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IVCA Feature: Highlights of Toolkit Event, “Developing Top C-Suite Talent,” Sponsored by Lantern Partners June 11, 2014 One of the seminal issues for both private company investors and company management is the assessment, recruitment and retention of the talent necessary to deliver results. The IVCA presented a Toolkit Event on June 5th, that addressed this vital topic, “Developing Top C-Suite Talent”, sponsored by Lantern Partners. Lantern Partners’ Michael Wyman assembled a panel of industry experts with an outstanding list of discussion questions for a lunchtime assembly of IVCA members and invited guests to delve into the subject. Moderated by Michael Wyman, Lantern Partners, the expert panel included:
The following are the highlights of the panel discussion, divided into the topics of Management Assessment, Recruitment and Retention MANAGEMENT ASSESSMENT Michael Wyman: I’d like to start by asking David and Steve on the investor side, how do you go about evaluating the management team before you make an investment? What are the processes, resources and tools that you use? David Chandler: The process of making an investment involves a continuous evaluation of the managers we’re seeking to back, because we’re looking for two key things – a good management team and the market to pursue from an investment perspective. First thing we do is get a book on the managers, who they are and what are their qualifications. In our market it’s a little hard to tell whether they are qualified or not, because they’re not a lot of Harvard MBAs running these companies – they are mostly entrepreneurs or someone who is transitioning. We start with the first impression, and then go through a process of meeting them multiple times and have multiple people from our side evaluate them. And towards the end of that process, before we make the investment, there is a final formal assessment from two different outside firms. One evaluates the individual in an absolute sense and another group that evaluates the team in a relative sense – who has what skills and how does it fit together. It helps us to understand who we’re backing, since eventually we’ll be in the battle together. Wyman: How do these firms rank these assessments? Chandler: They don’t give us a ‘yes’ or ‘no,’ it’s more about here are the things to consider about each individual potentially on the team, the upsides and downsides. The problem is about the competition for these individuals, and you don’t get as much time as you’d like. The more that you can get out of someone, in considering how they think, the better. It’s continuous and multi-dimensional inside our firm, and every partner will meet with the CEO of the business we’re making an investment in. Wyman: Steve, how would you and your organization tackle that issue? Steve Stubitz: This is an area at Riverside in which we’ve gotten a lot more formal and systematic. We’ve bought 300 companies over the life of Riverside over the past 20 years, and 38 in total just last year. When we go back and analyze why one exit has a 4X return and another crashes and burns, a large percentage of the cases has to do with leadership. So we made a commitment as a firm to get much more systematic and focused about how we grade leadership. Not only for companies we’re going to acquire, but also the ones we’re holding in our portfolio. Many of you have probably looked at a management team and graded them on some kind of scale...and inevitably everyone gets a “B+.” We found that this grade was expected, and it didn’t serve us properly. What we did was develop a comprehensive grading scale together with the firm we hired. We categorized it in four ways – inspiration, integrity, execution and leadership. There are five sub-bullets underneath those categories, and we picked them because of the the size of the mid-level companies we were evaluating. Wyman: And what type of grading did you develop from this system? Stubitz: We wanted to get away from the letter grades. We would rank them one to five on the categories I mentioned, and we would add up the score. We got our folks comfortable with the notion that someone could be a ‘three,’ and still run the company successfully, and more importantly exit successfully. We had that developed for the top five positions in each company, from CEO down. This system also gives us timing on when we should make a change – we can now identify problems and act on them sooner. We’ve also have relied on a study by Steve Kaplan, at the University of Chicago, who broke down some determinations for what it takes to be a successful CEO in Private Equity. The model is called P.E.P. – for Proactive, Efficiency and Prioritizing. It sounds simple, but he backed it up with great statistical analysis. We used that to come up with our model. Wyman: Isn’t integrity binary – you either have it or you don’t – how do you divide that up into a one to five assessment? Stubitz: We look at a number of dimensions, with those ‘sub-bullets’ underneath the category of integrity. We had somebody come in and give us some coaching, to give us an idea of how to assign the number grade. We’re using this as a tool – to understand why we would say ‘yes’ or ‘no’ in regard to integrity. We use the scale to expand that judgment. It’s a tool for use to ask the right questions, to eventually make that ‘yes or no’ determination on a person’s integrity. Wyman: Michael, on the company level, how did you come in and assess The Tie Bar when you took over? Michael Alter: It’s only been several weeks since I started, so the key thing from an assessment position right now is that I still have to give it 60 to 90 days to understand the business and the personnel, as far as what skills I need. The two things I look at is one, the stage of the business, which is critical to the people you have. A person can rise as the company grows, but the odds of that person doing it successfully are slim. The person that is great at the 10-20 million level, might not be able to go beyond that, and you shouldn’t look at them as a failure. The other thing that is critical is culture. As the CEO you drive the culture. You either have to adapt and like the culture you have, or you have to change it. There are certain things I look for that I want to see in terms of values, and the willingness to take risks. With those risks will come mistakes, but if you don’t take any risks, you will get lapped in competition. If my executive staff makes logical decisions, they’ll be right more than they’ll be wrong. That is what works for me. Wyman: Well then, going back in history, what were your assessment standards for SurePayroll? Alter: I ran the company for 14 years, so there were many transitions as the stages of the company changed. Skill sets changed as we got bigger, and we had to determine new priorities at those different stages of change. Can I train those people to scale upward or do I need to move them out? Something else not to be afraid of is shifting people around and across into various other disciplines. Somebody who knows your business and culture can be very helpful in many areas. Wyman: Jim, let’s get you into the discussion. What’s your take on the assessment process in regards to the four companies that you had experienced as CEO? Jim Gagnard: The first thing is you have to understand why you’re there – if everything was wonderful you’d probably not be in that job. There is something inside the company that needs to be dealt with, and the odds are you’re not going to discover it in the interview cycle. The situation becomes ‘what culture do you want to establish and how do you communicate that to the rest of the employees?’ If you apply those questions, what is going on with your management team begins to fall into place. One thing that I like to do is have the executive staff each explain what they do – just to see how they view the position, and how they evaluate it. The other thing that you learn is that everybody generally does not believe a word you say. They really don’t. It becomes an objective to get them to believe, and it takes about six months. Then you establish culture, and culture drives the assessment of personnel. Wyman: Dave, how soon in a new investment do you feel comfortable making changes in the company? Chandler: I don’t know if we’ve ever done it ‘soon enough.’ but we do it quickly. Usually within five to nine months. We always tell the CEOs when we come in that we have their back, but don’t give us a reason not to do that. We are usually right every time. Wyman: Michael, how do you do it on your side? Alter: I’ve never done it quickly enough. Maybe I’m quicker than I used to be, because the last few changes I made at SurePayroll were more proactive. But their direct reports usually tell you that it should have happened quicker. Gagnard: It’s always a complex issue and I agree with Michael, we never do it fast enough – although companies create their own challenges in this area based on what performance review systems they have in place. One thing I’ve always believed in is that performance reviews shouldn’t just be about what they do, but how they do it. In my companies, 60% of how we measured were against the raw numbers, and 40% are based on how they measure up with the culture of the company. I’ve had a number of people leave my companies because they failed on the 40%, even though they made their numbers. Wyman: Has there ever been a situation in which you delayed firing someone, and their performance got better? Alter: There was a situation at SurePayroll in which a key role wasn’t working – and I was ready to fire him – but with a little more time I found out that our styles were different. I’m an extrovert and he was an introvert. When I understood that difference, we started to get along very well, and in his role he did a great job. Gagnard: This is one area in which using a behavioral evaluation scheme does have value. It’s not the complete answer of who they are, but you do begin to get a sense of their personality type, and I think that’s really helpful. Wyman: At what point in growth do those evaluations become more necessary? Gagnard: Probably about a 20 million value and 80 employees, there becomes enough of a clear culture to develop a need and structure on how to evaluate your personnel. When we got to that point, we started thinking about the different behavior styles of people. Are they interactive? Are they decisive? Are they controlling? We started to look at that, and then their personal values. We then developed a profile, and we used it as an initial screening, especially at important positions, just to see if we could get a match. It is done online, and it helped us a lot just to screen things out. Wyman: Didn’t you eventually have a case study on all this? Gagnard: Yes. At one point, I was rolling along with a company, growing at 40% a year, everything is great. But whenever you’re hearing only what you want to hear, ask another question, because something is about to happen that probably won’t be good. We had some major losses we never anticipated, and it was a big deal. The challenge there was to focus on executives who had reached a point in which they were no longer self aware or insightful about what is going on. It was painful to assess, but it had to be done. RECRUITMENT Wyman: Steve, what is important about previous growth stage experience, when recruiting for the companies the firm is investing in? Stubitz: Recruiting at best is an inexact science. It’s agonizing when you don’t get the right person, and you have to make a change. It’s a bit different for us, since we’re not owning these businesses forever. It’s important to get someone to execute quickly, so we can meet our growth goals, and make our investors happy at the exit. It’s hard to figure, and experience is important, but it’s not the only thing. The what is important, but the how is important as well. Chandler: The Fortune 500 is not your friend in middle market companies. Early in my career we were in love with people who had run, for example, big chunks of AT&T. They were great presenters, but the results weren’t there. There are not a lot of golf games in the middle market – well, maybe for investors but not for CEOs. [laughs] Wyman: What percentage of new hires are people that you’ve worked with before? Stubitz: For us, it’s a huge plus if we’ve worked with an executive before. That is the best evaluation criteria. How did they do in your environment and culture? Maybe about half of the executives we recruit we haven’t had prior experience with, and that becomes a more difficult process to get to know them and see if they fit. As far as big company recruiting, our philosophy was to get someone in a ‘double-bounce.’ Maybe they went from a big company, and tried something else. Last year we bought 38 companies, but looked at 4000 companies to get to that number. Some of the management teams we were familiar with, some we weren’t. So when you have to make a change, sometimes you get lucky and sometimes you have to find somebody. Gagnard: For me, one of the top execs on my team was somebody I knew from a previous life at each company I was at, and a couple I had to recruit. When I initially come into a company, within a year I have turned over at least half of the staff. The CEO begins a culture and the executives drive it – and they either buy into it or they don’t. That’s fairly standard. Alter: I’ll say a couple of things. As you’re scaling a company, you will have a bunch of people going out. You have to get the skill set that steps you up, because in middle market companies you don’t have time to keep training someone. You have to think about that, and you have to think about the company first in that process. Wyman: Jim, how important is it for you to get someone out of early growth stage companies versus a big company such as Motorola, when putting together a middle market company as CEO? Gagnard: For me, I don’t like to hire from big companies. I heard ‘double bounce’ earlier, I prefer the term ‘detox,’ you have to detox them from that big environment. If they get through that, then they’re an ideal candidate. Candidates from larger companies may want it intellectually, but emotionally they don’t know what it will be like. Wyman: Steve and Dave, what is that like on the Private Equity side, what do you do in identifying talent to join your organization? Stubitz: There are two tracks in our firm – the classic investment track and our operating partners. They people who have run businesses, ex-CEO and CFOs, they come from the outside or other PE firms. Even in PE firms there are different views on what you want your operations people to do. Within our firm, I’ve been an interim CEO on six occasions, which lasted 3 months to 18 months. But that chews up a lot of resources within the firm, and it says something to the marketplace. We do it, but we take great pains to not do it on a regular basis. We want to recruit to get the right folks in there, as opposed to rotating our people in and out. Chandler: We both want to grow our own talent within and take advantage of recruiting in the marketplace. We are smaller, so we have to evaluate towards our gaps, every five years or so. From our operations side, we’re more opportunistic. We have a guy that has come back four times, in challenging and high growth situations. The people in businesses need that leadership, and if we have someone that can fit, we take the opportunity to bring them in. Overall, we have to cover these companies laterally and from the bottom up. Wyman: Michael, what will you do when you have to add a position or replace someone? Alter: There a lot of variables, depending on the position we’re trying to fill. I like to ask myself, how much do I understand what I need? In middle market companies, it tends to be a ‘one-off.’ Up front, it’s figuring out what role you need to create. One of the challenges of an early stage company is getting that right. Many times when you hire the wrong person it’s because you didn’t understand what you really needed. You bring in somebody who is ‘A,’ when you really needed ‘B.’ And that becomes my fault. Then the next thing is about timing – how long will it take to recruit or find them? Do I want to find that person myself or use a firm to do it? There is no black and white answer. When the interview comes, I always have a guide – on one side the cultural fit and on the other the skills. The skill part has usually been vetted by the time they get to me. I try to focus on the environment I’m running and the culture. Where do they fit in? Wyman: How do you determine cultural fit and do you rely on others to help? Alter: There are a couple of dimensions of what the cultural fit is to me. One, do they have the same set of values and attitudes toward things that I do, and what I want the business to have? I need doers in the types of businesses I’ve been involved with, it’s about the execution. And the other dimension is simply, can I get along with this person? There’s going to be some tension, but you’ve got to make sure your executives like and respect each other. Chandler: For us to find a CEO, for example, it depends on when and what stage we’re doing it in. We have a hire/fire topic in each of our weekly meetings, and we intent to be as inclusive as possible in regards to recruiting with our partnership. I want to hear how other people approach the interview, because not everyone covers the whole spectrum of possible inquiries. It’s about being inclusive and having multiple points of view. Gagnard: Interviewing is a mating ritual, for better or worse. So as David said, you want as many viewpoints as possible, to get behind the force field a person presents on a resume. You’re trying to find out who the person is, and is it a cultural match. I generally don’t even have a resume in front of me when I interview, because I care where their brain is now. Stubitz: We tend to break the interview into parts, with different people in the firm focusing on different parts of the candidate Wyman: Jim, in the interview process, while a candidate tries to sell themselves on you, how do you sell the company to them? Gagnard: The tricky bit is about when you start selling. In recruitment, you and the candidate are trying to get information. They start to get interested, but I have to know the right time to sell the company. I look to them first, and reciprocate when we get farther along in the process. Alter: And then again, you don’t want to oversell the opportunity. For example, they might expect a sexy internet company, and what they get is a payroll company in Glenview. Our responsibility is to understand our persona, and give the impression of what the job is, in the sense of what they will do on a daily basis. It’s a weird balance, because if it is someone we want, how hard do we sell the company to them? I want to close, but I don’t want to close on impressions that are opposite. I’d be lying if I told you I have that balance, but I’m always conscious of it in the process. Stubitz: We think we have the greatest opportunity in the world, but the person on the other side of the desk – especially if they’re good – probably has multiple offers. There is a bit of an art on selling the opportunity, but being realistic about that opportunity. Chandler: For me, I’m a relationship oriented person, and if it doesn’t work out I don’t want people walking away thinking I’m mean-spirited or inconsiderate. It’s a network world, so I want to be respectful of the candidate. When I’m in heavy sell mode, I want them to walk out accepting the position, but I also want to be transparent about what they are getting into, and I want to do that early in the process. Selling with transparency is my style. RETENTION Wyman: Besides making sure your top level executives are paid well, what do you do to focus on retention, and keeping your good people happy? Gagnard: One of the best measures when you’re running a great tech company, besides the exit, is to see how the people who report to you take on other jobs. That’s an indication of whether they developed on the job, or just simply did it. The basis is the performance review, and people tend to like that clarity. Also, smart people tend to have a lot of ideas, and one of the leadership’s main jobs are ‘herding the cats.’ What is the job and how are we trying to get there? You want to give your good people time for ideas in front of the boardroom, away from just numbers, or challenge them with extra projects. Top performers want to take something on, especially when it’s developmental. Finally, find a way to celebrate and have fun – establish some traditions that are rewarding. Take a little time to celebrate, it’s not all about work. Alter: If you think about your senior team, one size doesn’t fit all. I have different rules for my top performers rather than my average performers, and I’m blatant about that. Also I want to understand who someone is, and what makes them tick. Incentivizing doesn’t have to be expensive, but it can be creative. Find out what your good people enjoy, and surprise them with an incentive they didn’t expect. Stubitz: There is a power in individual motivation, that’s how you find out how they tick, and to create incentives with that in mind. You have to do something that changes a person, an incentive that says when they go home something is different. Chandler: From a Private Equity perspective, the real test is not just can you get a top performer to work for you once – because the pay package is pretty good at that level – but whether they will work for you again. Because in the recruitment process everybody is selling, the second time they know who you are, so it isn’t about the money. That’s the fun part – a relationship and a journey with a person that will be in trenches with you everyday, and do you support them in that journey? That’s why you have to get to know them, spend the time with them, in whatever way you can. It’s the second time around when you know if you really got them.
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