How to challenge your assumptions around human capital

Here are a few tips to help you challenge your assumptions:

1. Human capital determines how effectively your investment thesis is enacted, so capability issues are side-lined at your peril. Ineffective leadership practices cost companies millions of dollars each year by negatively impacting employee retention, customer satisfaction, and overall employee productivity. It’s estimated that the cost of every year of delay in addressing leadership capability costs 7% of an organisation’s total annual sales.1 So don’t wait to see whether management will perform, ensure they do by conducting effective assessment of capability and intervening immediately to plug any development gaps. Provide transition coaching (particularly for new CEOs) and top team effectiveness interventions as well as alignment workshops between the Private Equity owner and the Executive Team.
2. Share the difference in expectations (as compared to a corporate environment, for example) and common traps with ‘new to PE’ Executives.
3. Don’t assume that experience automatically equates to superior management performance. Superior capability is not automatically acquired through experience, it depends on the leader’s ability to learn from that experience. Some leaders may simply be honing ineffective strategies, or overlooking differences between current and past challenges. Furthermore, effective development can elevate the capability of leaders who have been in their roles for just one to two years to a level comparable to leaders who have been in their roles 10 years or more - promoting consistency in leadership quality regardless of tenure.2
4. Avoid falling into the ‘binary’ trap - don’t limit your options to ‘top or hop’. No leader is the perfect all-rounder, so don’t sit back and wait to see if they sink or swim. Put processes in place to support all leaders’ development to reduce the risk of failure. Sometimes development can be a quicker path to improved performance than firing them and finding a replacement (who isn’t guaranteed to succeed either, since the drivers of organisational performance are multiple and complex). Currently, the hands-off approach adopted by some PE firms makes this a self-fulfilling prophecy. The delay in taking action means that not only have you lost time, but you’ve got yourself into problems that are much harder to resolve, the only viable option then becomes fire and replace.
5. Recognise the situations when replacement is particularly unlikely to be the remedy (or at least the sole remedy). For instance, when you’ve got bigger cultural or systems issues at play - a new CEO has a strong influence on culture, but they can’t always easily overpower the strong bottom up influence. Previous research has highlighted that firing a CEO is not just a bad solution to a complex, long-term problem, it is also surprisingly ineffective at generating short-term gains.3