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.

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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.

 

Going, Going, Gone — How Fast Do Your CEOs Decay?

Going, Going, Gone — How Fast Do Your CEOs Decay?

By Leslie S. Pratch

When you buy a company, you need the CEO to execute and adjust the plans that will achieve your financial targets. And most investors only buy a company when they think they have someone who can run it. But many investors complain that the CEOs they have in place when they buy a company don’t perform as required. Some firms have examined the issue systematically and are surprised to see how many times they’ve had to change CEOs.

There’s a simple way to see if you have a problem with CEO churn. If you do, you can take a few steps that will help you improve CEO retention.

HOW MANY CEOS DO YOU LOSE, AND HOW QUICKLY AFTER HIRING THEM DO THEY LEAVE?

Here’s an analysis you can do.

Look at completed transactions to see if the CEO you started with achieved your goal of a successful exit. For deals you have already exited:

  1. What percentage of your CEOs lasted for the life of the deal?
  2. How many of your CEOs left in the first year, how many left in the second year, and how many in the third year, and so on.
 

Look at current investments to assess your current track record:

  1. How many of your CEOs left in the first year, how many left in the second year, and how many in the third year? If you had to replace some, how many years did their successors last?
  2. When did the ones who left start to seem problematic — before the deal, within the first year, by the second year, or by year three?

Examine your findings.

1. Is there a trend? If you have enough data, slice and dice it by deal vintage, deal team, industry, or characteristics of the deals and see if you can find important patterns.

2. For each CEO who is problematic or left — Why are/were they problematic? Is it because the person didn’t perform in the way you expected on the tasks you expected in the world you expected? Or is it because the person failed to adjust to an unexpected problem or opportunity?

HOW TO DO BETTER

If you discover that you are not uniformly excellent in CEO selection retention, what are the ways to avoid having to fire your CEO? (I am assuming that having a CEO you don’t want to fire is a quicker route to achieving your investment goals than having a poorly performing CEO.)

• Screen better before the deal. Screening before the deal will likely remove at least a third of the “planned CEOs”. My data from over 10 years of assessing CEO candidates for sophisticated private equity investors suggest that at least a third of the CEOs these investors were planning to hire/keep for a company they are buying can be accurately predicted ahead of time to be very likely to be a very poor choice.

Frequently, investors assume that a candidate’s past performance predicts their future performance — but it doesn’t. Past performance indicates little about how the person would handle new challenges, and new challenges are likely over time in any business situation. You can do better by measuring a person’s psychological capacity to actively and successfully cope with challenges. Combined with other measurable characteristics, knowing this coping capacity enables a much better prediction of how the person will handle and even capitalise on unexpected challenges and opportunities.

• Screen better after the deal. Does the company have the right CEO to execute on the strategic plan? If it wasn’t feasible to assess the CEO before the deal (and in many situations, it’s not) then think about doing it just after the deal closes. You might be able to discover you have a problem before the house burns down; if you learn what situations are like matches in his hand, you might be able to avoid untimely disaster. Through the right kind of assessment you can learn the CEO’s development needs and the interaction style that will work best with him.

• Behave differently when you manage them. If you’ve assessed the CEO, you will know his development needs and how to most effectively interact with him. You can modify your behavior to bring about the best possible working relationship with the CEO. Remember: Even if the CEO is not as capable and mature as you’d like, you can make the Board-CEO interaction work if you are well-informed, capable and mature. Board members who are mature and self-aware and other-aware can live with an immature CEO. The problem is when nobody is self-aware and mature. Lead Directors can grow themselves and their insight, which can be easier than fixing the CEO.

THE MOST IMPORTANT JOURNEY BEGINS WITH A SINGLE STEP

Give me a call and I’ll be happy to talk with you about doing this analysis (or sending me the necessary data so I can do it for you). Then we can see what kind of improvements might make sense.


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.

 

 

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.

 

 

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.