Oops, Wrong CEO – And You Need More Leaders

An Investor’s Least Favorite Statement: “Oops, Wrong CEO”


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By Leslie Pratch

It is possible to identify executives who are likely to act with consistently high integrity and who demonstrate sound, timely judgment when they occupy positions of power. These executives — as distinct from others who have similar backgrounds and temperaments — have specific underlying motivations and coping tendencies. Understanding ‘active coping’, as I define it and measure it, is central to predicting leadership.1 Executives can also learn how aspects of their personalities and particularly their coping styles might adversely affect how they work and use that knowledge to make themselves (and their colleagues) much more effective.

Effective leaders must meet challenges and resolve them productively, day after day, for many years. They must constantly adapt to the unforeseen — and must mobilise, coordinate, and direct others. But when hiring executives, how do you know which candidates possess such qualities? When they all look good on paper, how do you make a choice? Given the frequency of CEO turnover, and the frequent cases of CEO failure after long, successful careers in the same place where they became CEO (e.g., Jeffrey Immelt at GE, David Pottruck at Schwab, Doug Ivester at Coke), it’s apparently not that easy. But it can be done, by including an analysis of executives’ readiness to acquire new skills and strategies for coping with complexity and change — in other words, their active coping.

Active Coping is a Style of Approaching Life, Baked into Who you Are

How a person approaches life’s challenges develops as a result of nature and nurture. Some people run from problems, some lash out at others, and some passionately wait and hope that problems (or even opportunities) will just go away.

Active copers, by contrast, are built to be capable and eager to deal with whatever obstacles and opportunities they face. Active coping is being ready and able to adapt creatively and effectively to challenge and change. Active copers continually strive to achieve personal aims and overcome difficulties, rather than passively retreat from or be overwhelmed by frustration. They move towards the problems and opportunities with open hearts and open minds.

In business, unexpected events occur, for which no playbook has been written. Active copers do not lose their footing in such cases, but rather thrive on the opportunity to seek out information about what is happening, rally the right team, and learn as part of the process of steering towards success.

Leaders with other personalities and styles may do as well in circumstances that can be predicted in advance, but active copers are the best people to have in place when the unexpected occurs.

Whereas active copers seek to confront and resolve, passive copers are reactive and avoidant. Passive coping is refusing to tolerate the full tension that a situation imposes, for instance, reacting before the facts are sufficiently understood. Passive coping is retreating from reality, tuning out information, and resisting change. It’s dealing with minor problems in order to avoid confronting the anxiety of major problems. In a crisis, passive copers will be prudently hoping that the problem goes away, or trying to do what they did before in vaguely similar circumstances.

Predictive Validity and Utility

Using the methodology that I have researched, developed, tested, and validated at the University of Chicago and in my practice,2 I have been assessing senior executives for public and privately held firms for 20 years. I have assessed over 450 corporate executives and over 50 partners at private equity firms. I know what motivates and impedes business leaders and especially what it takes to make it in the world of private equity.

Leaders with other personalities and styles may do as well in circumstances that can be predicted in advance, but active copers are the best people to have in place when the unexpected occurs.

My assessments have a documented predictive validity of 98%. That means that over all of the situations in which I’ve assessed executives and made recommendations, in 98% of cases, the client who observes the executive’s subsequent performance says that my analysis and conclusions capture the key elements of the person’s performance and of the challenges of working with that person.

In an assessment, I learn what conscious and unconscious characteristics make the person succeed or fail — not just whether he succeeded in the past. I come to understand how he approaches and manages (well or poorly) key relationships, and the challenges in how he leads that he will have to overcome, work around, or have other people work. When a private equity sponsor has me assess a CEO as part of due diligence, pre- or post-close, then I become a uniquely capable resource for also monitoring and coaching the company’s most valuable human capital.

I’ve found in my 20 years working to evaluate executives that active coping is an attribute of a healthy personality structure. This means that the ‘activity’ is not always overt and observable; sometimes it takes place internally, in decisions made, visions developed, and conflicting drives resolved. An active coping stance, however, often gives rise to certain observable traits and skills. These should be sought out in anyone being courted to run a business. They include:

Skills and Traits associated with Active Coping

 

 

 

 

Awareness. Active copers are able to see reality, including their own needs, capabilities, and limitations.

Courage. Active copers are brave. They seek out new experiences; they are not intimidated by challenges.

Resiliency, toughness, and the ability to learn from experience. Active copers, like all humans, make mistakes. Life is too complicated to anticipate every possible contingency. Active copers regroup and recover.

Energy, fortitude, and the willingness to persevere. Active copers summon the energy to continue to move forward even under the most trying circumstances.

Resourcefulness. Active copers invent solutions to problems by creatively pulling together the resources they have at hand or by developing new ones.

Decisiveness. Active coping gives a person the fortitude to handle conflicts among competing goals. Making a choice means giving up an alternative. Active copers face that loss and move on.

Executing a Plan. Active coping involves planning. Active copers anticipate, strategise, and weigh the risks of potential actions. Then they act. Active coping combines introspection and action.

These are the kinds of traits active copers show and business leaders need to have for dealing well with fast-changing and always uncertain situations.

Common Mistakes Employers Make When Considering Candidates for Leadership Roles

A very common belief is that past performance is the best predictor of future performance. But all that past performance shows is that the person was able to do what was demanded in the past; it says nothing about what the person could do with new challenges.

Another is hiring someone who looks like me. People like people they can communicate easily with, and feel that a common background reduces uncertainty about who this other person is — which is not an effective way to choose leaders.

All that past performance shows is that the person was able to do what was demanded in the past; it says nothing about what the person could do with new challenges.

A third example is not defining well enough what a company is looking for. You need to know the challenges that the person is going to have to deal with. For example, many investors do not have experience leading the sort of company they have invested in, and so they lack a feel for the challenges of dealing with the rest of the management team, customers, and even the other investors.

What are some examples of leaders in business (and elsewhere) who seem to have excellent active coping skills? What about the opposite?

It’s hard to tell from people’s public personas or even from their actions whether they are active copers, but I will hazard a guess about people whose public image seems consistent with active coping.

Nelson Mandela decided to get smart rather than get angry when imprisoned. He used the time to learn Afrikaans to be able to understand the oppressors. He kept his eye on his goal and was willing to switch tactics, embrace opponents, invent new forms of interaction, and generally do what it took to move forward — and he did it all with style, charm, and balance.

Lewis and Clark. In 1804, these men headed west from St. Louis with a group of 33 men to find a water route to the Pacific. They had no good maps and little information to go on. Over a period of two years and a few months, they journeyed successfully to the Pacific and back, through territory filled with potentially hostile American Indians. They prepared well, but just about everything was unexpected. They succeeded, and only one member of the expedition died.

Jim Lovell, who commanded Apollo 13. Although the safe return from space was clearly a group win, the crew was a key part of the response. As Lovell explained, “We were given the situation to really exercise our skills, and our talents to take a situation which was almost certainly catastrophic, and come home safely.”

In the world of business, Jim Collins put together his list of the 10 greatest CEOs. Although he wasn’t looking necessarily for active copers, one of his choices was Katharine Graham, a terrific active coper. In 1971, as chief of the Washington Post, she considered the risks of publishing the Pentagon Papers, the leaked Defense Department study that revealed government deceptions about the war in Vietnam. If the Post published, it risked being prosecuted for theft of government secrets, which, in turn, could doom its pending public stock offering and other businesses. Graham wrote, “I would be risking the whole company on this decision.” Nonetheless, she approved publishing and the Post still had an extremely successful IPO.

For non-active copers, we can certainly start with plenty of executives who appear to have a narcissistic personality. I won’t name names but a quick Google search for ‘narcissists’ and ‘CEOs’ will show where others have made the link. Narcissism can be extremely successful but extreme narcissists are not active copers. Why? They lack empathy. They are not seeing the reality of the world; they’re seeing the world filtered through a view of themselves as the grandiose center of the world, assuming that whatever action they take will be praiseworthy.

Can Active Coping Be Learned?

Active coping is something that is learned over a lifetime. It is something that someone can get better at, but the improvement process is slow, incremental, and mostly internal. It means learning much more about the ways you’ve learned to protect yourself from what you fear — by retreating, by lashing out, by neurotically doing X — and then choosing to abandon those techniques because there’s a better approach available.

Active coping is helpful wherever it’s not likely that everything will go as planned — that is to say, everywhere and anywhere. Active copers experience each twist and turn in life — even unavoidable losses such as the death of close relatives or their own impending death — as an opportunity as well as a loss. With each new moment, active copers ask: What can I learn from this event? How can I use it to strengthen my commitment to the ideals I pursue? What’s really happening now, and what is the healthiest response I can make?

Active coping is important not only for leaders and companies evaluating people for leadership positions, but also for leaders who can benefit from understanding their coping style to improve their own performance.

Active coping is important not only for leaders and companies evaluating people for leadership positions, but also for leaders who can benefit from understanding their coping style to improve their own performance.

Active coping lets a leader go farther and faster more surely. Consider an analogy with a car. We can get where we need to go driving an ordinary, inexpensive car, and we can make it through life with a less than optimal coping style. But to drive on curvy, treacherous roads in dark and foul weather, we need a superbly engineered car, and that car will get us farther, faster, with less likelihood of accident or breakdown in other situations. A strong framework of active coping enables a leader to survive the rough spots and also to perform better than others would in ordinary times.

If you’d like to improve your active coping, some of the most important things to keep in mind are:

(1) Know what you want; (2) recognise sources of threats or frustration; (3) possess the psychological freedom to act — take the action that is in your own best interest, not the action that feels easiest; (4) be ready to deal with resistance and overcome threats; and (5) pursue what you want in a way that is consistent with your values and ideals

A version of this post was originally published in The European Financial Review.

About the Author

 

Leslie Pratch is the founder and CEO of Pratch & Company. A clinical psychologist and M.B.A., she specialises in helping private equity investors and management committees and boards of directors of public and privately-held companies identify whether the executives being considered to lead companies possess the psychological resources and personality strengths needed to succeed. In addition to her consulting work, Leslie actively conducts research and publishes in peer-reviewed journals in the area of successful business leadership and personality assessment. Her first noteworthy book, Looks Good on Paper?, was published by Columbia University Press in July 2014.

References

Pratch, L. (2014). Looks Good on Paper?: Using In-Depth Personality Assessment to Predict Leadership Performance. New York, Columbia University Press.
Pratch, L. (2001). Assessing potential leaders of private equity funded ventures. Journal of Private Equity, 15–29.
Pratch, L. (2008). The use of a clinical psychological method of assessment to predict management performance. Journal of Private Equity, 1–25.
Pratch, L., & Jacobowitz, J. (1996). Gender, motivation, and coping in the evaluation of leadership effectiveness. Consulting Psychology Journal: Practice and Research, 48(4), 203–220.
Pratch, L., & Jacobowitz, J. (1997). The psychology of leadership in rapidly changing conditions: A structural psychological approach. Genetic, Social, and General Psychology Monographs, 123, 169–196.
Pratch, L., & Jacobowitz, J. (1998). Integrative capacity and the evaluation of leadership: A multimethod assessment approach. Journal of Applied Behavioral Science, 34(2), 180–201.
Pratch, L., & Jacobowitz, J. (2004). Successful CEOs of private equity-funded ventures. Journal of Private Equity, 8–31.
Pratch, L., & Jacobowitz, J. (2007). Optimal psychological autonomy and its implications for selecting portfolio CEOs. Journal of Private Equity, 53–70.

Endnotes

1. In research funded by the University of Chicago Graduate School of Business, I led the first systematic effort to identify in advance individuals with the psychological resources needed to be successful business leaders. This research established the ability of measures of active coping to predict leadership beyond conventional standards of chance occurrence among already high-achieving leaders (e.g., Pratch & Jacobowitz 1996, 1997, 1998, 2007). We subsequently conducted the first-ever empirical study into the personality characteristics of successful CEOs of private equity-funded ventures (Pratch & Jacobowitz 2004) and have continued to refine our predictive model through ongoing empirical research in the field (e.g., Pratch & Jacobowitz 2007, 2008, 2010).
2. Pratch and Jacobowitz (1996)

 

 

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Leaders Who Always Get the Job Done

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By Leslie S. Pratch

Effective leaders must meet challenges and resolve them productively, day after day, for many years. They must constantly adapt to the unforeseen—and must mobilize, coordinate, and direct others. But when hiring executives, how do you know which candidates possess such qualities?  When they all look good on paper, how do you make a choice?  Given the frequency of CEO turnover, and the frequent cases of CEO failure after long, successful careers in the same place where they became CEO (e.g., Jeffrey Immelt at GE, David Pottruck at Schwab, Doug Ivester at Coke), it’s apparently not that easy. But it can be done, by including an analysis of executives’ readiness to acquire new skills and strategies for coping with complexity and change – in other words, their active coping.

Active Coping is a Style of Approaching Life, Baked into Who You Are

How a person approaches life’s challenges develops as a result of nature and nurture. Some people run from problems, some lash out at others, and some passionately wait and hope that problems (or even opportunities) will just go away.

Active copers, by contrast, are built to be capable and eager to deal with whatever obstacles and opportunities they face. Active coping is being ready and able to adapt creatively and effectively to challenge and change. Active copers continually strive to achieve personal aims and overcome difficulties, rather than passively retreat from or be overwhelmed by frustration. They move towards the problems and opportunities with open hearts and open minds.

In business, unexpected events occur, for which no playbook has been written. Active copers do not lose their footing in such cases, but rather thrive on the opportunity to seek out information about what is happening, rally the right team, and learn as part of the process of steering towards success.

Leaders with other personalities and styles may do as well in circumstances that can be predicted in advance, but active copers are the best people to have in place when the unexpected occurs.

Whereas active copers seek to confront and resolve, passive copers are reactive and avoidant. Passive coping is refusing to tolerate the full tension that a situation imposes, for instance, reacting before the facts are sufficiently understood. Passive coping is retreating from reality, tuning out information, and resisting change. It’s dealing with minor problems in order to avoid confronting the anxiety of major problems. In a crisis, passive copers will be prudently hoping that the problem goes away, or trying to do what they did before in vaguely similar circumstances.

How to get what you want (and how to move – fast – when you don’t)

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Not everyone is equally good at all parts of the “private equity person” role – some investors are better at sourcing deals, buying companies, or raising money than at being director or leading the Board. To be great at guiding portfolio companies, you need to know when and how to work with a CEO who will not always (or maybe ever) be pleased with the Board. Getting each party to do its part in achieving the aims of the investors – a job they must do together – benefits from planning, skills, and knowledge.

Do the planning

  • Agree on the desirable Board culture  how do we want the Board to function, and how can we fail to achieve that? Managers should know that a culture of engagement and direct, robust debate is the norm for private equity boards. Be explicit about the purpose of Board oversight and questions. Also, articulate the scope of Board input – which matters does it DECIDE and on which matters does it ADVISE?
  • Identify the deliverables from the CEO to the Board. The CEO is responsible for executing initiatives for the year that emerge from the investment thesis. The CEO needs to provide the Board critical information about problems and new opportunities – and how he is addressing them. He should identify where he could use outside assistance (e.g., restructuring, hiring senior management) – and how he is seeking it and what role he would like the Board to play.
  • Identify the deliverables from the Board to the CEO (e.g., clear guidelines on what is expected, performance review, introductions, perspectives and guidance on strategic, operational, and financial management issues).
  • Discuss guidelines for interactions – and adapt them to changing circumstances as time goes on.  What will Board meetings look like (agenda, decision-making rules). What conversations between the CEO and Board members outside of formal Board meetings are expected? What other ways can or will Board members see what is happening in the business or market (e.g., talking with employees, talking with customers, talking with distributors, talking with customers’ customers)?
  • Clarify ahead of time the process of identifying when performance is an issue. Clarity of process is important. You need a plan to address problems that arise at the Board level, just as you have a plan in place if a factory burns down. You’ll handle problems much better if you’ve been clear ahead of time about how you are going to work together and about how you’ll handle the kinds of problems that could crop up while being aware that each circumstance is unique.A Lead Director working for a private equity firm that has a majority interest could say to a CEO, “Here’s the process that works for me. I set the agenda in Board meetings. I serve as a liaison between the CEO and the Board. I’ll coach and advise. But if something becomes a serious problem, the timeline for intervention will be short.”

    Your planning should include from the start a backup leadership plan (or succession plan).

  • Clarify skills. When a Board member offers a perspective or a directive on a business issue, CEOs may feel that an industry novice is trying to tell them how to do their jobs. It’s advisable to spend some time at the beginning having each party describe their perceptions of their own strengths and the strengths of the others. Generally, the CEO brings operating knowledge and valuable relationships with key employees and customers. Private equity directors bring insight from other settings and the ability to see the business from the outside.

Having a discussion about roles, process, and skills creates a more efficient investment. It is worth clarifying for managers what dealing with a board when a private equity firm has control means. Even if you’re recruiting a CEO, it may “go without saying” but it’s still worthwhile saying. “This is what we bring to the party, this is what we do to make it work, if you want a Board that won’t challenge you, don’t do a deal with us. You as CEO aren’t in charge to the degree you were in the past. You may have opinions and we want to know what they are but it’s our call if we disagree.”

Only one side of the Board member-CEO interaction needs to be “mature” to make the process work – so make sure that the Lead Director is mature. A CEO who is mature and self-aware can live with Board members who aren’t perfect, and Board members who are mature and self-aware and other aware can live with an immature CEO. The problem is when nobody is self-aware and mature. It’s easiest if lead directors grow themselves, as opposed to fixing the CEOs.

Build the skills

  • Talk to someone who is a master at being a lead director. What does he do that helps him get the most out of CEOs and minimizes the risks? What methods work for him for delivering tough messages without making management teams defensive?
  • Learn from others’ experiences – talk to other investors at your firm about their successes and failures in guiding portfolio companies.

Get the information

  • Assess senior management. Does the company have the right CEO to execute on the strategic plan?  Insight into the management team before doing the deal is important. Learning by trial and error or after the house is on fire is expensive. Wouldn’t you like to know before the person lights the match and take the matches away from him? What are the CEO’s development needs? What interaction style would work best with him?Assessments can help clarify any concerns you have. One firm entered alongside an entrepreneur who insisted he remain the majority investor.  They wanted to understand why the entrepreneur was so careful to retain control and where he’d view them as crossing the line. They used the assessment to learn how to build the best possible working relationship with him.

    Also consider sharing the findings of the CEO’s assessment with the CEO – doing so conveys respect, builds trust, and sends the message that you expect management to be fully committed to the future success of the business.

  • Assess yourself – and share the findings with the CEO. What are your development needs? What is your interaction style? Share what you know in a way that can help your relationship work better. An investor who knows that sometimes he is too challenging could say to a CEO, “There’s something I’m working on and it’s a hyper-challenging style, so if you’re hearing hyper-challenging from me, let me know. I want to have a conversation about it. I’ll consider what you say, and decide if your concern in valid. But in any case, I welcome hearing it.”

What you can do

Working well with your CEO partner is vital to creating operational value, a major key to PE success in today’s environment. Consciously thinking about and discussing how you are going to work as a Board member with your CEO will make your success larger and much more likely.

Think about the boards you’re on. How many of these conversations have you had and would it be good to have one? Think about what, if anything, you contribute to the challenges on your most difficult board.

Leslie S. Pratch
Much of my latest work now appears in The European Financial Review.

 

Management For When You Least Expect It

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Management For When You Least Expect It

By Leslie Pratch

If you’re in private equity and serve as the Board representative of your investors, you help select and oversee the top management of your portfolio companies.

Is that oversight as smooth and efficient as you would like?

CEOs for portfolio companies need to handle the unexpected

When you pick a CEO, you need someone who can handle well both the expected and the unexpected.

  • The expected. You want someone who can execute your investment thesis. So you’ll check their track record to see that they’ve done the needed tasks before. You’ll rely on your own due diligence or get help from your search firm or even an outside interviewer or an evaluator
  • The unexpected. The future is never what we expect. You need to know “how will the candidate respond when the future presents something unexpected.”

What to expect when it’s unexpected

Predicting what highly skilled people will do with the unexpected is my life’s work. I help private equity investors understand who are active copers. Active coping is being able to — emotionally, intellectually, and behaviourally — successfully confront unforeseen challenges and successfully capitalise on emergent opportunities. For most people, it’s not something you can tell much from their business track record. Identifying it takes a different approach.

How you can proceed

Looks Good on Paper? (Columbia University Press, 2014) outlines my approach, and private equity investors use it to identify CEOs who can lead through turbulence and seize upside opportunities.

  • You can learn more in the coming months. I’ll be writing on this topic, and I’d appreciate you letting me know what you think and if you’d like me to focus on particular aspects.
  • We can talk. My ultimate goal is to apply what I know to make you more successful. I want to reduce the time and energy you spend on overseeing your portfolio companies, and give you more time to raise money and find deals, and at the same time to improve the performance and ROI of your portfolio companies.

A version of this post was originally published by Leslie S. Pratch in The European Financial Review.

About the Author

Leslie Pratch is the founder and CEO of Pratch & Company. A clinical psychologist and MBA, she advises private equity investors and management committees and Boards of Directors of public and privately held companies to help identify whether the executives being considered to lead companies possess the psychological resources and personality strengths needed to succeed.

Leslie recently published a book, Looks Good on Paper?: Using In-Depth Personality Assessments to Predict Leadership Performance (Columbia University Press; 2014). In it, she shares insights from more than twenty years of executive evaluations and offers an empirically based approach to identify executives who will be effective within organisations — and to flag those who will ultimately very likely fail — by evaluating aspects of personality and character that are hidden beneath the surface. Central to effective leadership is a psychological quality called “active coping,” which she defines and explores by referencing case studies, historical figures, and her own scholarly work.

 

 

How to Avoid an Ugly Mess

 

 

How to Avoid an Ugly Mess

By Leslie S. Pratch

Not every management assessment is the same. Picking the right assessment approach could mean the difference between having an outstanding investment return and having to explain an ugly mess to your partners. Different options answer different questions, so you need to figure out what you most want to learn.

What you might like to know

Has he done it before?

This question is good to ask when you know what you want and are sure it isn’t going to change. A good way to answer this question is with a talent and skill assessment. Search firms, many assessment firms, and many psychologists focus on past achievements. They document if the “candidate has done it before in a compelling fashion”. Typically, they use behavioural interviewing to understand how and when the candidate has “done it before”.

If you plan to exit the deal in three to five years, and know that the company won’t change and the world won’t change in that interim, and that there will be no unexpected opportunities and no unexpected problems, then this could be a good approach — for your needs.

How will he cope with change?

Will he capitalise on opportunity? Can he do something no one has ever done? How much do you care about how well the candidate will perform under new or unexpected conditions? You can pick someone who seems like he fits the bill but the world changes for better or worse. When it changes for the worse, you see how adaptable he is. But you may not know when it changes for the better, because the executive doesn’t take advantage of the change until the competition does.

In faster-moving or more uncertain markets, expecting the unexpected makes sense. You need someone with skills but ability to cope — which requires raw cognitive capability and a stable information-seeking personality much more than specific pre-defined skills — is also critical. Talent and skill assessments don’t address these at all. An approach aimed at understanding active coping capabilities as they will be needed for the business challenge fits well here.

How can you get the most of the executive?

Sometimes a candidate brings a lot but isn’t perfect. That introduces the other party in the interaction — you. How can you act so you capitalise on the executive’s strengths and proactively protect against his weaknesses as a leader? Talent and skill assessments won’t shed any light here; Pratchco’s approach to understanding personality as part of the assessment will.

How will he cope in a private equity environment?

The pace is fast and CEOs have to cope with having investors challenging their thinking. If they’ve been in a private equity environment in the past and you know the investors they worked with before, a talent assessment is adequate. If they’ve never been in a private equity environment or you don’t know the other investors, you should use Pratchco.

Are incumbents worth keeping, even though the strategy is changing?

You are inheriting a management team. They know the business and losing them would be a big loss. But they haven’t done what is being called for next, even if they thought of it (similar to founders’ problem with startup), so they will all fail a simple talent assessment. But they might very well be keeping if you could supplement them with your skills or add a team member at the right time. If you assume they can’t do it, you will have to hire a new team, which will lack the understanding of the company the original team had.

What’s in it for the executive?

Executives don’t generally relish the opportunity to be assessed. Putting them through a painful assessment that provides no value to them won’t be a great way to start a relationship and might even be a way to end one.

Talent and skill assessments document what the executive says and usually provide no value to the executive. Assessments that find underlying themes can help executives understand themselves better and can provide guidance that the executives can use to improve how they interact with others (including but not limited to you).


A version of this post appeared in The European Financial Review

About the Author

Leslie S. Pratch is the founder and CEO of Pratch & Company. A clinical psychologist and MBA, she advises private equity investors, management committees and Boards of Directors of public and privately held companies whether the executives being considered to lead companies possess the psychological resources and personality strengths needed to succeed. In her recently published book, Looks Good on Paper? (Columbia University Press, 2014), she shares insights from more than twenty years of executive evaluations and offers an empirically based approach to identify executives who will be effective within organisations — and to flag those who will ultimately very likely fail — by evaluating aspects of personality and character that are hidden beneath the surface.

Serious Human Capital Management for Seriously Good Performance

Choice of the personnel

HR contemplating where to put the employee.

By Leslie Pratch

Private equity firms develop financial and strategic plans and manage their portfolio companies by them. But most private equity firms are more casual about avoiding human capital disasters, and very casual about ensuring the best results form human capital. Portfolio companies are generally left alone to manage their own leadership issues until problems show up — and they will.

Some larger firms have realised that unthinkingly ignoring human capital issues until there’s a big problem is a strategy for having big problems. Doing nothing and then having a problem 18 months later seems like a poor idea. In response, some larger firms have recently decided to use an outside consultant to deal with human capital or have hired an internal staff member to oversee management recruitment and to otherwise support portfolio companies on matters related to traditional human resources functions.

You need to know what’s happening with your key managers. Good private equity firms can earn even better returns by having someone know all the people who report to the CEO in a portfolio company and how they work together.

It’s not voluntary to give quarterly numbers, it’s not voluntary to discuss the strategy, and it’s not voluntary to be able to talk intelligibly about the status of your top management teams. Your standard operating procedure should be poking your noses into how your CEOs work with their management teams. Just as you don’t stop assessing the leading indicators of profit and cash flow, you should not suspend HR diligence after the deal is done.

Medium-sized firms also need a methodology to monitor portfolio company talent, and they likely will need help in executing it.

A Part-time Human Capital Advisor is the Right Solution for Certain Firms

A part-time human capital advisor can track the status of management teams on an ongoing basis and also be a resource to address situations before they deteriorate and cause financial damage. A part-time human capital advisor may be the best answer for any medium-sized firm with aggressive timetables and financial goals, a history of surprise poor performance by CEOs, and/or little knowledge about the portfolio company management teams and what’s happening in them. It can also be a great solution for some larger firms. It may be right for your firm if you are:

  1. A medium-sized firm that makes control investments in growth companies, investments in distressed situations, or buyouts
  2. A large buyout firm that does not do in-house assessments of CEO candidates
  3. A firm with a history of replacing CEOs post-close and of being surprised by poor CEO performance
  4. A firm that needs better knowledge about portfolio company management teams

Someone who has taken the time to know investors’ value creation plan can be positioned as management’s advisor whose role is to help the portfolio company management succeed in carrying out the strategy.

What a Good Human Capital Advisor Actually Does

A good human capital advisor gets to know the managers, and with them, conducts a structured analysis of their jobs. With the manager, the advisor identifies key targets and metrics and documents the relationships that will be crucial for the manager’s success. Together, the advisor and manager make plans for building and measuring the progress of those relationships, especially the manager’s relationships with investors, Board, key customers, and key team members. Having assessed the baseline of each relationship and developed a plan for each relationship, the advisor then monitors the manager’s progress on the plan in the context of the business as it evolves.

If the advisor has done a thorough psychological assessment of the manager (typically as part of due diligence or just after the deal closes) the advisor starts with an enormous understanding of how the manager’s mind functions and how to be most effective in helping him or her change; the advisor understands where and why resistance arises for that person and therefore has a better chance of avoiding it.

An advisor focuses on how people interact. But just as a good CFO assesses progress and thinks about the business with a focus on finance but does not limit him/ herself to finance, so a good human capital advisor helps investors and CEOs assess progress and think about the business with a focus on key relationships and the functioning of its top managers but does not limit him/ herself to this perspective.

An advisor works all sides of each relationship. The advisor identifies a problem and then considers which behavior changes, by whom, would be the easiest route to the solution. Sometimes it’s the CEO who must change, but often the Board or investors can slightly adjust their own behavior and therefore remove or minimize the problem.

An advisor brings independent judgment and experience to bear on the business situation as a whole and to the challenges that the manager faces. The advisor’s goal is the successful achievement of investors’ goals. At the same time, though, the advisor facilitates the development of the manager’s capabilities, so to the manager the advisor may feel or seem more like a coach.

Deliverables

The start-up phase of this service can include assessments, regular discussions with the CEO and/ or CEO and management team members, and then twice yearly Board updates with or without the CEO.

Benefits

This kind of advising/human capital monitoring leads to better solutions and more successful execution, and to problems not occurring even when things appear to be going well. It leads to the advisor’s being able to find problems as they arise and spot patterns that are important for investors to know.


A version of this piece was published in The European Financial Review

About the Author

Leslie S. Pratch is the founder and CEO of Pratch & Company. A clinical psychologist and MBA, she advises private equity investors, management committees and Boards of Directors of public and privately held companies whether the executives being considered to lead companies possess the psychological resources and personality strengths needed to succeed. In her recently published book, Looks Good on Paper? (Columbia University Press, 2014), she shares insights from more than twenty years of executive evaluations and offers an empirically based approach to identify executives who will be effective within organisations — and to flag those who will ultimately very likely fail — by evaluating aspects of personality and character that are hidden beneath the surface.

 

 

Gender, Coping, and Leadership

In our research, we found that women leaders need to be even better at active coping than men to be seen as effective in their roles[i] because a female leader faces certain higher barriers to reaching any goal than a male leader does, and active coping is about overcoming barriers to goals. Specifically, a woman will have a harder time getting and keeping followers than a man will.

Here’s why:  A woman’s followers will have mixed thoughts about her when she is strong and directive, and mixed thoughts about her when she is collaborative and interested in others. A man’s followers, on the other hand, will laud him for being strong and directive, and give him a pass when he is collaborative and interested in others. It’s not fair, but it’s reality.

A female leader trying to achieve the same goal from the same starting point as a male leader has a harder task, simply because of this tangle of attitudes, which stem from typical expectations about men, women, and leaders. As a result, a female leader needs to be a better active coper than her male counterpart would.

[i] Pratch and Jacobowitz (1996)

 

Can Active Coping Be Learned?

Active coping is something that is learned over a lifetime. It is something that someone can get better at, but the improvement process is slow, incremental, and mostly internal. It means learning much more about the ways you’ve learned to protect yourself from what you fear—by retreating, by lashing out, by neurotically doing X—and then choosing to abandon those techniques because there’s a better approach available.

Active coping is helpful wherever it’s not likely that everything will go as planned—that is to say, everywhere and anywhere. Active copers experience each twist and turn in life – even unavoidable losses such as the death of close relatives or their own impending death – as an opportunity as well as a loss. With each new moment, active copers ask:  What can I learn from this event?  How can I use it to strengthen my commitment to the ideals I pursue?  What’s really happening now, and what is the healthiest response I can make?

Active coping is important for not only for leaders and companies evaluating people for leadership positions, but also for leaders who can benefit from understanding their coping style to improve their own performance.

Active coping lets a leader go farther and faster more surely. Consider an analogy with a car. We can get where we need to go driving an ordinary, inexpensive car, and we can make it through life with a less than optimal coping style. But to drive on curvy, treacherous roads in dark and foul weather, we need a superbly engineered car, and that car will get us farther, faster, with less likelihood of accident or breakdown in other situations. A strong framework of active coping enables a leader to survive the rough spots and also to perform better than others would in ordinary times.

If you’d like to improve your active coping, some of the most important things to keep in mind are:

(1) Know what you want; (2) recognize sources of threats or frustration; (3) possess the psychological freedom to act—take the action that is in your own best interest, not the action that feels easiest; (4) be ready to deal with resistance and overcome threats; and (5) pursue what you want in a way that is consistent with your values and ideals.

What are some examples of leaders in business (and elsewhere) who seem to have excellent active coping skills? What about the opposite?

It’s hard to tell from people’s public personas or even from their actions whether they are active copers, but I will hazard a guess about people whose public image seems consistent with active coping.

Nelson Mandela decided to get smart rather than get angry when imprisoned. He used the time to learn Afrikaans to be able to understand the oppressors. He kept his eye on his goal and was willing to switch tactics, embrace opponents, invent new forms of interaction, and generally do what it took to move forward—and he did it all with style, charm, and balance.

Lewis and Clark. In 1804, these men headed west from St. Louis with a group of 33 men to find a water route to the Pacific. They had no good maps and little information to go on. Over a period of two years and a few months, they journeyed successfully to the Pacific and back, through territory filled with potentially hostile American Indians. They prepared well, but just about everything was unexpected. They succeeded, and only one member of the expedition died.

Jim Lovell, who commanded Apollo 13. Although the safe return from space was clearly a group win, the crew was a key part of the response. As Lovell explained, “We were given the situation to really exercise our skills, and our talents to take a situation which was almost certainly catastrophic, and come home safely.”

In the world of business, Jim Collins put together his list of the 10 greatest CEOs. Although he wasn’t looking necessarily for active copers, one of his choices was Kathryn Graham, a terrific active coper. In 1971, as chief of the Washington Post, she considered the risks of publishing the Pentagon Papers, the leaked Defense Department study that revealed government deceptions about the war in Vietnam. If the Post published, it risked being prosecuted for theft of government secrets, which, in turn, could doom its pending public stock offering and other businesses. Graham wrote, “I would be risking the whole company on this decision.” Nonetheless, she approved publishing and the Post still had an extremely successful IPO.

For non-active copers, we can certainly start with plenty of executives who appear to have a narcissistic personality. I won’t name names but a quick Google search for “narcissists” and “CEOs” will show where others have made the link. Narcissism can be extremely successful but extreme narcissists are not active copers. Why?  They lack empathy. They are not seeing the reality of the world; they’re seeing the world filtered through a view of themselves as the grandiose center of the world, assuming that whatever action they take will be praiseworthy.

Common Mistakes Employers Make When Considering Candidates for Leadership Roles

A very common belief is that past performance is the best predictor of future performance. But all that past performance shows is that the person was able to do what was demanded in the past; it says nothing about what the person could do with new challenges.

Another is hiring someone who looks like me. People like people they can communicate easily with, and feel that a common background reduces uncertainty about who this other person is – which is not an effective way to choose leaders.

A third example is not defining well enough what a company is looking for. You need to know the challenges that the person is going to have to deal with. For example, many investors do not have experience leading the sort of company they have invested in, and so they lack a feel for the challenges of dealing with the rest of the management team, customers, and even the other investors.