Steer towards success: What very successful portfolio company boards do

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

Structured board activities

Good boards have thoughtful structures for their activities.

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

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

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

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

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

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

Board activities outside of board meetings

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

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

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

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

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

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

The importance of trust, and how it is created

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

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

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

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

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

How do you deal with bad behavior?

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

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

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

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

Conclusion

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


By Leslie Pratch

Much of my latest writing appears in The European Financial Review

About the Author

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

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Systematically Get The Evidence You Need

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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.

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.

 

Management For When You Least Expect It

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Management For When You Least Expect It

By Leslie Pratch

If you’re in private equity and serve as the Board representative of your investors, you help select and oversee the top management of your portfolio companies.

Is that oversight as smooth and efficient as you would like?

CEOs for portfolio companies need to handle the unexpected

When you pick a CEO, you need someone who can handle well both the expected and the unexpected.

  • The expected. You want someone who can execute your investment thesis. So you’ll check their track record to see that they’ve done the needed tasks before. You’ll rely on your own due diligence or get help from your search firm or even an outside interviewer or an evaluator
  • The unexpected. The future is never what we expect. You need to know “how will the candidate respond when the future presents something unexpected.”

What to expect when it’s unexpected

Predicting what highly skilled people will do with the unexpected is my life’s work. I help private equity investors understand who are active copers. Active coping is being able to — emotionally, intellectually, and behaviourally — successfully confront unforeseen challenges and successfully capitalise on emergent opportunities. For most people, it’s not something you can tell much from their business track record. Identifying it takes a different approach.

How you can proceed

Looks Good on Paper? (Columbia University Press, 2014) outlines my approach, and private equity investors use it to identify CEOs who can lead through turbulence and seize upside opportunities.

  • You can learn more in the coming months. I’ll be writing on this topic, and I’d appreciate you letting me know what you think and if you’d like me to focus on particular aspects.
  • We can talk. My ultimate goal is to apply what I know to make you more successful. I want to reduce the time and energy you spend on overseeing your portfolio companies, and give you more time to raise money and find deals, and at the same time to improve the performance and ROI of your portfolio companies.

A version of this post was originally published by Leslie S. Pratch in The European Financial Review.

About the Author

Leslie Pratch is the founder and CEO of Pratch & Company. A clinical psychologist and MBA, she advises private equity investors and management committees and Boards of Directors of public and privately held companies to help identify whether the executives being considered to lead companies possess the psychological resources and personality strengths needed to succeed.

Leslie recently published a book, Looks Good on Paper?: Using In-Depth Personality Assessments to Predict Leadership Performance (Columbia University Press; 2014). In it, 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. Central to effective leadership is a psychological quality called “active coping,” which she defines and explores by referencing case studies, historical figures, and her own scholarly work.