Steer towards success: What very successful portfolio company boards do

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In our previous edition, we began to look at how you can design and fill the boards of your companies so they will be more effective. This edition shifts attention to board processes. Board processes exist to help the company reach its goals. First, we’ll examine how boards organize their activities. Then we’ll look at how board members actually behave in and between board meetings to support the company’s achieving its goals, and how to build the trust that facilitates good interactions between the Board Table Garamond.001board and management. The purpose of board processes is to encourage good board behavior to happen, but sometimes bad behavior still happens, and drastic action may be required.

Structured board activities

Good boards have thoughtful structures for their activities.

Clear communication and shared understanding of value creation plan. Because aligning goals is imperative, a very clear and direct communication between the owner and the CEO regarding the owner’s goals, expectations, and priorities must occur on a regular basis. From the outset, it is important for the CEO to understand how value is determined and created, and the strategic priorities for the company. Many investors make the CEO explicitly focus on evaluating his/her direct reports, objectively, to ensure the company has the bench strength to meet investors’ goals for the company. Successful investors focus regularly and repeatedly in these conversations on these topics.

Meeting schedules and meetingsThe board decides when it will meet and what will be discussed in each meeting. The chairman and the CEO usually agree on an annual program of issues to be brought to the board, and boards usually meet four times a year. The four meetings follow a rhythm, addressing different areas necessary to the company’s success. Typically, an annual cycle includes a strategic planning meeting, an operating planning meeting, a human capital planning review, and an execution-focused meeting. Whatever the particular focus, at all meetings the board also:

  1. Examines progress on the executional tasks of the business
  2. Takes a look forward at potential market and competitive factors that could affect strategic, financial and operating results.
  3. Closely reviews initiatives that are crucial or behind, and also initiatives that are progressing nicely and where the board may be able to provide assistance or advice.
  4. Reserves time every board meeting to step back from that day’s agenda to look at the horizon. The willingness and ability of management to admit and learn from mistakes emerges when a collaborative, trusting relationship between the management team and the board has been built. Allowing some time in each meeting for free discussion or new ideas enables the CEO to mention something off the agenda that may or may not be worth exploring. When the board and management perceive and explore unexpected challenges, they can respond. They can also act upon unexpected opportunities, or even turn a challenge into an opportunity.

At board meetings, board members may use a table like the one above (under communication) to help them keep their minds and management’s minds on the key drivers of success.

Many firms have a dinner the night before the board meeting. In that less structured setting, management and board members can brainstorm strategy. The board may also hold separate strategy sessions that do not necessarily occur every year. These sessions may include people outside the board, such as subject matter experts or other managers in the company.

Information flow to the board. Most boards provide the management with a format for preparing board packs that combine elements investors need to see on regular basis with information management wants to share. Lead or controlling investors typically are able to examine the board pack before it is sent out to the board and may make changes and add material. The board chair (often the lead investor) and CEO agree to the specific meeting agenda ahead of time. Directors receive the formal board packs seven days to 10 days before the meeting.

Board activities outside of board meetings

As part of the overall governance approach, investors also have monthly two-hour financial operating calls led by the lead investor (who may be the chairman) or by the CEO. These meetings involve the whole deal team. Investors also review monthly dashboard reports or KPIs. In addition, the lead investor and/or chairman (if the lead investor isn’t the chairman) interacts with the CEO several times a week.

If the CEO and chairman are in sync and in touch frequently between board meetings, it’s important for the CEO and the chairman to keep the other directors informed of the outcome of those discussions.

The chairman must truly be an arbiter: eliciting the thoughts and feelings of the other directors and representing them to the CEO. The chair’s ability to listen and actually represent both the board perspective as well as from the management perspective brings out the best ideas and decisions. One non-executive chairman described his interactions with other board members as follows:

I don’t just take what they say and run with that to the CEO, I will challenge them, I will say I don’t quite understand that, give me a little reasoning here why this is more important than not and I think they know when they say this, I am going to say “So what?” so they really have to put together their thought process better. Then I will ask the board members “Do we have unanimity here?”

The chairman has a different relationship with a CEO than other board members. If the chairman represents control, the CEO needs an excellent relationship with that individual. “If the chairman doesn’t represent control, he becomes more of a conveyor of the board’s view, rather than his own. In that case, the CEO needs to understand which board members exert more influence by virtue of their ability to sway other members of the board. The CEO also needs good relationships with multiple board members – not merely the chairman.”

Good CEOs get permission from their chairmen to meet one-on-one with board members, and they do it on annual basis. These relationships can be built at retreats and other board social functions as well. The CEO should inform the other directors of decisions that have been taken in discussions with the chair in between board meetings. If the CEO is also the chairman, he or she should give the board the information it needs to help solve problems and make decisions.

The importance of trust, and how it is created

Board members who trust management can sleep more easily at night.  Trust between the board members and the management team is built (or damaged) by the discipline management demonstrates between meetings. If the management does what is says it will do, then trust will over time grow; if management doesn’t do what it says it will, then trust will falter. Similarly, how the board handles difficulties can build or damage trust.  Management will be more forthcoming admitting mistakes or expressing harebrained ideas if they know they will not be punished for them.

Ensuring that directors receive the board package several days before the board meeting and assuming that the board has read it helps build trust. “This leaves directors confident management is not running around putting out fires but has a discipline and a process to summarize what is going on” and address priorities.

Trust is especially important if the CEO is also the chairman, because investors tend to fear management’s ability to snow them with misleading information.

Different kinds of board members don’t make a fundamental difference

Because this process is designed to serve up what people need when they need it, it should not vary with different kinds of members on the board (e.g., junior private equity professionals, outside directors). To get the most out of outside board members, the board chairman should have candid, open, and honest conversations upfront about how these outside directors can be most effective and engaged. “Here’s your role, here’s where you can be most effective and where we would like you to spend your imagination and thought.”

How do you deal with bad behavior?

The problems usually occur when personalities clash. “Personalities make a big difference. No matter what the resume says, any individual can be disruptive, combative or inattentive. People like this shouldn’t be directors, which requires collaboration skills above all.”

Good boards address the issue of problem directors quickly and make a change. It is never easy because feelings get hurt and friendships can be strained. Usually it is apparent who is causing trouble. If the dysfunctional director is a major shareholder, it is really tricky. One approach is to try and convince the individual to put someone else on the board who can represent the shareholder’s interest. Having other board members threaten to resign if the difficult person won’t step off is a possible tactic. If there is a real fundamental disagreement between board members who have big stakes, and nobody will step aside, it is demoralizing to management and can damage the business. The solution is usually to sell the business or buy out one of the disagreeing directors.

If a board member does not perform his or her duties, the consequence is being asked to leave the board. The same can be true for a CEO, or a chairman, or someone who is both. A non-executive chairman described the beneficial effect of removing a CEO who also had been chairman of the board, hiring a new CEO, and separating the chairman and CEO roles:

We have a very collegial board but a very frustrated board. The old CEO was very protective of everything, he would only let the board really know what he wanted them to know. He was not hiding; he would bring up bad things, but he would never really try to solve problems and that is what led to the problems that we had. The board was not really participating in the decisions to the point where a president was hired without the board really having the final say. We met ourselves as independent board members, agreed it was the path we have to take, then convinced the CEO it was time to leave. “The proper procedures in hiring a president were not followed; therefore, you lose your job” is effectively what was said. The board stuck together and as a result of that we made the decision to hire a new CEO. The old CEO wanted to stay on as Chairman and we didn’t want that so we got the agreement of the board and the backing of a lot of the management team to say that the new CEO would be hired as CEO only and not Chairman, and … [the incoming CEO] was very receptive to that. As a result, now that I’ve been non-exec chairman of the board for nine months, it’s clear to me the independent board members are truly represented versus that CEO-chairman role where they were only given the information that he wanted them to have. The working relationship between the CEO and board is tremendously better, there’s greater openness from the CEO and the management team and the board.

Conclusion

As discussed in our previous edition, the best choices about who should be on a board can vary with the characteristics of the deal and the needs of the company and the investors. As we discussed in this edition, the best ways to run the board and the interactions between the board and the management tend to not vary much across boards and using these approaches can help you achieve the goals you have set for your company and investment.


By Leslie Pratch

Much of my latest writing appears 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 organizations – and to flag those who will ultimately very likely fail – by evaluating aspects of personality and character that are hidden beneath the surface.

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What is Active Coping?

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By Leslie Pratch

Active coping is the healthiest response to stressful situations, and the one most likely to lead to a successful resolution of them. It is like a car. We can manage to get where we need to go if we are driving an ordinary, inexpensive car, and we can make it through life with a less than optimal coping style. But driving a car with superb engineering is crucial if you are racing in the Indianapolis 500 and will get us farther, faster, with less likelihood of accident or breakdown in other situations. A strong framework of coping does exactly the same thing.

Active coping is the readiness, willingness, and ability to adapt resourcefully and effectively to novel and changing conditions. It is a stable, albeit complex, psychological orientation across time and circumstance, a style of functioning, a continuous seeking for the most effective path through life. Think of it asa constant state of being “open for business” that springs from a healthy personality structure. It comes into play in the now, at each moment of decision or challenge.

Individuals who are active copers strive to achieve personal aims and overcome difficulties, rather than passively retreat or become overwhelmed. The psychological ammunition that active coping provides is extremely useful when determining the best way to respond to a situation that was not, or could not be, anticipated.

Active copers feed on experience; they incorporate what they have learned into their psychological systems, making themselves increasingly capable of tolerating uncertainty and devising new strategies for growth. When they fail, they learn why, and respond more effectively the next time. Rather than hide from constructive criticism they seek it out as useful advice. This openness increases their effectiveness as leaders and, more generally, in life.

Active copers support others and take advantage of opportune moments to share what they have learned. They pass on their experiences, not only to help others make similar improvements, but to remind themselves of their own life lessons and reinforce their own growth. This tendency to teach and share is what motivates leaders to develop mentoring relationships, helping younger, up-and-coming leaders to develop their own modes of active coping.

Whereas active copers seek to confront and resolve challenges, passive copers are reactive and avoidant. Passive coping is an inability to tolerate the full tension of a difficult situation. We have all seen examples of passive coping: the board member who reacts in crisis before the CEO can gather sufficient facts, the manager who lashes out at subordinates to relieve stress, or the friend who hides from tough decisions. 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. It’s rearranging the deck chairs on the Titanic. In business, active copers continue to build their understanding of industry dynamics and disruptive technologies and to anticipate economic changes while passive copers repeat what worked yesterday.

Active copers are not always successful. Any number of unexpected events—injury or illness, economic downturns, divorce, war, the competition, disruptive technologies—may undo good planning and resolute effort. Reality is essentially refractory. It gets in the way of what we want. Even when life does not throw up insurmountable barriers, we can fail. No one copes actively in every situation. We don’t expect perfection of those around us and shouldn’t expect it of ourselves. But knowing that sometimes our coping may falter, we can take steps to prevent it. Shoring up weaknesses is a part of active coping, too.


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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 organizations – and to flag those who will ultimately very likely fail – by evaluating aspects of personality and character that are hidden beneath the surface.

Getting the return you want: How some very successful PE investors build their boards

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By Leslie S. Pratch

This edition examines what you as a private equity investor can consider as approaches to make the boards of your companies work more effectively. It is the result of initial conversations with 12 experienced private equity investors and board members. If you are an experienced board member, you may agree, disagree or have another perspective on the topics discussed. If you share those ideas with me, I will try to share them with others in future editions. If you are less experienced as a board member, you may also have some additional thoughts, and likely will have much to learn from the experts sharing their wisdom.

A successful board is one that contributes well to helping its company reach its goals. For larger investments (e.g., KKR or TPG buying billion-dollar enterprises led by professional management), the board functions more like a public company board; it is thinking about the long-term health of the enterprise as well as achieving short-term goals. For firms making investments in smaller companies, the goal of the board is to achieve the returns estimated in the investment thesis documents, by the means specified therein or by other means.

Boards achieve these goals by making decisions and providing direction to the management team. Specifically, boards typically manage long-term performance (e.g., redefining key strategies to achieve the desired outcome at exit) and examine, adjust and add to the talent in the organization in relation to achieving the desired outcome. Boards typically also handle tradeoffs between competing objectives (e.g., culture and talent), prioritize long- and short-term goals, and oversee short-term performance.

The context and who the board members are determine how the board behaves

How a board carries out its activities can vary. You can think of the process of supporting the CEO and management in establishing the optimal strategy for the business, monitoring the implementation of that strategy, and challenging and supporting management in performing their duties as defined by three factors:

  • The context established in the deal within which the board must operate
  • The composition of the board, including whether the CEO and chairman roles are held by the same individual or different individuals, and the right mix of skills and backgrounds for different company situations
  • How the board members behave with each other, including what they aspire to do, how they communicate with each other, and how their personalities interact.

This edition covers the first two factors and we will take up the third in a subsequent edition.

The structure of the board drives the behavior of the board

The powers of the board are delineated by the company’s bylaws. By carefully writing the bylaws (and the provisions by which they can be changed) key investors can ensure control of the board on the most critical issues. The bylaws limit and influence the behavior of board members.

The way the board works together is driven substantially by the interests of the investors who serve as board members. While board members have a fiduciary duty to the company, there may be conflict on the board that will be hard to resolve within the frame of “what’s best for the company” to the degree that board members’ interests as shareholders vary. Different funds may be at different periods of their life and may need different things – “somebody needs a home run, somebody needs to put more money into the deal, somebody needs to lower their basis.” This conflict can be solved by one investor buying out the others, and smart deal structurers include buyout mechanisms in the original agreements. Lead investors also can try to manage this challenge by making sure all key groups are invested in the same securities. Many PE firms insist that outside board members make a substantial investment of personal funds in the deal, ideally on the same terms and with the same structure as the PE firm.

Some investors try to ensure that management teams have as much of their personal net worth as possible invested in the same security investors do. If they bring in co-investors, they try to ensure co-investors have the same objectives. As one investor stated about a particular case: “We had to recapitalize a company and put the three big investors on the same page. After that recap, our interests were the same, same price, same security, same everything. That made for big cooperative decision making.”

The board is often supplemented by other governance mechanisms. For example, it may often be stated as part of the deal negotiations that lead and other investors will get certain information in between board meetings and will meet regularly with and discuss performance directly with the management.

Bylaws, capital structure, and the board and other governance mechanisms are the context in which the board does its work. Getting these elements right is important.

Board composition options

Private equity-owned businesses operate under a range of boardroom structures including combining the chairman and CEO roles and splitting them; with independent directors and without them; with industry specialists and without them. The company’s problems and challenges are a big factor in determining who should be part of the board.

Size. The right size for a board is five to seven and no more than eight people who open their mouths at a meeting and vote. Most PE investors think that that’s the number of seats to have. This sort of size constraint usually means you have to prioritize because there are more kinds of people you might want on a board than there are spots for them.

Types of potential members. Potential board members include: chairman, CEO, other members of the management team, representatives of the major investors, non-executive industry, sector, or functional experts, and outside operating executives. The CEO is always on the board. Almost always there are a few investors, and sometimes one or two additional management team members. Some firms add two industry or functional specialists. Some situations require a board observer seat.

Who should be the board chairman?

The board chairman is a crucial role. The chairman is responsible for leading the board, making sure that agendas have the right information and for driving the meetings. His or her role is to foster open, honest, candid and productive board communications involving all board members. The chairman is responsible for synthesizing board and communicating it to management. The chairman sets the tone and regulates the conduct of the board.

Choices for chairman include:  the senior deal team leader, the CEO, or a non-executive who is not the lead investor. Under what circumstances should the chairman be the CEO, under what circumstances should it be an investor; under what circumstances should it be someone else? In one model, the investor leading the deal serves as the chairman. By separating the roles of CEO and chairman, the board can more readily confront the management of the company with issues the latter would prefer not to raise. A non-executive chairman reduces the opportunities for the company management to obfuscate important issues at the board level and increases the likelihood that the CEO will perform satisfactorily.

Some PE firms almost always make the CEO the chairman. “We find it empowering to good CEOs to also be the Chair of the board, and we console ourselves that we usually have enough shareholder control and enough bylaw protection. It’s a big velvet hammer.” One situation where this can work is when almost all the value is created in doing the deal rather than in managing afterward. It’s desirable because it lets the CEO be empowered and it has very little downside. This can be the case when the main value of the acquisition is cheap assets that the PE firm believes they can sell for much more in the near future when they expect market conditions will have changed. The opportunities for these kinds of deals have decreased for PE over time because there are now lower-cost investment vehicles to use on asset-based plays. Another situation where making the CEO chairman makes sense is when you have a strong desire to do the deal and the incumbent CEO can control whether the deal happens and also has a strong desire to be the chairman.

A third possibility for chairman is an independent non-executive director. An independent non-executive chairman can provide strong leadership not biased by a leaning to either investors or management. Independent non-executive chairmen have the particular ability to be arbiters, and to combine aggressive leadership and independence from investors and the management. One independent non-executive chairman characterized his role as follows:

I talk to the board a lot, I don’t just take what the board says and run with that to the CEO, I will challenge them … I will say, “I don’t quite understand that, give me a little reasoning here why this is more important than not” and they know I am going to say “so what” so they really have to put together their thought process better. I will ask them if we have unanimity. When I have a discussion with (the CEO), I share it back with the board. I am very close to the pulse of the board. … I understand what their feelings and concerns are which makes it easier to go to the CEO and say, “Here’s what we on the board are seeing.” … If he says, “I get it, I understand their concerns, let’s talk about it,” we have a call. The CEO may say, “I know that this is an issue, let’s not have this as a recorded board meeting but let’s discuss it.” This open communication is the glue of an effective team. As a result, we are not fighting these wars in a back room.

An independent non-executive chairman may be particularly useful when there is a substantial risk that the CEO may need to be replaced.  Then the chairman can also become the CEO if taking on the CEO role is temporary. If the CEO needs to be replaced, an outside director can step into an interim CEO role. “You’re lucky to have one outside director who can be independent and break a tie. A non-executive chairman of the board who is really engaged is a good way to warm a guy up in the bull pen.” Otherwise it may be difficult to find someone quickly to be CEO.  “It’s hard for a really good guy to come on and take a job unless he knows he’s going to be successful.”

Who else might be on the board, what role they may play and what are the pros and cons of having them on a board, or circumstances where they are really important?

More people from the private equity firm or other investorsTypically, there are at least one other besides chairman (or two if CEO is chairman). You may have to add even more as part of arrangement with other investors.

Junior PE professionals. You may have two or three relatively junior professionals from your firm on the board who will run the numbers and make sure that short term targets are being met. The benefit of their being on the board is their development. Senior professionals need to leverage their time by giving some of the grunt work to junior professionals. The cost is that they take up a seat that could be used by someone who could add more value. An alternative to having them take a board seat is to have them work closely with the company’s CFO and attend but not vote at the board.

Other company officers. Some firms automatically populate the board with both the CEO and the CFO. Having the CFO on the board can be a good idea if you have the seat available and the CFO can provide useful insight and perspective from inside the company. On the other hand, CFOs often have limited ability to see the forest for the trees. If you don’t put the CFO on the board, you can have the CFO (or other officers) attend particular board meetings in order to inform directors and answer questions. Company officers can be used as a sounding board for determining the ease of implementing a planned course of action. Because the discussions are different when officers are present, boards need to have both types of sessions to make sure sensitive issues get aired (and they are limited in their ability to do that when the CFO is also on the board).

One sensitive issue when other officers are on the board is the CEO’s compensation. If there are other officers on the board, the board can meet in executive session with management team members excused to discuss and decide, or if there is a compensation committee, to hear and consider its report.

Outside directors. Outside directors may be operating executives who are functional experts or industry insiders. Outside directors can add value in strategy discussions and can win the trust of the CEO. This person can play an important role in supporting the CEO and fostering a more cooperative dynamic on the board, especially if the CEO has a voice in putting the person on the board, A CEO may be less concerned about a hidden agenda and more readily buy into an idea suggested by an outside director. Outside directors can sometimes bring credibility other board members may lack; an outside director who has been a successful CEO in a business can be more effective in a board role than someone who hasn’t had to run a balance sheet.

Outside directors are not viewed consistently as helpful because they typically are not deeply involved with the business as other board members are. Investors are often involved on a weekly, not a quarterly, basis and are performing the role of the board along the way, outside of formal board meetings. If you have a formal board meeting with an outside board member in the meeting, and with two people from your firm who are deeply involved with facets of the business, “you are either dumbing down the meeting for the new person or the meeting is over the head of the outsider.”

Investors can recruit industry talent to the CEO and CFO roles. Investors can also bring their networks aggressively to bear in building a working board. For example, an investor in a frozen sweet goods business recruited his former boss, a CFO of a large baked goods business, to the frozen sweet goods company board, and this board member oversaw the installing of needed IT systems at the frozen sweet goods company. This investor also recruited to the frozen sweet goods company board another person out of food service with end user relationships (e.g., Starbucks) who oversaw rebuilding the frozen sweet good’s company’s food service organization.

On the other hand, many investors view bringing in functional expert to compensate for a weakness of the CEO as having dubious value. “They don’t make great members because only 20% of the meeting is dealing with that.” You can get the benefit of the expert’s perspective and value without putting them on the board by hiring them as advisors.

In almost any deal, some outside independent perspective is very valuable. Many firms get this perspective by putting two or three fully independent directors on the board of every company, to create highly customized boards that align with the investment management plan. In these models, the early board activities are “business building” – first, focusing board members to use their expertise on systems and processes the business really needs, and second, to install systems and processes that the board really needs, such as the board packs and helping management get the financial data that they want. For example, the business may not have collected the right kind of data for balance sheet management. The board’s subsequent conversations shift to strategic development and growth. Here, “conversations become quite rich where we’re batting around strategic topics around how to improve the value of the business.”

Other firms get this outside perspective without having independent board members by using outsiders as advisors or consultants. You would particularly want to have independent outside board members when having independent directors is a differentiator in terms of businesses that are willing to partner with you. An independent director might be important if it adds to the value creation and you think the CEO will respond more readily to a board member’s suggestions than to an advisor or consultant.

Operating partners. Putting operating partners of the investment firm on the board requires care. Because they are operators, some operating partner directors may seem to the CEO to want to run the company themselves. They can undermine the confidence of CEOs. “Operating partners have a skillset and have insight into what the CEO is doing but may want to run things and make the CEO fearful.” Operating partners with domineering personalities can develop a reputation for being unpleasant to work with and alienate potential deals. A good operating partner needs to have more than operating skills; they need to understand their role and how they are going to interact with the company’s management.

Former owners/ founders. When private equity buys businesses from founders, founders often stay involved but the private equity investors take control and usually propose changes. “There is some dissonance through redirecting how the company functions and where it is going. You deal with the sacred cows and there’s a lot of trauma.” It is challenging to have founders with board seats but who are no longer running the business. “They can be bitter and disruptive or sit in the corner silent and change the whole tone of the meeting.” Former owners/ founders can be hard to deal with in those circumstances, because they probably don’t want to not attend or to resign. If you promise a board seat to founders who were leading the day-to-day business, they may say they have a legal right to be on the board. To minimize the disruptive effects of a founder, some firms resort to having only one official board meeting a year. Others give the founder or founders another role but not a seat on the board. “To the degree that is possible, we don’t have the founders on the board unless we feel really good about them.”

When there is a grumpy founder or concerned management team, a PE firm can give sellers the option of appointing an independent board member from a list the PE firm provides. “There are entrepreneurs who have a tough time going from an environment where they are in control to one that there’s not in control. Having them appoint an independent board member has worked pretty well. It’s certainly better than having them on the board directly.”

Generally, firms prefer not to have founders on the post-acquisition board but sometimes they have to agree to a board seat for them as a condition in buying the business.

Observers. Some situations involve board observers. This arrangement may give the investors the benefit of the observer’s insight into a company that operates in “a business line in which the investor is currently active or in which it is seeking to expand”without giving the observer fiduciary duties. The arrangement may promote a relationship with a potential strategic partner. To avoid the observer’s gaining undue influence or access to privileged information, the arrangement needs to be documented carefully. The American Bar Association (ABA) recommends that the board observer agreement “expressly provide that the observer has no right to vote on matters brought before the board (or any committee), and that the observer’s presence will not be necessary to establish a quorum at any meeting.” The ABA adds that the board observer agreement “should not grant the observer any veto rights over corporate matters.” Even if the observer cannot vote on corporate matters, the board may occasionally seek the observer’s input.

Getting the context right and getting the composition right sets the stage for a very effective board but the board still needs to act in the right ways, which will be the subject of the next edition.

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Elements of Coping Style

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By Leslie S. Pratch

This entry begins a series on active coping and its relationship to leadership. I developed a psychological model of leadership by studying the theories behind the concept of active coping and the qualities required for effective leadership. I thought about what effective leaders did, felt, and thought; why they behaved as they did, why they made the decisions they made, and why those actions were effective—or not. I condensed these thoughts and theories down to create my personal definition of effective leadership: leadership is effective when it influences the actions of followers toward the achievement of the goals of the group or organization.

Working with this definition, I identified four interconnected parts, four elements of the active coping style: integrity, psychological autonomy, integrative capacity, and catalytic coping. These elements seemed necessary to engender and sustain effective leadership.[i]

Integrity depends on the consistency of your behavior in accordance with your values and ideals.[ii] Leaders who demonstrate integrity earn the trust of their followers, their superiors, and the community. This trust allows them to function more efficiently, because they don’t have to spend a long time getting acceptance and approval for each action they take.

Lack of integrity causes leaders to act erratically because they are not strongly connected to a secure or consistent system of values. They are unreliable leaders, often favoring their personal whims over the interests of others and may damage their organizations or communities by their selfish actions.

Psychological autonomy involves the ability to recognize and respect the aims and feelings of others while purposefully striving to achieve a goal or path. It is the ability to make and impose choices on the world—the opposite of groupthink. Psychological autonomy gives a person the freedom to choose the most effective course of action.[iii] Leaders with high psychological autonomy can respectfully disagree with their followers, their colleagues, and their superiors. They have the confidence to take an unpopular but necessary action and stand firm against doubt and disapproval.

Conversely, those with low psychological autonomy capitulate to pressure from their subordinates, peers, and authority figures. They require the safety of consensus.

Integrative capacity is an ingrained ability, developed through practice, of drawing together diverse elements of a complex situation into a coherent pattern. It is, literally, the capacity to integrate information from your own self and surroundings, into a new and greater understanding of the tapestry of life.[iv] Leaders with strong integrative capacity are aware of their emotions and motivations, as well as their weaknesses. They have open minds, accepting input from all sources. Then they put together what they know about themselves with the realities of their situations to create a deep understanding of possibilities.

Leaders with poor integrative capacity have a narrow focus, ignoring any information that doesn’t fit their limited worldview. They may have little awareness of their own motivations and states of mind and therefore fail to understand the motivations of others. They lack an understanding of mutuality. They deal with events one at a time, blind to the connections between them, unable to extrapolate into the future.

Catalytic coping is the ability to invent creative, effective solutions to problems and then carry them out. It is the most overt expression of active coping, the easiest to observe and measure. Leaders strong in catalytic coping always seem to have thought out several options to resolve each problem. If there isn’t an option, they create one. They develop detailed plans and execute them. That does not mean they are rigid; if conditions change and the plan ceases to be effective, catalytic copers immediately rethink their options and adjust the plan.

Leaders who lack catalytic coping do not look, think, or plan ahead. If they come up with a plan, it often lacks depth or creativity. They will stick to it whether it suits current conditions or not. They seem lost when faced with difficult or unusual conditions and may fail to take timely action or any action at all.

These elements are not entirely different factors; they are elements of a whole style of being. If you wonder whether the four elements of active coping carry different weights in predicting leadership effectiveness or general adaptation to life, consider this analogy. Are there relative weights for the circulatory, respiratory, digestive, endocrine, and neurological systems of bodily functioning, to name only a few? One could argue that one system is more crucial than another—but the fact is that if any of those systems ceased to operate, the body would die. If any became relatively dysfunctional, such dysfunction would affect the entire body. In the same way, the four elements of active coping rely on each other to function effectively.

Another good analogy is a Greek temple—solid, stable, enduring, as the picture at the beginning of this post suggest. The building’s strong pillars support a wide triangular pediment and roof; intact, it can withstand nature’s onslaught for centuries. This iconic structure illustrates well how the elements of active coping are a crucial part of active coping as a whole. Each element—integrity, psychological autonomy, integrative capacity, and catalytic coping—is like a pillar. Each supports the active coping “roof,” which covers and encompasses them all. If one pillar is missing, the structure loses stability and strength. If several pillars are missing, the structure crumbles. But if all four pillars are in place, the structure will stand firm for many years. I look for this active coping structure when I am trying to identify executive candidates who will stand the test of time in a challenging position.


[i]There are other elements that are important in some cases but not as important in other cases, for example, self-esteem. Self-esteem is a reflection of self-confidence, self-respect, and self-worth.

[ii]See Pratch, “Integrity in Business Executives,” 1-45.

[iii]See Pratch and Jacobowitz, “Optimal Psychological Autonomy.”

[iv]See Pratch and Jacobowitz, “Integrative Capacity.”


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.

How to attract (and hire and keep) a capable portfolio company CEO

Mature businessman discussing with colleagues in meeting room

By Leslie S. Pratch

Sometimes private equity firms have trouble landing the CEO of their dreams. The firm identifies him or her (or thinks it has) but then the candidate chooses not to pursue the opportunity or even turns down the offer. While some of the blame may fairly belong to a search firm, much of the blame may belong to the private equity firm. You may not be doing everything you can to be attractive to the best CEOs. And even if you haven’t had a problem, you might have some room for improvements that could help you, your CEOs and your investors.

Great CEO candidates typically want:

  • An attractive and clear value proposition for taking the job,
  • A Board they can work with and benefit maximally from,
  • The tools they need to be successful, and
  • The plausible expectation that the experience as a whole will be enjoyable (or at least tolerable) and not “the toughest job they never loved.”

To capture such a candidate, think about how your firm looks to him/her and shore up your own weak links. Specifically:

  • Be clear on the value proposition to the candidate – what does the candidate get for what?
  • Provide good support (on the board, off the board, in the compensation arrangements, via the value creation plan)
  • Provide a good culture between the Board, your firm, and the CEO
  • Understand and compensate for the CEO’s weaknesses.

BE CLEAR ON THE VALUE PROPOSITION TO THE CANDIDATE

What does the candidate get for what performance? Lay out the cap table, pricing incentives up front, so that the candidate can make informed decisions (“You have this percentage, let’s look at what that can be”). Such disclosure early on prevents a potential disconnect down the line over what one actually has to do to get paid what one’s been promised.

PROVIDE GOOD SUPPORT

On the board

Smart CEO candidates know that a strong Board is a key factor for success. Make sure your Boards are strong.

Give the Board the right role

The main aim of the Board is to ensure the company’s prosperity, which it does by examining the objectives and the progress of the company in achieving what it has set out to do. But in addition, the Board is the main link between the investors (e.g., the PE firm) and the company’s operations. And it can also be a source of contacts, connections and help for the company and its CEO.

Have the right people on the board

Capable CEO candidates want a heavy-hitting ally on the Board. That can be an experienced PE person in your firm who can make things happen at the PE firm, an operator who has been engaged with your firm for a long time or an operator with a towering reputation from his/her work elsewhere. Each of these people brings something different but they also bring something that is the same: the ability to convince the Board of something the Board is skittish about.

Have an experienced operator on the Board if you can (from the same industry sector if possible). That person should be able to add substantial value. They often can provide industry experience (e.g., “Here’s how Ford makes decisions, here’s how GM makes decisions”) or deep operating knowledge in multiple fields (e.g., a Larry Bossidy).

Be sure the Board is set up to work as well as possible

Be sure the Board has a set of rules/practices that it will use to enhance its functionality (and minimize its dysfunction).

Figure out Board processes and dynamics, information flow, and timeliness of Board packs. What will Board meetings look like (agenda, decision-making rules)? What conversations are expected between the CEO and Board members outside of formal Board meetings? How else 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)? What is the quality of Board packs and how long before a Board meeting will they to be distributed so that all members can be well prepared and can enable meetings to focus on strategy? Capable CEOs don’t want Board meetings to digress into discussions of operational minutiae that distract from broader issues of policy.

Establish the role of the Chairman. It is helpful if the Chairman is open to figuring out how best to work with the CEO. He or she can establish a productive collaboration by discussing and developing with the CEO a plan that describes the best ways for the CEO, the Chairman and the Board to work together.

Ask Board members to be open to the CEO if the CEO approaches them about how to make the Board or the relationship with Board members more effective.

Off the board

The Board doesn’t have to be the only source of outside input and support for the CEO. Through your firm, provide additional sources of help and support such as consulting (e.g., KKR Capstone, Bain Capital, Cerberus Operations and Advisory Company, Vista Equity) or HR support across portfolio companies.

Consider leveraging the all/many of the firms in your portfolio by organizing access to training and idea-sharing for portfolio company CEOs; this peer exchange is attractive to many candidates and CEOs.

An outside operators’ council is another option attractive. Some firms give their CEOs access to an industry roundtable of operating executives who are not on the Board of the portfolio company.

In the agreement on the value creation plan

Have clear outlines of how any EBITDA will be used. If there is extra, then will some of it be plowed back in the business or will it all be taken by the PE firm as dividends or leverage reduction? The value creation plan — base case or upside extension — needs to provide opportunities for career growth and financial gain for members of the organization below the CEO. Many of these opportunities may be conventional; others, such as “performance credit units” that are designed to mirror the behavior of stock options (in other companies where stock options are actually available) may require board involvement to set up. Provide the CEO a mechanism that enables him or her to powerfully induce and reward performance of team members who don’t own stock in the company.

Have a process to understand (with the CEO) the potential upside and downside scenarios. Do some planning on how company would respond to “known unknowns” and “known risks” so that when they occur (or as time passes) the CEO can respond as he/she discussed with the board. Have a procedure in place for what to do when unknown/unexpected/undiscussed developments occur — how should the CEO interact with the Board? On what issues does the Board want to be CONSULTED, on what issues does it want to ADVISE? On what issues does it want to DECIDE?  On what issues does it just want to be INFORMED?

PROVIDE A GOOD CULTURE

Ensure good interactions with the Board. This can begin with giving clear explanations of what will be expected (especially for a CEO who is new to private equity, e.g., a founder taking an investment) – Board interaction can be much more in-depth or intrusive in private equity than in other settings. A smart CEO candidate will ask for evidence that your PE firm can work well with its portfolio CEOs; aim to be able to provide good references from three previous CEOs who have led one of your portfolio companies, who can speak to the quality of working relationships with the private equity firm.

Ensure good interactions with the private equity firm providing the lion’s share of equity. This means, directors at the private equity firm should hold and be prepared for weekly calls and monthly meetings and should welcome calls and contacts from the CEO. The CEOs might want contact more than just at the Board meetings. It’s even possible that the board members might want more contact beyond the board meetings. The nature and frequency of contact can be established by joint agreement or by felt need, and it needs to be negotiated and renegotiated as things change. The board and the CEO need to find together the right interaction that gives them each what they need.

UNDERSTAND AND COMPENSATE FOR THE CEO’S WEAKNESSES

No one is perfect for a job on all dimensions. If you truly understand what the job requires and the strengths and weaknesses that the CEO has (and the CEO can acknowledge those weaknesses) then the Board and investors (and CEO) can figure out ways to compensate for those weaknesses, for example, getting a strong #2, finding Board members who can supplement industry contacts that CEO may not have.

A firm that is clear on its value proposition for the CEO, provides good support to facilitate the CEO’s success (including a good culture and ways to compensate for any CEO weaknesses) will find itself very attractive to very attractive candidates. Very profitable matches (for all) can be made.


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.

Don’t lose the CEO you want to hire before they arrive

By Leslie S. Pratch

It’s a huge loss when a candidate you have wooed for a CEO or other top job at a portfolio company turns you down.  You’ve failed to get the attractive candidate — and you’ve wasted time and energy pursuing them instead of finding and hiring someone else.

You (and your search firm if you are using one) can minimize the probability of a late candidate withdrawal by identifying all potential issues early in the recruitment process.

Let’s look first at some “bad outcomes” and then see what search pros suggest to avoid them.

  • Bad outcome 1:  You are recruiting a CEO to lead a new portfolio company. Your search firm finds two strong candidates. Both candidates interview with the Board and both go through a deep psychological assessment. You decide on one and make him an offer. Unfortunately, he turns you down. Why? His explanation is that his wife wants him to stay at his current firm and retire after two years. You suspect this isn’t the real issue, but you don’t know.
  • Bad outcome 2:  You need to recruit a leader of your firm’s operations executives. After a search, you find someone suitable who claims he’s ready to leave his #2 job at his current firm in order to lead an operations team of his own. But he will have to move from one major metropolitan area to another and his kids are still in high school. You make him an offer. After that, he calls you, not the recruiter, and says the job is too big for him. You feel it’s a bizarre excuse and that the candidate handled it in a bizarre, indirect way.

In each case, something came up and prevented success. What are the typical problems that come up and how can you prevent last minute surprises?

WHAT CAN GO WRONG

According to SpencerStuart consultant Joe Kopsick, the reasons why candidates turn down compelling job offers vary by situation. “It’s dangerous to try to come up with one or two explanations for every time it happens. Changing jobs can be an extraordinarily stressful situation. Emotions get involved and fact-based decisions get put to the side.”

That being said, the collective experience of search consultants I interviewed points to three deraillers in recruiting talent:  family ties (the candidate is not the sole decision maker); compensation; and something else you don’t know about.

Family ties

Sheila O’Grady of SpencerStuart emphasizes understanding, from the very first discussion, the important other people who will affect the decision they may be making. Beyond the partner or spouse are children and their needs. Children who are juniors or seniors in high school or in eighth grade will often make relocation next to impossible. “Executives should be smart enough to consider the spouse’s position,” Kopsick notes, “but I have seen candidates get serious about an opportunity and go through the exercise of interviewing without really getting buy in from their wife or their husband or their partner. That’s something the recruiter needs to be checking on to make sure there’s engagement with the spouse or partner.” O’Grady agrees. In the first conversation with the person, a recruiter should ask if the person has talked to his or her partner about the idea of taking a different job, of relocating, how his or her partner feels about that, and whether that he or she would be supportive of a new job and moving. “Spousal point of view shouldn’t come up at the point of job offer and if it does, it’s a big red flag.”

Compensation and risk

As the recruitment process proceeds, typically candidates get more visibility into the role, the situation of the portfolio company for which they are being hired, and the Board they’ll have to work with. According to Kopsick, “Sometimes what looked good from 30,000 feet doesn’t look so good from 5,000 feet, and that can derail what appear to be good matches.” “You may have someone who wants the job, but the private equity sponsor and the candidate do not agree on compensation. Financial rewards may not be aligned with the risk in the situation.” O’Grady concurs, giving an example of a search she ran where the candidate turned down an offer involving ISOs, because he preferred RSUs or restricted stock units. “The candidate was looking at an expectation versus a possibility.”

Something you don’t know about

The recruiter should also ask, many times, the open-ended question:  What else could you imagine might get in the way of taking this job?

The candidate may have many concerns, and if they don’t bring something up that youcan imagine, then you or the recruiter should bring it up? They may wonder:

  • How many of my own people do I get to bring in?
  • What resources will I have?
  • Can I bike to work?

There are so many things that you don’t know about, that may be important to a candidate, and you won’t know about them unless you ask. Paul Maranville, Managing Partner of Lantern Partners, said that he always asks candidate about their future career dreams and when they plan to retire to ensure goal alignment. If, for example, the investors think success will take eight years, but the person wants to retire in four, there isn’t goal alignment. Some candidates may be concerned about the Board, so it’s really good to let them know what the Board’s going to be early on and to find out if they have concerns about it. Just as you ask what grade Junior’s in, you find out their views of the Board. If they say, “I wish they had someone who was really a part of the industry,” and if it’s not a bad idea to find someone, then you can hire an independent Board member.

You can’t do anything about something you don’t know about. But you can try to find out — upfront — what it will take for the candidate to agree to take the job. You can probe for every reason you have ever heard about from anyone, including family (spouse, children, parents, other family responsibilities), business challenges, compensation, risk, counteroffers. Then you can develop a strategy to help the candidate so he or she can decide to choose to take your offer.

WHAT TO DO – HOW DO YOU PREVENT LATE REJECTIONS?

  • Talk about issues early and often.In the first conversation you have with a candidate, raise family issues and risk and compensation issues as important subjects for discussion. Let the candidate know you are open to talking about them and also that he or she should start talking to his or her wife, husband or partner. Be sure the person has thought through the complexities of the situation and is comfortable with the process. O’Grady emphasizes, “Communicate constantly with the candidate. Understand what is important to the executive and make sure that those important items are checked off in your offer.” She also notes that first-time CEOs requires more hands-on management of the different issues than seasoned veterans. “You think they know how to manage the process, the family, compensation, and if something else comes up – but they really don’t.”
  • Be realistic. Is this person really recruitable? Will your stock options be trumped by the person’s existing employer’s RSUs?
  • Be transparent about the business. Kopsick advises, “Keep the interview process tight. As early in the process as possible, get the candidate to sign an NDA and walk through the numbers in the business.” O’Grady adds, “For last-time CEOs it is the transparency and making an informed decision about the challenges of the assignment that really makes the difference. There’s nothing worse than to get in the job and find the business is not where you thought it would be. No one wants that to be their last chapter.”
  • Be prepared for the late stages of negotiation. Let candidates know that they may have other opportunities, but that you are interested in them and are willing to pay to get them. Expect possible counter-offer, talk about them in advance with the candidate, and have a plan for dealing with them. Know where you can add to your offer (not necessarily cash) and what your best alternative is to a negotiated agreement.
  • Learn from a rejection when it happens. The search consultant should understand why it happened and give you honest feedback so that if style adjustments need to be made they can be made.

ARE ALL LATE REJECTIONS BAD?

Late rejections are bad — because they could always be replaced by earlier rejections (by you or by the candidate). But a late rejection can sometimes be better than an acceptance, if you’ve missed something along the way. Was he bi-polar, and will the charm, self-confidence, and energy with which he’d pursued the opportunity with your firm go away with the onset of a depressive cycle? Was he really not up to handling the job, and not able to stably pursue his own interests? If you do psychological testing, this should be discovered before you make an offer. If you do not do testing, then it is better to learn if the candidate is highly problematic before you hire him or her rather than after they start to work for you.


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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.

How to get the most out of your team (and keep the ones you really want for a long, long, long time)

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By Leslie S. Pratch

You pay people — so it’s a good idea to get the most out of them. You invest in them, so it’s good to keep them in your firm for as long as you want them. Start by recruiting well, and then support firm members’ maximum development and contribution by understanding what makes them tick and helping them succeed. You also can help them (and you) by understanding what makes you as a firm leader tick, and sharing that with the others at your firm.

The process to get the most out of people is: (1) Learn about your own biases, blind spots, goals, and unconscious motivations. (2) Provide a way for others to learn their own biases, blind spots, goals, and unconscious motivations. (3) Tell others about yourself, including some of what you have recently learned. (4) Let others tell you what they’d like to tell you, of what they have learned and also share their perceptions of you. (5) Take action based on what is discussed.

 

In the process:

1. You become aware of information about yourself that you didn’t know (some through feedback from others who did know, some through new insights you uncover).

2. You become aware of new information about them (that they uncover and choose to share).

3. They become aware of new information about you that they didn’t know (information you choose to share in self-disclosure).

4. You can discuss and agree on what you already knew about each other.

5. You can act on your new knowledge to create a situation that responds much more accurately to the underlying needs, desires and capabilities of each participant in the process.

Getting to know yourself (or someone else) deeply

Getting to know yourself (or someone else) deeply means understanding what motivates you, what frustrates you, your role models, your personal and professional goals, how you think about colleagues and leadership, and how you deal with setbacks. Most people don’t really understand all of this about themselves, and very few understand this about their colleagues. Uncovering and sharing insights about these factors can make it possible to structure work in ways that are much more effective and frequently much more enjoyable for all concerned.

Sharing

You can follow a framework to share what you have learned as it bears on your understanding of your developmental goals, needs, frustrations, and strategies for coping with those frustrations, both individually and with respect to the firm.

1. Articulate who you are, what motivates you, how you think, and what your individual goals and challenges are.

2. Open up and understand each other better on the dimensions outlined above.

3. Using what you have learned about your individual and collective perspectives and goals, craft a roadmap for the firm’s development that will help everyone build and manage the firm.

Examples of unleashing people capabilities (and retaining them)

A leadership team successfully re-orients

A firm faced a crisis/opportunity moment. The founders, who had worked together for years as extremely close teammates and built the firm as a 50/50 partnership, wanted to play very different roles in their firm going forward. One wanted to dive in and build the next generation of leadership — as his/their legacy; the other wanted to spend more time on outside pursuits. At the same time, a very talented but interpersonally challenging operating partner of the firm wanted to become an investor, and had the resources to make an investment in the partnership. None of the three was happy about the growing sense of dysfunction and mutual irritation, but uncomfortable conversations seemed to lead to intractable dead ends. The firm risked splitting apart, and losing the next generation too.

Instead, each of the three leaders did a self-assessment that highlighted the forces motivating them — consciously and unconsciously. The assessments let them see how they were responding to elements of the existing firm situation as if these were earlier, often “family of origin” situations. When each of the three shared with the other two, in a structured process, their newly uncovered insights, they were able to see why differences in desires had been interpreted as betrayals, and largely unconscious personality features, as intentional actions. In light of their new knowledge, the two partners were able to reach an mutually acceptable plan for how to run the firm in the future, and the evolution of role of the operating partner (and how each of the founders could much more productively interact with him) was clarified.

A leadership team strengthens the next generation

At a different private equity firm, all the members of the senior leadership team had participated in a self-understanding assessment and had shared in a discussion the results of their evaluation. Each of them had described, for the others, their developmental goals, needs, frustrations, and strategies for coping with those frustrations, both individually and with respect to the firm. They shared them in what they called a roadmap for the firm’s future. As a result, the leaders understood each other much better, and were able to navigate some changes in the composition of the leadership group.

Then the firm leaders invited some of their rising talent to participate in the self-understanding process, as part of the firm’s effort to help these talented people succeed. Two participants were women. Each participant was asked to articulate, based on his/her self-understanding assessment and other knowledge about themselves, who he/she is, what motivates him/her, how he/s he thinks, his/her individual goals and challenges, and his/her perception of the firm’s most pressing challenges and how to meet them. At the same time, the firm leaders prepared to share similar information from their own assessments with the group of rising talent, so all would have the maximum valuable information to consider as they jointly figured out how to make the rising talent successful — which would also mean the longer term success of the firm. The result was the articulation of steps to:

  • Identify the next logical product extensions and when/how to address them
  • Specify the hiring needs over the next five years and a plan to fill them
  • Individual strategies to engage high potential employees with the long term decisions of the firm
  • More effective communications to key employees, especially about development and upward mobility, in order to keep them and energise them

The kinds of themes that emerged from talented team members

Elements of self-description shared with others

Desire to be ambitious without domineering. High expectations for people and willing to give straightforward feedback. Able to take negative input and crappy behaviour from others and adapt to it. Family-oriented, focus on efficiency at work. Mother is role model because of how she succeeded at work but also had strong family life at home. Aggressive, open, and extroverted. Emotional and driven. Interested in leading and nurturing others. Like pressure and like being in charge. High energy. Very competitive.

Short term goals for self, shared with others

  • Complete a buy-side platform acquisition
  • Develop or hire two to three Senior Associates who can take lead execution responsibility of running a deal and be promoted to Vice President
  • My most important near-term personal goal is to raise my kids to be well rounded, compassionate, independent children and launch them into a career. This goal can’t be achieved without a balance of work and home time.

Longer term goals for self, shared with others

  • Have enough money to provide for my kids and do the fun things that we want to do without needing to worry. Be available to my parents as they age.
  • Eventually spend more time with my family. To do this, I’ll need to have less direct execution responsibility as I rise through the ranks.

Goals for firm shared with others

  • Enhance the culture we have in place as we grow; we should be even more aggressive/hungry to find the next deal.
  • Fill key roles in IR and improve BD; develop stronger relationships with our larger sources of deal flow. Communicate better with investors to hedge for if investment performance is not best in the industry.
  • Refine our medium term strategic plan. This will insure we are all rowing in the same direction, eliminate ambiguity, and allow us to efficiently invest the new capital we have.
  • Have partners speak with one voice and set clear direction and responsibilities throughout the organisation. Deal with all internal questions promptly instead of letting them fester.
  • Expand the partnership.
  • VPs play an appropriate role. This requires investing in training the Associates so VPs don’t have to do associates’ jobs.
  • Build a better business development model.

Frustrations shared with others

  • I am frustrated by people who disappoint me, who give confusing or inaccurate information and who give unfair feedback.
  • Lack of clarity around upward mobility in the firm could ultimately cause turnover and a change in our culture, which would adversely affect achieving our professional and personal goals.
  • I need to learn to be more tactful and when to be polite and not… I need to get my ideas across to people without overtly intimidating or arousing aggression in them.
  • I care about people but apparently come across as dismissive; I don’t want to alienate people. I want them to trust me and know that I trust them, but I don’t know how to communicate that way.
  • One of the founders is a fabulous investor and fundraiser but he causes mistrust among employees. This has persisted for years and has to change.

Deciding whether this might help improve performance at your firm

If you don’t know — accurately — the kinds of things that a self-assessment and sharing process reveals, then you might want to try it. It takes some openness on the part of your colleagues, and some courage from you (to look hard at yourself, to be open to what you learn, and to share). But the payoffs in keeping your leadership team strong and in both motivating and developing your key people can be great.

For you, you’ll get more for what you are paying. For your people, the more they are able to do, the more they will have grown and learned. They will be happier and more productive. They are also likely to stay longer. You’ll minimise the unnecessary loss of talent you wanted to keep.


a2ce5-1prvaap3nymg8ukglxvw0haLeslie 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.

Originally published by Leslie Pratch in The European Financial Review

 


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Hiring Season for New Associates — Help Wanted?


Hiring Season for New Associates — Help Wanted?

By Leslie S. Pratch

The hiring season for new associates begins soon. If you hire people out of investment banks or consulting firms, it’s time to be thinking about the best way to identify the right talent, including people who have the potential to grow into firm leaders one day. Some ways of screening talent are better than others. If you want to do something different this year, you need to start developing your interview protocols and additional screening measure right now.

Many of your candidates will have the smarts to do (or quickly learn to do) the technical parts of their new job. But to find future firm leaders you’ll need to identify the relatively few who have all of these characteristics:

1. High integrity

2. An interest in private equity that is motivated by genuine interest in understanding how businesses grow (no simply motivated by the potential financial rewards or the ability to jump through the next hoop presented them after good grades and achievements in high school, in college, and then in the first job)

3. Strong desire to grow and be challenged professionally

4. Work best and want to work as part of a team

5. Eager to work with people who are as smart or smarter than they are

In short, you want find candidates who will survive in private equity beyond the senior associate role.

The way you currently interview and assess may or may not help you find these characteristics. Do you explore their basic aims and goals, how they see frustrations, how they cope, and how they maintain their self-esteem. How do they think — consciously and unconsciously — about working with, learning from, and being challenged by peers or superiors? Are they willing to take responsibility for failures and to learn from their mistakes? When faced with inevitable setbacks or challenges, do they have the self-confidence and creativity to find new ways around obstacles that would stymie others? Do they have secure self-esteem, grounded in positive identifications with people (typically parents or parental figures) they admire and idealise?

If you don’t get at these kinds of issues, you may be missing critically important insights that you could fairly cost-effectively and quickly obtain.

As part of your evaluation of a candidate, you can also predict whether the candidate will likely be able to manage both the intellectual demands of the current position and the intellectual demands of future positions in future years. You can do this with an inexpensive, sophisticated cognitive ability test.

If you would like to learn more about what to look for when looking at candidates in your associate and senior associate recruiting pool, and how you can differentiate future leaders from those who will likely not develop beyond the level of senior associate, you can look at this post or call me. If you think your firm could benefit from a discussion but are not the person leading recruitment of associates, please share this post with that person.

Originally 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.

 

 

Building a Firm You Are Proud Of

By Leslie S. Pratch

Many private equity firms don’t survive the loss of the firm’s leadership. Building your team is crucial if you want your firm to continue to flourish when you are ready personally to ease up. Even with you still there, savvy investors understand how important smooth functioning teams are to the performance of a fund and the long-term performance of a firm. Consequently, you need a team behind you, and eventually instead of you. And you need your firm and its investors to understand and have confidence in your team development approach.

Importance of building a team

Leaders of many private equity firms have two goals after their initial success: to have continued economic success and to create an organisation that will survive after they retire. To achieve these goals, they need a team of professionals who can understand the details of deals, and act strategically, decisively and effectively on their own (without the founders’ input). In addition, firm leaders need to hire individuals who can lead. To attract this talent, firms must provide an environment where people can be successful and have room to grow into leaders.

Firms can tap a mix of sources to build their teams: some future partners will join the firm as mid-career professionals (e.g., Vice Presidents, Managing Directors, or Partners) and some future partners will join the firm as associates after some initial experience at an investment bank or consulting firm.

The advantages and challenges of bringing in people at mid-career

Advantages: They know what they are getting into, generally. They bring different experiences and ways of working to your organisation (and some of these different ways might be good to adopt or adapt).

Disadvantages: They already have a way of working, and might resist your methods. It’s hard to get the people you want; those committed to private equity and doing very well at their present firms will often not want to move, except for very compelling economics. Ones more open to moving, especially at a reasonable price, might not be doing very well where they are.

The advantages and challenges of “growing your own”

Growing your own means bringing people in early in their careers and getting them to learn what they need to know, and to develop, on your team. The challenge is to find the right (usually) young people, among all of those available, and at the same time making your firm attractive to them.

In private equity’s recruiting pools, e.g., the people with 1–2 years of investment banking or consulting experience, many people are still crafting their identity. They may be very insecure about their achievements, and can often be easily motivated (as they may be by their current employers) by the opportunity to get the highest grade, or the biggest bonus. They will do or overdo what they are asked to do. But they may not think much about whether something is worth doing. They may not be able to guide themselves or foster the development of others. They may well not survive in private equity beyond the senior associate role.

Others are actually in fact young grown-ups, or well on the path to becoming grown-ups with goods odds of maturing quickly. They are not just looking for the next hoop to jump through. Rather, they know what they want in their career, and know what they are looking for in a firm and in colleagues. They are looking for the place to build their career and they have the emotional disposition to be a firm leader.

Picking associates and having associates pick you

If you are looking for young grown-ups, what should you look for? Investment banks and consulting firms have screened for you, eliminating those who lack ambition, achievement orientation, and basic skills for succeeding in an associate role in those firms. The main job of your interview is to differentiate candidates who will not survive in private equity beyond senior associate from those who will.

Interviewing candidates for Associate

What you are really going for is to find high integrity individuals whose interest in private equity derives from genuine interest in understanding how businesses grow, who want to grow and be continuously challenged professionally, to be part of a team, and to work with individuals as smart or smarter than they.

All this is true regardless of gender. Some nuances are influenced by gender, and that’s an issue I’ll talk about in another newsletter.

As part of your evaluation of a candidate, you can also predict whether the candidate will likely be able to manage both the intellectual demands of the current position, and the intellectual demands of future positions in future years. You can do this with an inexpensive, sophisticated cognitive ability test.

Having associates pick you

Future leaders will be more attracted to some firms than others. The culture and integrity of the place and having a differentiated model for achieving returns will make your firm stand out. Being regarded as a firm where talented young professionals can feel there is room to grow up and are excited about learning from their peers and superiors is important. Having a culture where junior talent is cultivated, where people get quick feedback on the quality of their work and the problems their immediate superiors and superiors once removed anticipate in their career development is important.

Even how you recruit affects who you get to see and what other candidates think about you versus the competition.

One firm put out an announcement to members of the Yale Sailing Team — searching for a summer intern at a private equity firm. The applicant selected was a two-time inter-collegiate All-American sailor majoring in Economics and Statistics. She is getting great exposure to a firm that had the forethought to recruit from a school, major, and sport that breeds smart resourceful, competitive, team players.

What to do

  • Know what you are looking for when you do your interviews and be systematic about pursuing your objective.
  • Develop the culture that will attract the talent that you want even if that requires some adjustment to what you have.

In future posts, we’ll discuss developing and retaining the people you have and issues in lateral hires.

Originally 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.

Getting Even Smarter About Hiring CEOs and CFOs

 

 

Getting Even Smarter About Hiring CEOs and CFOs

By Leslie S. Pratch

Picking good CEOs and CFOs for your portfolio companies is generally thought to be quite important to investment performance. You probably have a process that you use with some discipline. But does it work? And even if it does, can you improve it? You can do some research to figure out the answers to these important questions.

I’ve worked with some firms to try to understand:

  • Whether some or all of the information they currently collect about CEO/CFO candidates in fact statistically predicts their performance outcomes.
  • How the firms can make their hiring processes more efficient and more accurate in predicting success.

Firms’ Typical Hiring Approaches May Not Be Effective

Many firms use a process of testing, assessment by outsiders, and interviews by firm members to select their CEOs and CFOs. If you looked at a firm’s hiring approach, you would hope to find that:

  • The hiring process predicted success vs. failure of the hired candidates; that is, people who did better in the process in fact did better on the job, and
  • Hired candidates were more highly rated/scored in the process; that is, hired candidates tended to do better in the process than candidates who were not hired.

In some recent research, the predictive validity of firms’ typical methods was not supported by statistical analysis. We found no evidence that any of the methods depicted above work to distinguish ultimately very successful leaders from those who performed considerably less well (or badly) after they were hired. The data that firms collected (and documented) couldn’t be shown to be helpful in predicting performance — although we cannot say for sure it was useless either.

Surprisingly, we also found that managers selected for positions appeared statistically indistinguishable (based on the data provided) from those the firms chose not to hire.

WHAT CAN YOU DO IF YOU ARE NOT SURE YOUR HIRING PROCESS WORKS VERY WELL

You can choose from at least three strategies. You can:

1. Duplicate the research to figure out if there are elements of your process you should definitely keep or get rid of, and/or

2. Take some “no regrets” actions to improve your process

3. Add some statistically valid components to your process

Duplicate the Research with your Own Data

Duplicating the research with your own data is possible if you have adequate data, and not too expensive if the data is accessible and complete. The data used is all the information you have on a set of candidates — scores, interview ratings, and other evaluations, plus the performance ratings of the CEOs and CFOs you ultimately hired. The research involves standard statistical analysis steps — such as getting the data in one place, cleaning the data, coding the data into discrete categories where required, and then running and interpreting the statistical results.

If you do your own research, you may discover that there are steps in the process that are adding no value — and you can save some money by eliminating them.

Take “No Regrets” Actions to Improve your Process

In the absence of data, you can still do some “good practices” that might be useful and that have minimal costs. These include:

  • Understand, specifically for your firm, the competencies required of portfolio executives and how the operating and deal team can recognise, in an interview or assessment situation, that a manager either has or does not have the competency. In this process
  • Focus on the competencies that you believes are most critical to success
  • Use “behavioral anchors” (descriptions of the behaviors that demonstrate a competency) to consistently measure the competencies.
  • Train interviewers in the firm to correctly execute the interview process so they efficiently get at what you are looking to understand
  • Calibrate across interviewers to ensure that competencies are rated consistently across interviewers
  • Consider using some kind of test (e.g., of cognitive ability) to screen out candidates before you spend too much time or money evaluating them. For example, if you do not want to hire a CEO who isn’t smart no matter how good they are on other dimensions, then give candidates a quick cognitive ability test upfront and you’ll probably eliminate quite a few.

Add the Right Kind of “Statistically Valid” Methods

You might want to add statistically valid measures, properly defined. There are many methods that describe themselves as “statistically valid”, but that term is used ambiguously.

Sometimes, the devisers/sellers of the method mean that the method reliably measures the thing it claims to measure, that is, a measure of “leadership” will accurately measure the specific concept of “leadership” defined by the method (which, by the way, may or may not have anything to do with your conception of leadership).

Other times, the devisers/sellers of the method can show that the method can predict outcomes based on the input. This kind of “predictive validity” is what you are looking for; however, you still need to sure that the prediction is relevant. In one case I know of, the studies about predictive validity were based on “managers”, and it turned out that being able to predict whether someone would be a good manager is quite different than being able to predict if someone would succeed as a CEO; the method was provide predictive validity but in a way that was irrelevant or even misleading for the purpose for which the private equity firm was applying the method.

Feel free to contact me if you want to talk about methods that have predictive validity including some that I use, or about methods that are claiming predictive validity if you’d like help in understanding the claims and what they mean.


A version of this piece previously 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.