Detailed Overview
Evaluating Management Effectiveness Overview
This program integrates traditional credit analysis with an assessment of management decision-making. Participants learn to search for the cause/effect links between business decisions and financial performance. They also become more astute observers of the business risk factors that drive management decisions. Participants learn specific management interviewing tools, practiced during the seminar day, that will be used on the job to assess the quality of management decision-making.
Program Outline
Welcome and Introduction
Instructor and participants begin with introductions and a fifteen-minute discussion of the participants’ impressions of the meaning of the term management. The instructor concludes this discussion by presenting the Pyramid of Management Effectiveness, an evaluation template that helps participants evaluate a borrower’s management track record in making decisions in three very broad but key categories:
- Market Assessment and Decisions
- Product Decisions
- Resource Decisions
Within these key decision areas, participants learn to assess management effectiveness at three levels:
Level One
Managers operating at Level One see and understand their business and market at a basic, informational level. For example, a company whose management is at a Level One understanding of its competition can describe competitors in terms of basic market facts-how many, their names, and an informed assessment of who seems to have the largest share(s) of customers.
Level Two
Level Two managers understand the cause and effect of business success. For example, managers with a Level Two understanding of competition not only demonstrate knowledge of Level One’s basic market facts, but also can describe reasons for competitors’ successes. These managers can not only name the top companies in their market, they can also explain how and why these competitors are successful. In addition, they can identify and describe specific skills and strategies that separate the strongest competitors from their own company.
Level Three
Company managers at Level Three identify and implement specific steps to success. In the Market Assessment example, they take their knowledge of the traits of successful competitors and use that information to develop a plan to meet or exceed competitor performance. The plan may not be formal or even committed to paper, but through observation and interview, lenders can recognize that these managers have translated their Level Two understanding of cause and effect into a road map for future success.
Assessing Key Management Decision-Making—Levels 1, 2, & 3
Participants learn to use the Pyramid of Management Effectiveness to begin measuring a borrower’s strengths and weaknesses, including an exercise that has the participants thinking about a well-known consumer products company in terms of its apparent approach to resolving market and competitive issues.
The Cultural Foundations of Success
Participants learn how to look for signals that a company’s managers have begun to install a culture of success in the business. Using a model developed by turnaround experts, participants learn to explore how four cultural foundations may contribute to a borrower’s enduring ability to succeed: empower employees, revere customers, relentlessly pursue productivity, and identify and dominate a market microniche. Participants draw from their knowledge of companies in their portfolios and as consumers to identify examples of businesses whose management strengths have been instilled into their company cultures.
Management Methods and Integrity
Participants learn to assess the development of a management team’s governance and decision-making approaches, and they discuss the implication of ethics in the credit underwriting. They also explore the tool of a criminal background investigation as a means of formally checking for integrity issues with new prospects.
Case Study Part 1
Participants begin work on a substantial case study that features significant information about a borrower’s market and competition, its range of product choices, and its range of resource choices. The objective of the first exercise with this borrower is to “digest” the significant information available-which mirrors information that might reasonably be collected by a relationship manager over a series of three to four meetings-about the three qualitative factors they have been discussing. Participants are required to synthesize the information and begin identifying potential difficulties the company’s management may encounter, as well as to formulate specific questions they need to ask of management to help assess the borrower’s own understanding of these risks. Minimal financial information is provided, to keep the participants’ focus on qualitative issues.
Case Study Part 2
Participants continue to work with the case study. They receive detailed financial information about the borrower’s most recent four-year history, as well as a scenario that suggests the borrower’s management will need to make important strategic decisions. Participants discuss and evaluate the range of alternatives facing the borrower and identify the path they feel management would most likely choose. They use questioning techniques learned earlier in the day to interview company “management” (played by the instructor), and apply the Pyramid of Management Effectiveness, assessing the degree of management risk they believe will influence repayment of the case study loan request.
The instructor leverages dissenting interpretations of management to support a wrap-up discussion of how a lender’s understanding and interpretation of management ability can and should play a significant role in the underwriting decision.
Discussing “Management” in the Write-Up
Participants learn key pointers for writing a concise discussion of management risk in the underwriting memorandum. They then work in small groups to develop a concise statement of the most important management risks discovered in the earlier case study discussion. The module ends with a discussion of how to use the Pyramid of Management Effectiveness to identify the most significant elements of management risk, and how to use the 3-level assessment scale to help translate lender intuition about a management team into a focused, written discussion of risk.
Course Summary
The program ends with a brief review of concepts learned and quick discussion of how to put the new skills into practice on the job.
Audience
This course is designed for lenders who wish to develop the credit skill of assessing management performance and potential.
Objectives
This course enables participants to:
- Understand the three key categories in which we measure management effectiveness.
- Understand how to analyze a management team’s market, product, and resource decisions in terms of their impact on financial performance and repayment ability.
- Conduct management interviews designed to reveal management strengths and weaknesses in the three key management categories.
- Apply concepts learned and practice management interviews through a case study exercise.
To Learn More
If you’d like to give your lenders a framework for analyzing management effectiveness, provide them with a template for evaluating and articulating management risk in the credit approval process, and systematize your bank’s approach to management assessment, either send us an E-mail or call us at 616-399-8036. We’ll be happy to discuss customizing an on site course and help you improve your lenders’ underwriting skills.
