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.

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

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

Do the planning

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

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

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

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

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

Build the skills

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

Get the information

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

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

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

What you can do

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

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

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

 

Serious Human Capital Management for Seriously Good Performance

Choice of the personnel

HR contemplating where to put the employee.

By Leslie Pratch

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

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

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

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

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

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

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

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

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

What a Good Human Capital Advisor Actually Does

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

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

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

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

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

Deliverables

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

Benefits

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


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

About the Author

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