Serious Human Capital Management for Seriously Good Performance

Choice of the personnel

HR contemplating where to put the employee.

By Leslie Pratch

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

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

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

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

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

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

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

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

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

What a Good Human Capital Advisor Actually Does

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

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

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

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

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

Deliverables

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

Benefits

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


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

About the Author

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

 

 

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Gender, Coping, and Leadership

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

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

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

[i] Pratch and Jacobowitz (1996)

 

Can Active Coping Be Learned?

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

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

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

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

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

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

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

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

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

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

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

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

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

Psychological Autonomy in Business

Leslie S. Pratch

Leslie S. Pratch

The president and CEO of Pratch & Company in New Canaan, Connecticut, Leslie S. Pratch capitalizes on her decades of experience as a clinical psychologist to assess and/or coach corporate executives and candidates for senior administrative positions. In Good on Paper, her comprehensive study of business psychology, Leslie S. Pratch defines and explains the importance of psychological autonomy.

Loosely defined as an inherent or learned freedom to choose, psychological autonomy involves the ability to disregard immediate professional and personal pressures when weighing the essential value or lack of value in any given business situation. This can be tremendously difficult to accomplish in the face of ongoing demands of company superiors, board members, customers, suppliers, the media, and/or the general public.

Psychological autonomy requires both substantial self-awareness and an equally perceptive awareness of others. First and foremost, one must be fully aware of both the internal and external influences that might interfere with his or her ability to make critical decisions. Then, the person must learn to assess these influences in terms of overall legitimacy and significance. Finally, individuals must learn to eliminate any unworthy influences from the decision-making process.

The Skills of a Successful Business Leader

Looks Good on Paper pic

Looks Good on Paper
Image: amazon.com

Leslie S. Pratch, PhD, MBA, has worked in the field of psychology for more than 20 years. The founder and president of Pratch & Company, Dr. Leslie S. Pratch helps stakeholders of privately held and public companies determine if executive leadership candidates demonstrate the personality traits and psychological resources necessary for success within a business.

In 2014, Dr. Leslie Pratch wrote Looks Good on Paper?: Using In-Depth Personality Assessment to Predict Leadership Performance.

Some of the information discussed in her book was featured in an Investor’s Business Daily article outlining the qualities experts have identified in the most successful business leaders. To experience success, aspiring CEOs must have the ability to do the following:

Take aim. Formulating realistic and specific goals will help individuals clearly identify and ultimately reach their business ambitions.

Strive for the top. Dr. Pratch reminds executives to strive for successes that are the most meaningful, those that best align with personal values and ideals. The means by which confidence is won in business entails setting achievable goals that force personal and career growth.

Prepare for difficulties. Business leaders require the ability to deal with resistance from outside forces. A strong leader ensures each and every goal incorporates tactics for addressing setbacks and roadblocks.

Active Coping – an Attribute of Successful Executives

Leslie S. Pratch - Blue    A clinical psychologist and graduate of Northwestern University’s Feinberg School of Medicine, Dr. Leslie S. Pratch, PhD, evaluates candidates to determine their ability to perform well as business executives. Dr. Leslie Pratch is also the author of the book LOOKS GOOD ON PAPER? Using In-Depth Personality Assessment to Predict Leadership Performance (Columbia Business School Publishing, 2014).

In LOOKS GOOD ON PAPER?, Dr. Pratch discusses a key leadership attribute called active coping. She gives several examples of this quality, including the following: “When a person always seems prepared, and quickly recovers from any setback, that is active coping. When a person earns the trust of his friends and colleagues by refusing to take unfair advantage of others, and refuses to let others take advantage of him, that is active coping. When a person has the vision and self-confidence to rise above the ‘business as usual’ when necessary, that is active coping.”

She goes on to define this leadership attribute as follows: “To many, the word ‘cope’ has connotations of barely scraping by. I use it quite differently, to refer to a sense of mastery, an orientation to life. Individuals can learn to master themselves and the circumstances that surround them, taking an active coping stance toward the world. Or they can be passive copers, allowing themselves to be defined by their circumstances and enslaved by their personal needs. When circumstances change unpredictably, an individual’s latent weaknesses – or untested strengths – emerge.”

Seven Traits and Skills Related to Active Coping

Looks Good on Paper pic

Looks Good on Paper
Image: amazon.com

Dr. Leslie S. Pratch holds a PhD in clinical psychology from the Northwestern University Feinberg School of Medicine. With more than 20 years of experience evaluating executive candidates, Dr. Leslie S. Pratch is the author of the book LOOKS GOOD ON PAPER? Using In-Depth Personality Assessment to Predict Leadership Performance (Columbia Business School Publishing, 2014).

In LOOKS GOOD ON PAPER? Dr. Leslie Pratch describes a concept called “active coping,” which is often predictive of effective leadership:

“Active coping is an attribute of a healthy personality structure. That means that the ‘activity’ is not always overt and observable; sometimes it takes place internally, in decisions made, visions developed, conflicting drives resolved. An active coping stance, however, often gives rise to certain observable traits and skills. These include:

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

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

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

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

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

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

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

Dr. Leslie S. Pratch on Active Coping

Leslie S Pratch pic

Leslie S Pratch
Image: pratchco.com

A graduate of Northwestern University, Dr. Leslie S. Pratch received her PhD in clinical psychology, then went on to earn an MBA from the University of Chicago’s Booth School of Business. She leverages her expertise to conduct personality assessments that help businesses find executives that will achieve positive results for their employer. Dr. Leslie S. Pratch shares her knowledge in her book entitled LOOKS GOOD ON PAPER? Using In-Depth Personality Assessment to Predict Leadership Performance (Columbia Business School Publishing, 2014), in which she explains the skill of active coping.

Although the resumes of some candidates may seem ideal, factors besides past experience are important when predicting success among already high-achieving executives. Chief among these is active coping. Dr. Pratch describes this quality as follows: “Even if you have never heard the term before, you know it when you see it. When a person always seems prepared, and quickly recovers from any setback, that is active coping.”

In her book, Dr. Pratch goes on to explain how she uses this term: “To many, the word ‘cope’ has connotations of barely scraping by. I use it quite differently, to refer to a sense of mastery, an orientation to life. Individuals can learn to master themselves and the circumstances that surround them, taking an active coping stance toward the world.” As part of the developmental assessment model in this book, active coping can help businesses predict which candidates are likely to thrive when tested, and successfully lead their organizations.

Four Personality Assumptions Used in Assessing Coping Stance

 

Looks Good on Paper pic

Looks Good on Paper
Image: amazon.com

A licensed clinical psychologist, Leslie S. Pratch leads Pratch & Company, a consulting firm that assesses the personality and overall functioning of business executives to predict their future performance as business leaders using its Active Coping Assessment system. In her book, LOOKS GOOD ON PAPER? Using In-Depth Personality Assessment to Predict Leadership Performance (Columbia University Press, 2014), Leslie S. Pratch examines the four assumptions her coping assessments make regarding personality.

1. Personality is a theoretical constructs, not a concrete object. Even so, the complexity of a personality can still be assessed scientifically.

2. Using the correct methodology and training, it is possible to predict the effects that personality has on decision-making.

3. Though some aspects of a personality can be changed with concerted effort, the degree to which such changes are possible is limited. Personalities act as a function of a person’s individual history, with childhood playing a particularly foundational role. This restricts the extent to which a personality can be reshaped.

4. A personality operates on the unconscious, semi-conscious, and conscious levels, each of which affects how a person feels, thinks, and acts.