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

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.

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.

 

 

Can Active Coping Be Learned?

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

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

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

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

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

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