The Realization That Changed Alpine
In January 2009, the world was in disarray. Lehman Brothers had declared bankruptcy. Merrill Lynch, Countrywide, Wachovia and dozens of other banks had either been acquired or simply evaporated. The stock market was down over 50%. At Alpine, we had several companies in default. We launched our fourth fund in August of 2008, about the worst timing in the past 20 years. Private equity secondary interests were selling as low as 30 cents on the dollar, making it nearly impossible to raise a new fund. I was writing checks from my savings account to make payroll.
I had just started my first-ever engagement with an executive coach named JP Flaum, which included a weekly call every Tuesday at 8 a.m. As an aside, I hit the jackpot with my first coach, and have found the experience so valuable that I have talked to an executive coach every week or every other week since then.
On this particular day in January, I sent JP a text to cancel our session. He shot back a text saying at a minimum we needed to talk for at least 10 min; he didn’t want me to get in the habit of canceling our sessions.
“So, Graham, what’s so stressful you don’t have an hour in your week?” JP asked provocatively.
“So, Graham, what’s so stressful that you don’t have an hour in your week?”
“JP, I’m flying out to Boston this week to meet with the bank for one of our companies. Then I’m going to Seattle. I just learned that we’re about to lose a major customer for another company. So I’m meeting with that customer, who is irate. Then I have to fly to Philadelphia. We’ve been working on a deal for over three months and the seller just called me to tell me the deal is off. So you can see I have no time for coaching this week.”
After he encouraged me to take a few deep breaths, he said, “Tell me more about Boston.”
“Okay. Well, we missed covenants after just curing them. It’s a mess. The bank is…”
He interrupted, “Why did you miss covenants again?”
“Well, it’s a horrible market, not sure if you’ve seen the news lately.” It came out more sarcastic than I intended.
“But Graham, it was also a horrible market six weeks ago when you made your new projections. Tell me about the leadership team.”
“The leadership team? We’re in a financial crisis of epic proportions. What does the leadership team have to do with anything?” I was getting frustrated.
After a pause, I acquiesced, “The CEO has been in the industry for nearly 25 years. He’s a legend in the industry. The rest of the senior team has been there for at least a decade. That’s not our issue though, JP. It’s a brutal time in the market.”
“And yet they missed their six-week old projections. Why?” He asked.
“Well the CEO flies a little high. He’s more strategic. And the CFO is overwhelmed,” I explained.
He pressed, “Give me a ranking for the CEO on an A, B, C, D, F scale. Where A is the best CEO you’ve ever seen, C is an average CEO and F is someone you know you have to fire.”
“I don’t know. He’s probably a B+. Hard to say. This is a really tough time.”
“Was he hitting projections before the crisis? Was he building a world class team? Was he winning new customers?” he asked.
I reflected on this question for a second. We hadn’t owned the company for very long prior to the crisis, but we had consistently come up short in landing new business.
I paused, then replied, “Actually, no. He wasn’t. His team is average, and it’s been the same average team since we made the investment. And while he does a good job with the existing customers, we haven’t cracked the code to win larger accounts. He’s okay, not great.” I reconsidered my rating of B+.
JP and I then walked through the situation in Seattle, and I rated that CEO of that company a B, which, in hindsight, was a generous grade. And then we talked about the deal in Philadelphia that we were about to lose. As JP and I talked more about it, I recognized the loss of the Philadelphia deal was largely caused by some missteps of the Alpine lead on that deal, who I also rated B player.
Then JP asked a series of questions that hit me right between the eyes, “Graham, you told me your goal was to be the highest returning private equity firm of all time. Is that still your goal?”
“Yes!” I said emphatically.
JP continued, “Are you going to get there with B or C CEOs running your portfolio companies? Or with B and C players at Alpine? How quickly can you scale trying to make diving saves when each of your B and C players inevitably fall down? Is this sustainable? Are you having fun?”
JP ended with a final question that gave me chills down my spine and still does to this day, “If you’re not building a suite of A+ leaders, Graham, how would you rate yourself as a CEO?”
Executive coaching simply stated is about creating intention and accountability. A coach helps you get clarity to answer the question, “What do I want (in life, in my career, in this situation, with this relationship)?” and then serves as your partner in holding you accountable to taking the steps to achieve that outcome.
JP was masterful in helping me determine that what I truly wanted was for Alpine to be the greatest performing private equity firm of all time, and that the path to achieving that outcome was to begin by making some difficult decisions regarding people.
Within several months, I gained the courage and conviction to replace the CEO of the Boston company. Together with another Alpine partner and with JP’s help, we created a “scorecard” for that role. A scorecard starts with clarity on the ideal outcomes for the person who will fill that position and also includes a list of the attributes of someone who will be able to achieve those outcomes. For this role, I began to realize that the outcomes were centered on building a team and selling new customers and had little to do with specific experience in that industry. In other words, I cared a lot more about the attributes of this person and cared less about the industry in which this person had previously worked. My 25-year industry veteran CEO knew the industry well, but lacked the key leadership attributes to build a world class company and land new customers.
Attributes are about who somebody is. Important attributes for leaders include characteristics such as leadership, ability to get people excited about a vision, ability to sell, persistence, work ethic, integrity, clarity in thinking, intellectual horsepower, ability to communicate, self awareness, ability to read people and ability to get along well with people.
The following graph summarizes my experience in hiring high attribute individuals versus individuals with lower attributes but with industry experience.
The new CEO of the Boston company performed to the scorecard. He topgraded his leadership team, and he jumpstarted sales. Within 18 months, the company was landing new customers and within two years, the company was one of the fastest growing businesses in the industry. That investment went from being one which may not have returned our capital to a deal that became one of the best performing investments of the fund. And from the time I placed the right leader in the company to the time we sold it, I never had to talk to another bank about covenants or lose sleep about the company.
Hiring for attributes over experience has since become one of our hallmark decisions at Alpine. Without the constraint of industry experience, we have been able to recruit from a more diverse candidate pool. The expanded aperture has allowed us to attract world class individuals into our companies and our firm. Simply stated, who someone is matters more than where they’ve worked.
“Simple stated, who someone is matters more than where they’ve worked. ”
JP Flaum opened my eyes. Through these coaching calls, I realized, as the CEO of Alpine, my job was not talking banks into relaxing covenants, assuaging angry customers, or stopping founders from walking away from deals. My job was attracting and retaining world-class people and more importantly building a firm where the best people would want to work and spend their careers. I realized Alpine was not in the deal business. We were in the talent business. That realization has changed everything.
“I realized Alpine was not in the deal business. We were in the talent business. That realization has changed everything.”