Assessing Management Capability Under Pressure
Part 2: The Lender’s Perspective – Control Without Chaos
The hardest question any lender faces when portfolio companies underperform is whether the current management team can navigate their way out of trouble.
This assessment matters more than almost any other factor in determining your approach. Back capable management through temporary difficulties, and you often see recovery that protects your position whilst strengthening the business. Continue supporting management that’s fundamentally mismatched to current challenges, and you risk deeper problems that require more dramatic intervention later.
The challenge is that assessing management capability during stress requires different skills from evaluating performance during good times. People behave differently under pressure. Some rise to the occasion, others crumble, and many fall somewhere in between. Standard references and track records become less useful when market conditions change or challenges exceed previous experience.
As a lender, you need frameworks for evaluating whether management has the specific capabilities required for current circumstances, not just general business competence.
The pressure test: How stress reveals capability
Business pressure acts like a stress test that reveals management strengths and weaknesses that might not be visible during normal operations.
Decision-making under uncertainty. During good times, many decisions can be delayed or refined endlessly. Under pressure, decision-making speed and quality become critical. Does management make decisions quickly enough to maintain operational momentum? Do they gather appropriate information without getting paralysed by analysis? Can they make calls with incomplete information when waiting isn’t an option?
Priority management when everything’s urgent. Pressure creates situations where multiple issues compete for attention simultaneously. Does management maintain clear prioritisation, or do they get pulled in all directions? Can they delegate appropriately, or do they try to handle everything personally? Do they protect time for strategic thinking, or get consumed by operational firefighting?
Communication during crisis. Stress changes how people communicate. Do they become more transparent or more defensive? Do they provide useful information that helps stakeholders make good decisions, or do they manage information to control perceptions? Can they maintain stakeholder confidence whilst being honest about challenges?
Learning and adaptation speed. When initial approaches don’t work, how quickly does management adjust? Do they persist with failing strategies hoping they’ll eventually work, or do they recognise when change is needed? Can they capture lessons from setbacks and apply them to future decisions?
Team leadership during difficulty. Pressure affects entire management teams, not just individual leaders. Does the team pull together or fragment under stress? Do they support each other’s decision-making, or start second-guessing and blaming? Can they maintain organisational confidence whilst addressing problems?
Reading management quality in real-time
Traditional management assessment relies on track records, references, and performance during stable periods. But when businesses are stressed, you need to evaluate real-time capability as it’s being demonstrated.
Problem diagnosis accuracy. When management explains what’s causing their problems, how accurate is their analysis? Do they focus on root causes or symptoms? Can they distinguish between problems they can control and external factors they must adapt to? Do their explanations make operational sense, or do they seem to be grasping for explanations?
Solution design capability. When they propose solutions, are they realistic given available resources and timeframes? Do they sequence changes appropriately, or try to implement everything simultaneously? Are solutions matched to the scale and nature of the problems, or do they seem generic?
Implementation track record during stress. Are they completing the initiatives they start? Are projects delivering expected results on realistic timelines? When implementation hits obstacles, do they adapt effectively or abandon efforts? Do they build on successes to create momentum?
Resource management during constraints. How effectively do they allocate limited resources (time, money, attention) across competing priorities? Do they make hard choices about what to stop doing, or try to maintain everything at reduced quality? Can they protect essential activities whilst cutting non-essential ones?
Stakeholder management during pressure. Are relationships with customers, suppliers, and staff improving or deteriorating? Do stakeholders express confidence in management’s handling of challenges, or are there signs of doubt? Can management maintain external support whilst implementing necessary changes?
The capability-challenge match
One of the most critical assessments is whether management capability is well-matched to current challenges. Capable managers can still struggle if challenges exceed their experience or skill set.
Challenge complexity assessment. Some problems are complicated (many moving parts but predictable solutions) while others are complex (unpredictable interactions requiring adaptive responses). Does current management have experience with the type of complexity they’re facing? Are they approaching complex problems with complicated-problem solutions?
Timeline pressure match. Different managers work effectively under different time pressures. Some thrive with urgent short-term challenges but struggle with longer-term capability building. Others excel at systematic improvement but struggle with crisis response. Is the timeline for required changes well-matched to management’s natural operating rhythm?
Skill set alignment. The skills required for recovery often differ from those that built initial success. Growth-oriented managers might struggle with efficiency and cost management. Operationally-focused managers might miss strategic opportunities. Does current management have the specific skills required for current challenges?
Experience relevance. Previous experience matters, but only if it’s relevant to current conditions. Has management successfully navigated similar challenges before? If not, are they learning quickly enough to develop required capabilities? Are they seeking appropriate external support when facing unfamiliar challenges?
Energy and motivation match. Different challenges require different types of energy and motivation. Some situations need entrepreneurial drive, others need systematic discipline. Is management energised by current challenges, or do they seem worn down by them? Do they frame challenges as opportunities or burdens?
Warning signs that suggest capability gaps
Certain patterns tend to indicate that management capability isn’t well-matched to current challenges, regardless of their general competence or previous success.
Repeated initiative failure. When multiple improvement efforts fail to deliver expected results, it often indicates either poor problem diagnosis or implementation capability gaps. One failure might be bad luck; multiple failures suggest systematic issues.
Blame pattern focus. While external factors certainly affect business performance, management that consistently focuses on external causes rather than internal solutions often struggles with recovery. Look for balance between acknowledging challenges and taking ownership of responses.
Analysis paralysis or action without analysis. Both extremes suggest capability gaps. Management that endlessly studies problems without taking action often lacks confidence in their judgment. Management that takes action without adequate analysis often lacks systematic problem-solving capability.
Communication inconsistency. When explanations change frequently, timelines shift repeatedly, or different team members provide conflicting information, it often indicates either confusion about what’s actually happening or coordination problems within the management team.
Resource allocation scatter. When resources (time, money, attention) are spread thinly across many initiatives rather than concentrated on vital few priorities, it suggests either inability to prioritise effectively or lack of confidence in specific solutions.
Stakeholder relationship deterioration. When relationships with customers, suppliers, staff, or other stakeholders worsen during recovery efforts, it often indicates that management approach is creating additional problems rather than solving existing ones.
Distinguishing between temporary stress and fundamental gaps
Not all management struggles indicate fundamental capability problems. Some are temporary responses to extraordinary pressure that resolve once situations stabilise.
Stress versus capability indicators. Temporary stress typically shows up as fatigue, shorter tempers, or delayed responses to non-urgent matters. Capability gaps show up as poor decision-making, inability to learn from mistakes, or consistently ineffective problem-solving approaches.
Support responsiveness. Management under temporary stress often responds well to appropriate support and guidance. Those with fundamental capability gaps may resist support, implement it ineffectively, or require constant direction to maintain progress.
Learning curve progression. When facing unfamiliar challenges, capable management typically shows improvement over time as they learn and adapt. Those with capability gaps often plateau or show inconsistent performance despite continued exposure to challenges.
Team confidence indicators. Teams working for temporarily stressed but capable management often maintain confidence in leadership despite current difficulties. Teams working for management with capability gaps often show signs of doubt, disengagement, or looking for external direction.
Recovery trajectory patterns. Temporary stress situations often show gradual improvement once appropriate support and time are provided. Fundamental capability gaps tend to create recurring problems or improvement that doesn’t sustain itself.
The intervention decision framework
Based on your capability assessment, different intervention approaches become appropriate.
High capability, temporary stress: Support and patience. When management demonstrates strong capability but is dealing with extraordinary circumstances, patient support often enables recovery. This might include covenant flexibility, additional resources, or access to specialized expertise.
High capability, unfamiliar challenges: Support with guidance. Capable management facing challenges outside their experience often benefits from external expertise or advisory support. They can typically integrate guidance effectively and build new capabilities quickly.
Moderate capability, moderate challenges: Structured support. Management with adequate but not exceptional capability might need more structured support through recovery. This could include operational oversight, regular check-ins, or specific expertise in key areas.
Moderate capability, severe challenges: Active intervention. When challenges exceed management capability significantly, more active intervention becomes necessary. This might include bringing in additional management resources, operational support, or restructuring management responsibilities.
Low capability, any significant challenges: Management change. When management capability is fundamentally mismatched to required challenges, management changes often become necessary to protect value and enable recovery.
Assessment without undermining
The challenge for lenders is conducting this assessment without undermining management authority or confidence. Excessive evaluation can become counterproductive by creating defensive responses or diverting management attention from operational issues.
Observation over interrogation. Much capability assessment can be done through careful observation of how management handles current responsibilities rather than formal evaluation processes. Watch how they conduct meetings, respond to unexpected issues, and interact with their teams.
Natural conversation opportunities. Regular lender-management interactions provide opportunities to assess capability through natural conversation rather than formal evaluation. Ask about decision-making processes, implementation experiences, and lessons learned from both successes and setbacks.
Third-party perspectives. Customers, suppliers, and other stakeholders often have valuable insights into management effectiveness. These perspectives can be gathered through informal conversation or relationship manager feedback rather than formal references.
Pattern recognition over individual incidents. Focus on patterns of behavior over time rather than individual decisions or outcomes. Capable management might make occasional poor decisions, but patterns of decision-making quality are more reliable indicators.
Constructive framing. When capability concerns emerge, frame discussions around support needs rather than competence evaluation. Ask “what additional resources or expertise would be most helpful?” rather than “do you have the skills to handle this?”
Building capability versus replacing management
Sometimes the choice isn’t between current management and replacement, but between building capability and accepting limitations.
Capability building opportunities. Some management teams can develop required capabilities with appropriate support, coaching, or additional expertise. This approach preserves relationships and institutional knowledge whilst addressing capability gaps.
Targeted reinforcement. Rather than replacing entire management teams, targeted additions in specific capability areas can address gaps whilst preserving existing strengths. This might include bringing in operational expertise, financial restructuring experience, or industry-specific knowledge.
Advisory support options. External advisory support can supplement management capability without replacing management authority. This provides needed expertise whilst allowing existing management to maintain ownership of decision-making.
Gradual transition approaches. When management changes become necessary, gradual transitions often work better than immediate replacement. This preserves business continuity whilst ensuring needed capabilities are in place.
The goal is matching capability to challenges in ways that protect lender interests whilst giving businesses the best chance of recovery. Sometimes this means patient support for capable management facing temporary difficulties. Sometimes it means active intervention to address capability gaps. The key is making this assessment accurately and implementing solutions that strengthen rather than weaken recovery prospects.
Next in the series: The Art of Intelligent Oversight – maintaining appropriate control whilst enabling recovery.
