Serious Human Capital Management for Seriously Good Performance

Choice of the personnel

HR contemplating where to put the employee.

By Leslie Pratch

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

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

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

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

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

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

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

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

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

What a Good Human Capital Advisor Actually Does

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

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

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

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

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

Deliverables

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

Benefits

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


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

About the Author

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

 

 

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The Four Different Kinds of Coping

Leslie Pratch, a licensed clinical psychologist with a Ph.D. from Northwestern University, is the founder and CEO of Pratch and Company, a business advisory firm that specializes in the assessment and development of senior executives for public and private organizations. Dr. Pratch has authored a book provisionally entitled LOOKS GOOD ON PAPER, to be published by Columbia University Press in March 2014, on the aspects of personality that contribute to effective leadership. Central to her book is the construct, “active coping.”

Webster’s definition of “cope” is “to deal with or overcome difficulties.” All human beings encounter difficulties on a daily basis, both internal (to the self) and external. We have intricate internal landscapes, filled with drives, values, dreams, and ideals. Some are compatible and some are in conflict. “Coping” is how we reconcile and express these many parts of ourselves, endeavoring to bring into balance our internal needs with the external demands of our environment.

We all have to make an effort to achieve our goals. To do so, we usually have to solve problems and overcome obstacles. Some of these are created by our surroundings, some by other people, and some by who we are. Encountering these obstacles creates stress.

When dealing with stress, a person can respond in one of four ways. The first is to identify the stress and remove it, maintaining—even improving— physical and emotional health. The second is to identify and tolerate the stress without changing it, keeping a status quo but not growing. The third is to defend against the stress by denying it, distorting the perception of it, or reacting to it in an unrealistic manner. The fourth is to suffer a complete breakdown in functioning.

The first response is active coping. The second response is passive coping. The third response is neurotic, defensive coping. The fourth response accompanies personality disintegration.

Active coping is the healthiest response to a stressful situation, and the one most likely to lead to a successful resolution.

It is like the structure of a car. We can manage to get where we need to go if we are driving a clunker, and we can make it through life with a less than optimal coping style. But driving a car with superb engineering will get us farther, faster, with less likelihood of accident or breakdown. A strong framework of coping does exactly the same thing.

Formally, active coping is the readiness, willingness, and ability to adapt resourcefully and effectively to challenging and changing conditions. It is a stable, albeit complex, psychological orientation across time and circumstance. Think of it as a constant state of being “open for business” that springs from a healthy personality structure. It comes into play in the now, at each moment of decision or challenge.