Serious Human Capital Management for Seriously Good Performance

 

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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Systematically Get The Evidence You Need

man sitting at desk looking at group of arguing people

By Leslie S. Pratch

The last two posts, we’ve looked at an approach to assessing portfolio company managers efficiently during due diligence. To evaluate portfolio company managers, you need evidence that demonstrates they have or lack the necessary competencies. Interviews and reference checks are the main tools available during due diligence to see if the managers have the skills you’ve defined in your competency framework. During due diligence, it’s important to learn both what an executive has accomplished and how. To do so, you must evaluate the personal characteristics, skills, knowledge, experience and attitudes used to achieve results and consider these factors against the criteria you identified for successful performance.

COMPETENCY FRAMEWORK UNDERPINS INTERVIEW GUIDE

A competency framework provides guidelines and interview prompts to help you collect evidence. A deal team can use a framework to identify the most important competencies for the role, define those competencies operationally, develop questions to ask in an interview and know how to evaluate the answers. Good questions will provide evidence of behaviours that indicate the competency. You’ll validate what you hear by drilling down with questions about the time the behaviour was displayed such as: what was your role, what were you thinking, what did you say and do, what was the outcome.

The deal team can craft an interview guide that defines each competency, provides both positive and negative examples of behavioural indicators for each competency, and offers questions designed to elicit evidence of the candidate’s historic demonstration of the competency.

What are you looking for in the interview?

Before you conduct an interview, establish the areas you will probe. For example, competencies required of a CEO might include a subset of the following high-level competencies:

 

Your value creation plan dictates the performance criteria for each management role. For instance, if negotiating skills are vital, ask the candidate to recount a time he or she applied these skills either successfully or unsuccessfully. Probing areas of poor performance and lack of success is important to understand how the candidate copes with setbacks and defeats, and whether he or she learns from failures and grows through adversity.

Probing for Strategic Leadership competency

Portfolio company CEOs almost always need to be competent at Strategic Leadership, which can be operationally defined as:

  • Defines the enterprise’s basic long term goals and objectives and acts and allocates the resources to carry out these goals.
  • Identifies conflicts among goals and considers tradeoffs and the time horizons in making decisions
  • Identifies how specific decisions will lead to specific outcomes
  • Leads by example and motivates others to follow.

As investors, you know how to ask questions related to strategic leadership. You might consider adding questions like:

  • What do you want important subordinates as well as outsiders to understand in your business? How do you bring about that understanding?
  • What are your staff’s main worries? What have you done about them?
  • When you have to tackle a complex problem for the first time how do you approach it? Walk me through a specific example.
  • Describe a situation when you solved a problem or clarified an issue that others could not.

Positive and negative behavioural indicators help you evaluate the degree to which the manager you have interviewed is capable in this area:

When the interview is over

After the interview, compare your notes to the interview guide, indicate positive and negative indicators demonstrated by the candidate, identify specific supporting comments, and rate the candidate.

Also note your overall impressions of the candidate, both as a person and as an executive. Can you see yourself working with this person? Can you imagine this person working well with key investors, founders, and other important subordinates? The answers to these question will go a long way to determining whether the person will be a successful addition to your executive team or not.

WHAT HAPPENS AFTER YOU BUY/ HIRE?

You can use the performance criteria you’ve established and what you’ve learned in the interview to guide how you build and support a new investment’s management team and the resources and support you provide to it. Next week we’ll look at ways to monitor the management team and measure performance against the value creation drivers for the deal.

A version of this piece 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.

Getting Systematic about Management Assessments

By Leslie S. Pratch

When you’re acquiring a company or building a management team, assessing skilled managers effectively can lead to improved ROI. Private equity investors can do more to achieve sustained success by making the process as systematic, rigorous, and efficient as possible. Having a system in place to guide judgments about management talent can add value.

A systematic process can have different roles for different team members at different stages in the deal:

A competency model outlines the behaviours that a firm’s managers should demonstrate as leaders. Competency models are based on the critical elements of accurate job descriptions and are the foundation of most systems for assessing managers.

In this letter, I’ll describe the first step: crafting the position description, which is the basis for the competency model and the assessment. In future letters, I’ll outline how to create the competency model and how to use it wisely.

DEVELOPING POSITION TEMPLATES

Begin by developing a position template. You and your firm undoubtedly have had some discussion of the position. Typically, a template includes:

1. Business Context

What is the strategy and what is the business model?

2. Critical Business Imperatives

What are the priority activities necessary to realise the strategy/objectives, and how will culture inform the execution of strategy?

  • The current and future nature of the team. What type of person would best complement the existing team? How should the team evolve?
  • The most important activities the company must do to realise the strategy (e.g., closing a major account, developing a major OEM partnership, completing a critical product development, or building the organisation).
  • The culture of the organisation. What are the organisation’s values? Management style, communications, and approach to training and development of people?

3. The Job

  • Job title and purpose.
  • Dimensions: budgets, people, materials, capital investment and key result areas.
  • Nature and scope and in particular, the difficulties and challenges in doing the job well.
  • Key relationships, both internal and external
  • Principal accountabilities: what are the two or three key objectives and the job’s expected contribution to the organisation; what is most important to the organisation from this position?
  • Performance measures related to the critical business objectives.
  • Time-span horizon of the role (how long it will take to achieve the longest task in the role).

4. The Person

What is the definition of the ideal candidate? Characteristics might include functional/ professional/ technical skills, work experience, career flow, prior level of performance desired, and key required competencies.

The ideal candidate definition is specific to a specific job at a specific portfolio company at a specific moment. The two or three principal accountabilities or tasks the jobholder needs to perform in order to be considered successful drive this definition. For example, what behaviours, actions, and contributions would a high-performing jobholder make in carrying out these critical tasks? Finally, what are the competencies associated with these successful behaviours, actions, and contributions?

WHO SHOULD DEVELOP POSITION DESCRIPTIONS?

Members of the deal team most closely involved with articulating the company’s strategy and overseeing its implementation should develop the position template, possibly assisted by a competent HR person and/or operating partner within the firm. If the deal team uses third party consultants to provide expertise in the market or industry that the deal team lacks, then those experts should be involved too.

WHAT ARE THE TRICKY BITS TO BE SURE TO GET RIGHT?

  • Be specific and real. Start with the leadership challenges implied by the strategy. Focus your assessment of management capability during due diligence on what the management team needs to achieve. Link the position description tightly to what you actually need managers to do well — the critical business imperatives of the role — in order to carry out the strategy. Anticipate what might get in the way to achieving the position objectives.
  • Don’t be too specific. It’s easy to get carried away with making things too specific and while there’s no constant definition of what’s too specific, you want to focus on the critical “what’s” that must happen while not specifying the “how” in inordinate detail.
  • Don’t forget culture. Take culture into account. If you plan to change the company’s corporate mindset as part of the strategy, the CEO’s job description should include shaking up the organisation and its bureaucracy quickly and deeply and probably taking other necessary, aggressive steps.
  • Write position descriptions that can serve as the basis for position scorecards once you own the company. You may be planning to use financial or other performance indicators as part of determining compensation and bonuses. More specific performance measures that measure success at moving the company closer to achieving the strategy are valuable to monitor progress, and if you think about them as you write the position description you won’t need to get outside help after the deal closes to put these metrics together.
  • Think through how long the person has to achieve each performance measure. Is a key item to be achieved in three months or within a year?

WHAT HAPPENS NEXT?

After you have the position description, you can easily model the competencies for position. The competency model translates the requirements of the position into the set of skills you want to be sure the candidate has and suggests the indicators you can look for that will indicate that he/she has the skills.

In future posts, I’ll look at competency models and putting them to use.


A version of this piece 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.

When The CEO Hasn’t “Done It All Before” — But Could Still Be The Right Choice

 

When The CEO Hasn’t “Done It All Before” — But Could Still Be The Right Choice

By Leslie S. Pratch

If you are like many investors, you like a CEO who has already done that job well in a similar situation; you believe that the CEO’s documented experience reduces your risk. Would you be willing to go with someone who doesn’t have “the track record”? What if there was a real downside to not going with the “novice”? Sometimes investors needlessly throw away important talent. You can frequently get the results you need if you understand the person you are considering, what makes them tick, and what would make them tick even better.

The right kind of management assessment can get you the insight that you need. And the right assessor will tell you how you should behave differently in order to maximise the executive’s performance. That’s what happened in the case of Wayne….

The Very Happy Case of Wayne

Investors asked me to assess Wayne, the COO of a company they were planning to acquire. They had a bit of a problem. Wayne said he’d leave if he were not made CEO upon the change of ownership. Did he have the leadership and management skills to be CEO — a major strategist and the executive driving operational change and growth? As detailed below, the assessment answered with a definitive “Yes!”

My report on Wayne

Wayne is extremely intelligent. He is a logical, sequential, quick, and flexible thinker. He analyses alternative scenarios in a sophisticated way. He creatively brings disparate pieces into a meaningful whole. He lives with the fact that he has made mistakes, and having made mistakes, tries to learn from them.Wayne also has social intelligence. He has insight into himself and is aware of what transpires around him. His eagerness to seek out information (including typical hard facts but also how people feel and are behaving) and weave it together allows him not only to formulate effective business strategy but also to motivate and work well with others in executing it. To the extent that his intuitive style biases him to take action without a full consideration of evidence and counterarguments, Wayne solicits the viewpoints of others before making final decisions. He encourages constructive conflict as a way to explore fully opportunities and problems and to resolve them. These are admirable qualities and evidence of sophistication in his functioning.

Unusual for an executive in his late 30s, Wayne has a mature identity as a leader. He sees himself as a father figure, at times encouraging, forgiving, and empathic toward his subordinates, at other times critical, reprimanding, and willing to mete out deserved punishment. Related to Wayne’s maturity is his serious and pragmatic style. He accepts basic social values. He plays by the rules. He seeks others’ input and makes decisions after consulting them. He prefers that his subordinates accept his leadership without his having to invoke the formal authority of his role. He wants the support of his team while clearly seeking the responsibilities as leader.

Important to Wayne’s self-image is that he be perceived as a good person. He does not easily handle criticism that appears to question (or that he construes as questioning) his morality or his fundamental decency as a person. One Wayne’s few weaknesses is that he becomes defensive when he fears that others have judged him as having done something bad. His need for others to perceive him in a good light makes him slightly rigid and less open and creative than he could be. It also makes him dependent on superiors for recognition and praise.

Wayne pushes himself to take advantage of business opportunities and to do the best he can, and he expects the same of others. He does not tolerate subordinates who do not live up to expectations. He will not hesitate to be critical when necessary and is a demanding boss. He requires integrity, reliability, and competent performance in others. He does not tolerate mediocrity or dishonesty.

Wayne’s tendency to be somewhat rigid does not interfere with being pragmatic. He understands bottom-line pressures and responds to them in a way that is appropriate for the success of the business, which includes dismissing subordinates who do not meet expectations or are otherwise dispensable. Wayne is likely to demonstrate the leadership that you expect. He possesses the resources to cope with the demands of the CEO role, now and in the future. He is extremely ambitious and believes he is now at a point in his career where he is ready to run an organisation. We agree. Your role in working with him should emphasise supporting him so that he can live up to his own high expectations.

My recommendations

One, you should be as explicit as possible with Wayne regarding expectations, goals, timetables, and resources he will have available, now and in the future. He tends to get touchy when presented with demands or expectations that were not previously established. He is sensitive to criticism and does not want to make a mistake and responds defensively to what he perceives as vague and poorly defined expectations.

Two, you should give Wayne a clear understanding of how you intend to work with him. He will keep his end of the understanding and will expect you to live up to your end. He’ll become frustrated if you fail to perform as promised. You should state up front what the process of control will be, and what the limits are. You should put these ground rules in writing so that Wayne cannot later complain he did not know.

Three, Wayne seeks recognition and support without being needy or exhibitionistic. He is a conscientious and moral person. It is important to him that others recognise those qualities in him. This bears on how investors should recognise Wayne’s achievements. He would like to be valued in the same moral terms he understands himself. He might like financial rewards but would also like others to see his skills and ability to grow the business. You should give him appropriate feedback if things are going well, and encourage him to keep up the good work. You should couch your criticisms to minimise the chances that he feels he is perceived as a bad person.

In sum, Wayne is a conscientious but pragmatic and bottom-line focused executive. He will do what it takes to help the Company be successful, achieving expectations in a moral way.

The very happy outcome

Two years later, investors sold the business. They rated Wayne as an “outstanding CEO who beat his budget every single month.” Their investment yielded 3.3x invested capital and had an IRR of 115%.

Conclusions That Can Be Drawn

If investors had insisted on having a CEO who had previously been a CEO, Wayne and his valuable knowledge would have left. Someone else who may or may not have been able to lead the company would have been hired. But the investors were willing to rely on my prediction about Wayne’s ability to do the job and my guidelines for how, as controlling investors, to interact with him in order to capitalise on his strengths and minimise the risks posed by his weaknesses. As a result, they harvested the ample fruits of Wayne’s efforts. They didn’t unnecessarily trade in the actually very good card in their hand for a draw from the pile.


A version of this post appeared in The European Financial Review

About the Author

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

 

Management assessment leads to action and improved ROI

A good management assessment can help you understand the person behind the more easily observable track record and activities. Below is a much-abbreviated version of an actual report I sent to the investors who had hired me to assess a potential CEO whom I call “Mack.” It will give you a flavor for the difference the assessment can make in maximizing ROI (and minimizing anxiety in investors).

The Happy Case of Mack

Mack had turned around underperforming operations but had never been CEO. His 25-year industry record looked good to the investors who had bought a large, family-owned company with plans for dramatically improving its performance.

The investors were concerned, though, about Mack’s ability to lead a billion dollar business. And they were interested in how he would work with the founding brothers (who would stay as operating executives) and other top managers through the wrenching change program.

My report on Mack (abridged)

Mack is strongly motivated to succeed as a CEO. He is honest, reliable, hard working, and extremely competitive. He has high standards for himself and for others. Cognitively, he is limited. He is not a great thinker. He sees in black and white, without noticing ambiguity or nuance.

Mack is rigid. His implementation is mechanical and reactive, without intuition or feeling. Supremely self-confident, he presumes that all problems will conform to his ability to solve them. He expects subordinates to execute in a logical, let’s-do-it manner. If they resist, he assumes they are wrong and he will not compromise. He does not consider that subordinates might not agree with his solution.

Mack succeeds by being intensely driven and self-confident. He responds to challenges directly, aggressively and with focus. Unfortunately, this style also means that Mack will likely cause conflict during the change program that a more listening, nuanced leader could avoid.

My recommendations

Mack operates best in a chain of command. He wants clear directives from the Board to implement and impose on subordinates. Mack won’t see trends and conceive or adjust the strategy; you (investors) will have to devise corporate strategy. Then Mack will work hard to execute it.

You will also need to monitor the other managers’ morale as Mack bulldozes over them to achieve your goals. Mack is neither interested nor capable in the softer aspects of organizational culture. In dealing with such issues, he will likely be ham-fisted and hard-hearted; he will fray human connections and will destabilize the company. On the many matters likely to significantly affect morale, you will have to act as a control rod and force Mack to think about how changes would affect others. You will need to develop relationships deeper within the organization to know how employees accept or reject Mack’s directives.

Mack is not a perfect fit, but he is capable of doing what the organization requires.

Outcome

The investors addressed Mark’s deficiencies, and his style and their guidance proved an effective combination in a turnaround situation. Investors created the strategy and told him to implement. They also monitored his impact on the organization, stepping in to communicate changes in ways others could accept. His implementation of an aggressive strategic plan yielded costs savings and revenue enhancements. The strategy and Mack’s outstanding, focused execution transformed the company into attractive platform on which to build a national competitor.

Four years after hiring Mack, investors sold the company to a financial sponsor. They called the investment “a home run,” having earned a return of 4.4 times their invested capital.

Conclusions that can be drawn

The assessment provided investors insight and confidence about what it would take for Mack to succeed. They understood what they needed to do, based on Mack’s managerial strengths and weaknesses. That awareness led them to provide him strategy in bite-size pieces he could implement, and to mitigate the effects of his hard-charging style.

How Some Private Equity Investors Use Management Assessments

How Some Private Equity Investors Use Management Assessments

By Leslie S. Pratch

Private equity investors use management assessments to figure out how best to work with the management of the firm in which they are investing. They can learn about:

  • Whether the manager has the cognitive capacity to run a complex organization
  • Whether the manager has the judgment, coping, and interpersonal skill to run a complex organization
  • Whether the manager will develop the capabilities in the future that will allow him to run the organization as it grows, and if the developmental trajectory of the manager be in sync with that of the firm
  • What motivates the manager
  • How best to work with the manager to get the most out of him
  • How to structure compensation packages that will be “very motivational” to the manager
  • Whether (and when) the manager will need to be replaced or require supplementary expertise/capability

In this one-minute video, Jim Bland of HCP explains how he uses management assessments to reduce risk and improve performance in his firm’s private equity investments.

And in this short video, James Sprayregen, restructuring partner and head of Kirkland & Ellis’ global restructuring practice, talks about the relevant contexts for assessments –not merely in private equity, but whenever a management team is being reconfigured.


A version of this post was 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.

The #1 Trait Effective Leaders Have to Have

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Finding and overseeing the right executives for your firm’s portfolio companies is a critical challenge. It affects the returns you and your investors see. It affects how much sleep you get at night.

Fast Company recently published a (very) small excerpt from my new book Looks Good on Paper?, about how to select the leader you want instead of the merely experienced. It starts like this, and you can continue reading if you’d like:

Effective leaders must meet challenges and resolve them productively, day after day, for many years. They must constantly adapt to the unforeseen–and must mobilize, coordinate, and direct others. But when hiring executives, how do you know which candidates possess such abilities? When they all look good on paper, how do you make a choice?

Given the frequency of CEO turnover, and the frequent cases of CEO failure after long, successful careers in the same place where they became CEO—think David Pottruck at Schwab or Doug Ivester at Coke—it’s clearly not that easy. But it can be done by including an analysis of executives’ readiness to acquire new skills and strategies for coping with complexity and change–in other words, their capacity for active coping.

ACTIVE COPING IS A STYLE OF APPROACHING LIFE, BAKED INTO WHO YOU ARE

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

Active copers, by contrast, are built to be capable and eager to deal with whatever obstacles and opportunities they face. Active copers continually strive to achieve personal aims and overcome difficulties, rather than passively retreat from or be overwhelmed by frustration. They move towards the problems and opportunities with open arms and open minds. Continue reading.

If you are interested, I’d like to discuss with you how you assess top leaders of your portfolio companies and whether there are some elements you might want to add. You’ll do better with a higher percentage of “active copers” on your team. 

 

By Leslie S. Pratch

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

 

Experience can be deceiving when it comes to securing success

 

ThinkstockPhotos-502867683-537x350Are you confident

Sometimes the wrong person looks like the right person, but backing the wrong person can be a disaster. Just because someone is in an industry and has been successful to date does not mean they have the “right stuff” for what you need now.

Are you confident the people leading your companies have the “right stuff,” or are you just hoping based on what they’ve done in the past?

Do you have a deal coming up where you’d be more comfortable knowing that the person leading the team has the skills and stability to thrive even in changing and unexpected times?

Consider the case of Jack, a CEO who turned out not to be what was expected….

The sad tale of Jack

Jack was the CEO of a start up exploiting opportunities in a rapidly consolidating but still highly fragmented distribution industry. He was a successful, smart corporate lawyer with a mergers and acquisitions background in this industry.

Jack’s start-up enjoyed no important advantages in terms of technology or marketing. The plan was to identify good targets and to close deals at attractive prices. Competition was intense as several of the industry’s global players were pursuing the same strategy. Management capability was crucial, and Jack was part of a management team with formidable strengths. Investors had already agreed to supply Jack’s company acquisition capital when they asked me to assess him.

What I reported after assessing Jack

Jack is hard working, self-reliant, and verbally very intelligent.

But his coping style is reactive and avoidant. He is especially weak when working with others. He is not good at generating goals or overcoming obstacles. He does not easily tolerate ambiguity; the more poorly defined the problem, the more passive his coping.

When confronted by matters that require him to take initiative, improvise, or be decisive he becomes extremely anxious. At such times, he is unable to withstand the tension that would accompany seeking a full understanding of issues and working to resolve them. In an effort to get rid of problems that vex him, he offers facile, simplistic solutions that gloss over crucial details. As a result, he forecloses options when he would be better off reflecting in order to develop effective solutions.

This passive coping compromises the quality of his judgment to the point that would put the venture at risk. Unfortunately, the issues most likely to make his business successful – such as finding targets at attractive prices and handling them in a timely manner – are precisely the issues likely to bring out his passive coping.

Jack has a narrow expertise, and beyond this range, his coping breaks down. If his company were to run into difficulty – if it missed deadlines, timetables, or forecasts – his passive coping would interfere with the venture being as successful as it needed to be.

What happened (the ugly, the bad, and the good)

As investors worked more closely with Jack in his first negotiation with a seller, they saw the poor judgment our assessment had highlighted. He entered into an agreement with a seller on terms the investors had explicitly rejected. After Jack rejected their directives and moved ahead without considering their concerns, they put on the brakes by withdrawing funding. Fortunately (for Jack), another private equity firm did the deal. Unfortunately (for Jack), they had to replace him with a new CEO. The company subsequently thrived under the successor CEO.

Conclusions that can be drawn

Assessment can help you identify a disaster waiting to happen before it happens. You have to know where to look.

Oops, Wrong CEO – And You Need More Leaders

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


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By Leslie Pratch

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

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

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

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

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

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

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

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

Predictive Validity and Utility

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

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

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

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

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

Skills and Traits associated with Active Coping

 

 

 

 

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

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

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

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

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

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

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

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

Common Mistakes Employers Make When Considering Candidates for Leadership Roles

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

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

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

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

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

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

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

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

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

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

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

Can Active Coping Be Learned?

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

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

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

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

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

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

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

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

About the Author

 

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

References

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

Endnotes

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

 

 

Leaders Who Always Get the Job Done

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By Leslie S. Pratch

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

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

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

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

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

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

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