management do what was needed to achieve it? The answers sort each dollar of the miss into one of four places.
Exhibit 1
Where each part of the miss belongs
Where it belongs
What the evidence looks like
Who has to act
The thesis
Evidence: Peers in the same market missed by a similar amount, or the diligence assumption was never reachable
Who has to act: The sponsor and the investment committee, by re-underwriting the plan
The market after close
Evidence: A shock nobody priced, with a sound and timely response from management
Who has to act: The board, by resetting targets and the capital plan
The sponsor’s promises
Evidence: The plan assumed people, systems or capex the sponsor did not deliver on time
Who has to act: The sponsor, by delivering them or rewriting the plan
The CEO’s decisions
Evidence: Peers achieved the lever, the resources were in place and management acted late or not at all
Who has to act: The board, by deciding whether the CEO can close the gap
Source: Arete Ventures.
Peer data is the most useful single check. For a private company it rarely arrives in one report, so build it: listed competitors’ filings, the sponsor’s other companies in the sector, distributors and large customers, and the lender’s own view of the sector. If competitors in the same end market raised prices by three points and your company took one, the price shortfall is mostly an execution problem. If every competitor’s volume fell by the same amount as yours, the volume shortfall belongs to the thesis or the market, however much the board wants it to be someone’s fault. Management still owns the response: a volume loss that cost was not cut to match is partly an execution problem.
A worked example · Illustrative
A $10 Million Miss, Split by Cause
The numbers are invented to show the arithmetic and describe no real company.
A manufacturer with about $175 million of revenue was underwritten at $50 million of EBITDA for its second year under the sponsor. It delivered $40 million. End-market volume came in six percent below the diligence forecast, and listed peers reported similar declines. Management cut variable cost in step with volume, so the response to the downturn was sound. Peers raised prices by about three percent while the company took one, after the CEO delayed a price increase for two quarters. The ERP system the plan assumed went live nine months late because the sponsor deferred its approval, which pushed back the procurement savings that depended on it.
$4.5 million
The thesis and the market: volume no one in the sector achieved
$2 million
The sponsor: savings delayed by the late ERP approval
$3.5 million
The CEO: the price increase that was available and not taken
Only $3.5 million of the $10 million miss, about a third, sits with the CEO. A new CEO might recover that part, at the cost of a nine-to-twelve-month transition. The $4.5 million needs a re-underwritten plan whoever runs the company, and the $2 million needs the sponsor to keep its own commitments. A board that replaced the CEO on the headline $10 million would be solving a third of the problem.
Judge the CEO on Decision Lag
Once the CEO’s share of the miss is clear, the board needs to know whether it will recur. The best evidence I know is decision lag: the time between the first clear signal of a problem and management acting on it.
For each material issue in the past year, write down three dates. When did the signal first appear in the data, a customer conversation or a plant report? When did management bring it to the board? When did management act? A CEO who sees a margin leak in March, raises it in April and fixes pricing in May has a lag of about two months. A CEO who sees the same leak in March and acts in October has a lag of seven months, and the cost of those extra months is in the bridge.
One long lag can be bad luck. A pattern of long lags across different problems, especially on decisions about people, says the CEO is slow to accept bad news or slow to act on it. That pattern rarely improves with coaching, because the delay is in the CEO’s judgment. Compare the CEO’s lag with the board’s own on the same issues. If the board took as long to respond, the lag is in the governance, and a new CEO will inherit it.
Keep a Promise Ledger
Every value-creation plan rests on things the sponsor agreed to provide: a new CFO by the end of the first quarter, a pricing team, a systems budget, capex for a plant upgrade, approval of add-ons within a set time. When the plan misses, the sponsor should check its own ledger before it judges the CEO.
The ledger is simple. List each commitment in the plan, the date it was promised and the date it was delivered. Then trace which levers in the bridge depended on it. In the worked example, the late ERP approval cost $2 million on its own. That money is the sponsor’s, and putting it on the CEO’s account distorts every decision that follows, including the brief for any successor.
The ledger also records the sponsor’s changing instructions. If the board asked for growth in one quarter and margin in the next, management’s apparent indecision may be the board’s. The fix for that is a clear order of priorities from the board, which costs nothing and should come before any change of leader.
Re-underwrite the Plan Before You Re-underwrite the CEO
Ask the investment committee’s question: knowing what we know now, would we underwrite this company on the current plan? If the answer is no because a core assumption has failed, the plan has to be rebuilt before anyone is measured against it. A CEO judged against an impossible plan will always look weak, and so will the successor.
If the answer is yes, the burden moves to execution. Then the CEO’s share of the bridge, and the CEO’s decision lag, become the evidence. Our note on when a PE sponsor should replace a portfolio company CEO covers how to weigh the cost of waiting against the cost of a change once the diagnosis points to the CEO.
The diagnosis also writes the brief. A successor search should be built on the revised plan and on the decisions the bridge shows were missed: the price increase, the plant manager who stayed too long, the add-on that was never integrated. That is how we start every portfolio company CEO search: from the investment case as it stands now, and the decisions it requires.
Frequently Asked Questions
How do you know if a portfolio company CEO is the problem?
Split the miss in dollars by cause and look at the CEO’s share. Then measure decision lag, the time between the first clear signal of a problem and management acting on it, across several issues. A large CEO share and a repeated long lag point to the CEO. A small share, or a lag the board shares, points elsewhere.
What should a PE board do when a portfolio company misses its plan?
Build an EBITDA bridge from the underwriting case to actual results and assign each part of the gap to the thesis, the market, the sponsor’s own commitments or management’s decisions. Then act on each part with the right tool: re-underwrite the plan, reset targets, deliver what the sponsor promised, or address the CEO.
How can a sponsor tell a wrong investment thesis from poor execution?
Compare the company with its peers in the same market. If peers missed the same assumption by a similar amount, the thesis or the market is the cause. If peers achieved it and the company had the resources to do the same, the cause is execution.
Can the sponsor be responsible for a portfolio company’s underperformance?
Yes. Plans often assume a CFO hire, a systems budget, capex or quick add-on approvals that the sponsor delivers late or not at all, and boards sometimes change priorities quarter to quarter. A promise ledger that lists each commitment and the date it was delivered shows how much of the miss belongs to the sponsor.
What should happen to the value-creation plan if the thesis was wrong?
Rebuild it before judging management against it. Ask whether the investment committee would underwrite the company on the current plan today. If not, reset the plan and the targets first, then measure the CEO against the revised plan.
The quality of a CEO decision can never be better than the diagnosis that comes before it.
Arete Ventures runs private equity executive search for sponsors and their portfolio companies. Every search is led by Gaurav Shah, who sits on private equity and venture capital investment committees and spent sixteen years as an operating partner running the businesses his firm owned.