Developing your leadership pipeline

Why do so many newly minted leaders fail so spectacularly? Part of the problem is that in many companies, succession planning is little more than creating a list of high-potential employees and the slots they might fill. It's a mechanical process that's too narrow and hidebound to uncover and correct skill gaps that can derail promising young executives. And it's completely divorced from organizational efforts to transform managers into leaders. Some companies, however, do succeed in building a steady, reliable pipeline of leadership talent by marrying succession planning with leadership development. Eli Lilly, Dow Chemical, Bank of America, and Sonoco Products have created long-term processes for managing the talent roster throughout their organizations--a process Conger and Fulmer call succession management. Drawing on the experiences of these best-practice organizations, the authors outline five rules for establishing a healthy succession management system: Focus on opportunities for development, identify linchpin positions, make the system transparent, measure progress regularly, and be flexible. In Eli Lilly's "action-learning" program, high-potential employees are given a strategic problem to solve so they can learn something of what it takes to be a general manager. The company--and most other best-practice organizations--also relies on Web-based succession management tools to demystify the succession process, and it makes employees themselves responsible for updating the information in their personnel files. Best-practice organizations also track various metrics that reveal whether the right people are moving into the right jobs at the right time, and they assess the strengths and weaknesses not only of individuals but of the entire group. These companies also expect to be tweaking their systems continually, making them easier to use and more responsive to the needs of the organization.     

The new road to the top

By comparing the top executives of 1980's Fortune 100 companies with the top brass of firms in the 2001 list, the authors have quantified a transformation that until now has been largely anecdotal. A dramatic shift in executive careers, and in executives themselves, has occurred over the past two decades. Today's Fortune 100 executives are younger, more of them are female, and fewer were educated at elite institutions. They're also making their way to the top more quickly. They're taking fewer jobs along the way, and they increasingly move from one company to the next as their careers unfold. In their wide-ranging analysis,the authors offer a number of insights. For one thing, it has become clear that there are huge advantages to working in a growing firm. For another, the firms that have been big for a long time still provide the most extensive training and development. They also offer relatively long promotion ladders--hence the common wisdom that these "academy companies" are great to have been from. While women were disproportionately scarce among the most senior ranks of executives in 2001, those who arrived got there faster and at a younger age than their male colleagues. Perhaps the career hurdles that women face had blocked all but the most highly qualified female managers, who then proceeded to rise quickly. In the future, a record of good P&L performance may become even more critical to getting hired and advancing in the largest companies. As a result, we may see a reversal of the usual flow of talent, which has been from the academy companies to smaller firms. It may be increasingly common for executives to develop records of performance in small companies, or even as entrepreneurs, and then seek positions in large corporations.     

Stop making plans; start making decisions

Many executives have grown skeptical of strategic planning. Is it any wonder? Despite all the time and energy that go into it, strategic planning most often acts as a barrier to good decision making and does little to influence strategy. Strategic planning fails because of two factors: It typically occurs annually, and it focuses on individual business units. As such, the process is completely at odds with the way executives actually make important strategy decisions, which are neither constrained by the calendar nor defined by unit boundaries. Thus, according to a survey of 156 large companies, senior executives often make strategic decisions outside the planning process, in an ad hoc fashion and without rigorous analysis or productive debate. But companies can fix the process if they attack its root problems. A few forward-looking firms have thrown out their calendar-driven, business-unit-focused planning procedures and replaced them with continuous, issues-focused decision making. In doing so, they rely on several basic principles: They separate, but integrate, decision making and plan making. They focus on a few key themes. And they structure strategy reviews to produce real decisions. When companies change the timing and focus of strategic planning, they also change the nature of senior management's discussions about strategy--from "review and approve" to "debate and decide," in which top executives actively think through every major decision and its implications for the company's performance and value. The authors have found that these companies make more than twice as many important strategic decisions per year as companies that follow the traditional planning model.     

How Corporate Diversity and Size Influence Spinoffs and Other Breakups

In recent months, the list of large diversified companies that have decided they would be worth more as several smaller, focused companies has grown sharply. In many of these cases, it has been outside pressure from activist investors that has motivated these actions by management—and with some pretty favorable results. But what is driving these strategic actions and what is most important in determining whether breakups create value? To answer this fundamental questions, it is critical to decide whether large, diversified companies have a value recognition problem or a value creation problem. In this article, the authors present and try to integrate the findings of two separate but related research studies on business diversity and size with the aim of identifying their implications for corporate strategy and helping company executives create more value for their investors. The specific reasons for underperformance by large diverse companies vary greatly, but there are a number of potential problems discussed in this article, including organizational “distance,” capital allocation, human capital allocation, cross subsidies, and ineffective governance. Instead of waiting for activist investors to demand a breakup, executives of large diverse companies should be proactive in addressing the potential weaknesses of their organizations. Private equity firms understand how to make diversification work and many of today's executives could learn some valuable lessons from these firms. Large diverse businesses should embrace “Internal Capitalism,” a corporate culture and set of practices that emphasizes the importance of strategic decision‐making that is linked through continuous performance assessment to the corporate goals of boosting efficiency and sustainable growth.     

Crisis communication. Lessons from 9/11

The sheer enormity of last year's terrorist attacks on the World Trade Center and the Pentagon gave new meaning to the term "crisis management." Suddenly, companies near Ground Zero, as well as those more than a thousand miles away, needed a plan. Because the disasters disrupted established channels not only between businesses and customers but between businesses and employees, internal crisis-communications strategies that could be quickly implemented became a key responsibility of top management. Without these strategies, employees' trauma and confusion might have immobilized their firms and set their customers adrift. In this article, executives from a range of industries talk about how their companies, including Morgan Stanley, Oppenheimer Funds, American Airlines, Verizon, the New York Times, Dell, and Starbucks, went about restoring operations and morale. From his interviews with these individuals, author and management professor Paul Argenti was able to distill a number of lessons, each of which, he says, may "serve as guideposts for any company facing a crisis that undermines its employees' composure, confidence, or concentration." His advice to senior executives includes: Maintain high levels of visibility, so that employees are certain of top management's command of the situation and concern; establish contingency communication channels and work sites; strive to keep employees focused on the business itself, because a sense of usefulness enhances morale and good morale enhances usefulness; and ensure that employees have absorbed the firm's values, which will guide them as they cope with the unpredictable. The most forward-thinking leaders realize that managing a crisis-communications program requires the same dedication and resources they give to other dimensions of their business. More important, they realize that their employees always come first.     

Talent management for the twenty-first century

Most firms have no formal programs for anticipating and fulfilling talent needs, relying on an increasingly expensive pool of outside candidates that has been shrinking since it was created from the white-collar layoffs of the 1980s. But the advice these companies are getting to solve the problem--institute large-scale internal development programs--is equally ineffective. Internal development was the norm back in the 1950s, and every management-development practice that seems novel today was routine in those years--from executive coaching to 360-degree feedback to job rotation to high-potential programs. However, the stable business environment and captive talent pipelines in which such practices were born no longer exist. It's time for a fundamentally new approach to talent management. Fortunately, companies already have such a model, one that has been well honed over decades to anticipate and meet demand in uncertain environments: supply chain management. Cappelli, a professor at the Wharton School, focuses on four practices in particular. First, companies should balance make-versus-buy decisions by using internal development programs to produce most--but not all--of the needed talent, filling in with outside hiring. Second, firms can reduce the risks in forecasting the demand for talent by sending smaller batches of candidates through more modularized training systems in much the same way manufacturers now employ components in just-in-time production lines. Third, companies can improve their returns on investment in development efforts by adopting novel cost-sharing programs. Fourth, they should seek to protect their investments by generating internal opportunities to encourage newly trained managers to stick with the firm. Taken together, these principles form the foundation for a new paradigm in talent management: a talent-on-demand system.     

Managing demographic risk

In developed nations, the workforce is aging rapidly. That trend has serious implications. Companies could face severe labor shortages in a few years as workers retire, taking critical knowledge with them. Businesses may also see productivity decline among older employees, especially in physically demanding jobs. The authors, partners at Boston Consulting Group, offer managers a systematic way to assess these dual threats--capacity risk and productivity risk--at their companies. It involves studying the age distribution of their employees to see if large percentages fall within high age brackets and then projecting--by location, unit, and job category--how the distribution will change over the next 15 years. Managers must also factor in both the impact of strategic moves on personnel needs and the future supply of workers in the market. When RWE Power analyzed its trends, the company learned that in 2018 almost 80% of its workers would be over 50. What's more, in certain critical areas its labor surplus was about to become a sizable shortfall. For instance, a shortage of specialized engineers would develop in the company just as their ranks in the job market thinned and competition to hire them intensified. Reversing its downsizing course, RWE Power took steps to increase its supply of workers in those key positions. The authors show how companies that face talent gaps, as RWE Power did, can close them through training, transfers, recruitment, retention, productivity improvements, and outsourcing. They also describe measures that companies can take to keep older workers productive, including workplace accommodations, revised compensation structures, performance incentives, and targeted health care management. The key is to identify and address potential problems early. Firms that do so will gain an edge on rivals that are still relentlessly focused on reducing head count.     

Gurus in the garage

Before the days of the Internet, it was primarily venture capitalists who coached young entrepreneurs in Silicon Valley. Today, because of the phenomenal number of new companies, venture capitalists are just too busy. The largest firms still take on a few carefully selected, highly promising zero-stage start-ups, but they simply can't spend the time on ones that aren't going to grow huge quickly. To fill the void, a new breed of adviser has stepped in to coach entrepreneurs. Called mentor capitalists, they help entrepreneurs with everything from recruiting top talent to attracting their first million in seed money. The mentor capitalists in Silicon Valley are cashed-out, highly successful business architects who no longer want to start businesses but who love the thrill of the entrepreneurial game. They spend hours and hours with first-time entrepreneurs, guiding them as they create and refine a business model, test their ideas in the marketplace, build business processes, raise money, and find talent. The authors of this article found through dozens of extensive interviews with entrepreneurs and their coaches that mentor capitalists play many roles: sculptor, psychologist, diplomat, kingmaker, talent magnet, process engineer, and rainmaker. In exchange for small equity stakes, the mentor capitalists wear these different hats, doling out expertise just in time, as situations arise, and in doses appropriate to the situation. Mentor capitalists seed Silicon Valley with expertise and knowledge, augmenting or even substituting for classes in entrepreneurship at local universities. But, as the authors note, the role of the mentor capitalist is essential to any start-up, anywhere.     

Justifying top management pay in a transitional economy

We investigate some aspects of top management pay in China's listed firms. We find positive pay and performance sensitivities and elasticities for top executives. In terms of magnitude, these sensitivities are similar to those reported in U.S. firms during the 1970s. However, the pay and performance relation is slightly weaker for firms located in less developed provinces. We also find that the pay disparities between top managers and employees are positively related to a firm's performance. Thus, it appears that any deviation away from a manager-worker compensation norm has to be justified by superior firm performance. In additional analyses, we find that managers' perquisites are not related to performance.     

Venture Capital in Canada: Lessons for Building (or Restoring) National Wealth

Canadian policymakers and regulators have been praised for avoiding many of the policy blunders that, when combined with excessive risk-taking by the banks, nearly brought down the U.S. financial sector. But, as the global economy begins to recover, policymakers everywhere need to find ways to stimulate the creation of new ventures.
On that score, Canada's record is not encouraging. The returns on Canadian venture capital investment have been dismally low, particularly in its government-run funds. In a recent survey, 40% of U.S. venture capital partners identified Canada as having the least favorable treatment of investors of any country they had dealings with. And perhaps most troubling, half of the Canadian corporate executives responding to another survey cited "inability to retain talent" as the biggest threat to their firms.
The authors begin by suggesting that these findings are all related. Without investors and the know-how and networks they bring with them, a country's ability to attract, develop, and retain top talent—business and managerial talent in particular—is significantly reduced. And as the authors go on to argue, the key to building a successful venture capital industry is to match talent with capital in such a way that all three parties—talent, capital providers, and the "matchmakers" who bring together talent and capital—are rewarded for superior performance and held accountable for failure.     

Stop wasting valuable time

Companies routinely squander their most precious resource--the time of their top executives. In the typical company, senior executives meet to discuss strategy for only three hours a month. And that time is poorly spent in diffuse discussions never even meant to result in any decision. The price of misused executive time is high. Delayed strategic decisions lead to overlooked waste and high costs, harmful cost reductions, missed new product and business development opportunities, and poor long-term investments. But a few deceptively simple changes in the way top management teams set agendas and structure team meetings can make an enormous difference in their effectiveness. Efficient companies use seven techniques to make the most of the time their top executives spend together. They keep strategy meetings separate from meetings focused on operations. They explore issues through written communications before they meet, so that meeting time is used solely for reaching decisions. In setting agendas, they rank the importance of each item according to its potential to create value for the company. They seek to get issues not only on, but also off, the agenda quickly, keeping to a clear implementation timetable. They make sure they have considered all viable alternatives before deciding a course of action. They use a common language and methodology for reaching decisions. And they insist that, once a decision is made, they stick to it--that there be no more debate or mere grudging compliance. Once leadership teams get the basics right, they can make more fundamental changes in the way they work together. Strategy making can be transformed from a series of fragmented and unproductive events into a streamlined, effective, and continuing management dialogue. In companies that have done this, management meetings aren't a necessary evil; they're a source of real competitive advantage.     

Confucian culture and the external pay gap

We examine the impact of Confucian philosophy on external pay gaps, and find that a Confucianist atmosphere is negatively associated with firms’ external pay gaps for both executives and employees. Mechanistically, the Confucian concept of “righteousness” reduces the self-interested motivation of management, in turn reducing executives’ external pay gap; “humaneness” causes management to focus on protecting employees’ rights and interests, benefiting employees’ compensation; and “honesty” improves information disclosure, reducing the external compensation gap for both executives and general employees. The inhibitory effect of Confucian culture on the external pay gap is greater in regions with weak formal institutions and non-state-owned firms, while foreign cultural shocks attenuate the Confucian influence. Finally, the Confucian culture-driven reduction of the external pay gap improves enterprises’ economic efficiency.     

Are leaders portable?

Does management talent transfer from one company to another? The market certainly seems to think so. Stock prices spike when companies announce new CEOs from a talent generator like General Electric. But how do these executives perform over the long term? The authors studied the careers of 20 former GE executives who went on to lead other major organizations, with strikingly uneven results. Even the best management talent, the authors found, is transferable only if it maps to the challenges of the new environment. More specifically, the authors identified five types of skills that may or may not transfer to a new job: general management human capital, or the skills to gather, cultivate, and deploy financial, technical, and human resources; strategic human capital, or individuals' expertise in cost cutting, growth, or cyclical markets; industry human capital, meaning the technical and regulatory knowledge unique to an industry; relationship human capital, or the extent to which a manager's effectiveness can be attributed to his or her experience working with colleagues or as part of a team; and company-specific human capital, or the knowledge about routines and procedures, corporate culture and informal structures, and systems and processes that are unique to a company. The GE executives' performance as CEOs depended on whether their new organizations were able to leverage each type of skill. The authors'findings challenge the conventional wisdom on human capital, which holds that there are two types of skill: general management, which is readily transferable, and company specific, which is not. In fact, they argue, other types of management capabilities can make a significant contribution to performance, and company-specific skills can be an asset in a new job.     

The Theory and Practice of Corporate Risk Management*

The financial crisis of 2008 and the resulting recession caught many companies unprepared and, in so doing, provided a stark reminder of the importance of effective risk management. While academic theory has long touted the benefits of risk management, companies have varied greatly in the ways and extent to which they put theory into practice. Drawing on a global survey of over 300 CFOs of non‐financial companies, the authors report that while most CFOs felt that their risk management programs have significant benefits, the risk management function in general needs more attention. A large percentage of the finance executives surveyed acknowledged that the most important corporate risks extend far beyond the CFO's direct reports, and that risk‐based thinking is not incorporated into everyday business activities or corporate strategies. A large majority of executives also said they were seeking a more widespread understanding of risk throughout their organizations—and many confessed their firms' inability, or lack of interest, in evaluating their own risk management functions. At the same time, the efforts of most companies to develop enterprise‐wide risk management (ERM) programs were said to fall well short of the comprehensive and highly coordinated programs envisioned by the proponents of such programs. Three areas of opportunity were clearly identified as having potential to improve corporate risk management in ways that increase firm value over an entire business cycle:

• ? Incorporate risk management thinking into the strategic planning process. Line executives, and not just technicians, need to be sensitive to risks, thereby building flexibility into the firm's business plan and its execution.
• ? Clearly define the objectives of the risk management function, in part by developing appropriate benchmarks. The risk management process should be subject to the same rigorous evaluation process that is used when measuring risks throughout the business.
• ? Instill a risk management culture throughout the organization. While an effective risk management function is necessary, only when employees at all levels of the company embrace risk management as part of their daily operations will the firm get maximum value from risk management.

     

Building a leadership brand

How do some firms produce a pipeline of consistently excellent managers? Instead of concentrating merely on strengthening the skills of individuals, these companies focus on building a broad organizational leadership capability. It's what Ulrich and Smallwood--cofounders of the RBL Group, a leadership development consultancy--call a leadership brand. Organizations with leadership brands take an "outside-in" approach to executive development. They begin with a clear statement of what they want to be known for by customers and then link it with a required set of management skills. The Lexus division of Toyota, for instance, translates its tagline--"The pursuit of perfection"--into an expectation that its leaders excel at managing quality processes. The slogan of Bon Secours Health System is "Good help to those in need." It demands that its managers balance business skills with compassion and caring. The outside-in approach helps firms build a reputation for high-quality leaders whom customers trust to deliver on the company's promises. In examining 150 companies with strong leadership capabilities, the authors found that the organizations follow five strategies. First, make sure managers master the basics of leadership--for example, setting strategy and grooming talent. Second, ensure that leaders internalize customers' high expectations. Third, incorporate customer feedback into evaluations of executives. Fourth, invest in programs that help managers hone the right skills, by tapping customers to participate in such programs. Finally, track the success of efforts to build leadership bench strength over the long-term. The result is outstanding management that persists even when individual executives leave. In fact, companies with the strongest leadership brands often become "leader feeders"--firms that regularly graduate leaders who go on to head other companies.     

Competing on talent analytics

Do investments in your employees actually affect workforce performance? Who are your top performers? How can you empower and motivate other employees to excel? Leading-edge companies such as Google, Best Buy, Procter & Gamble, and Sysco use sophisticated data-collection technology and analysis to answer these questions, leveraging a range of analytics to improve the way they attract and retain talent, connect their employee data to business performance, differentiate themselves from competitors, and more. The authors present the six key ways in which companies track, analyze, and use data about their people-ranging from a simple baseline of metrics to monitor the organization's overall health to custom modeling for predicting future head count depending on various "what if" scenarios. They go on to show that companies competing on talent analytics manage data and technology at an enterprise level, support what analytical leaders do, choose realistic targets for analysis, and hire analysts with strong interpersonal skills as well as broad expertise.     

Are the strategic stars aligned for your corporate brand?

In recent years, companies have increasingly seen the benefits of creating a corporate brand. Rather than spend marketing dollars on branding individual products, giants like Disney and Microsoft promote a single umbrella image that casts one glow over all their products. A company must align three interdependent elements--call them strategic stars--to create a strong corporate brand: vision, culture, and image. Aligning the stars takes concentrated managerial skill and will, the authors say, because each element is driven by a different constituency: management, employees, or stakeholders. To effectively build a corporate brand, executives must identify where their strategic stars fall out of line. The authors offer a series of diagnostic questions designed to reveal misalignments in corporate vision, culture, and image. The first set of questions looks for gaps between vision and culture; for example, when management establishes a vision that is too ambitious for the organization to implement. The second set addresses culture and image, uncovering possible gaps between the attitudes of employees and the perceptions of the outside world. The last set of questions explores the vision-image gap--is management taking the company in a direction that its stake-holders support? The authors discuss the benefits of a corporate brand, such as reducing marketing costs and building a sense of community among customers. But they also point to cases in which a corporate brand doesn't make sense--for instance, if you are a product incubator, if you've recently experienced M&A activity, or if you are expecting fallout from risky ventures.     

Growing talent as if your business depended on it

Traditionally, corporate boards have left leadership planning and development very much up to their CEOs and human resources departments-primarily because they don't perceive that a lack of leadership development in their companies poses the same kind of threat that accounting blunders or missed earnings do. That's a shortsighted view, the authors argue. Companies whose boards and senior executives fail to prioritize succession planning and leadership development end up experiencing a steady attrition in talent and becoming extremely vulnerable when they have to cope with inevitable upheavals- integrating an acquired company with a different operating style and culture, for instance, or reexamining basic operating assumptions when a competitor with a leaner cost structure emerges. Firms that haven't focused on their systems for building their bench strength will probably make wrong decisions in these situations. In this article, the authors explain what makes a successful leadership development program, based on their research over the past few years with companies in a range of industries. They describe how several forward-thinking companies (Tyson Foods, Starbucks, and Mellon Financial, in particular) are implementing smart, integrated, talent development initiatives. A leadership development program should not comprise stand-alone, ad hoc activities coordinated by the human resources department, the authors say. A company's leadership development processes should align with strategic priorities. From the board of directors on down, senior executives should be deeply involved in finding and growing talent, and line managers should be evaluated and promoted expressly for their contributions to the organization-wide effort. HR should be allowed to create development tools and facilitate their use, but the business units should take responsibility for development activities, and the board should ultimately oversee the whole system.     

非高管股权激励与企业创新:公平理论视角

股权激励管理办法允许上市公司通过股权激励计划对部分非高管员工进行股权激励,但设定激励对象等方面的有关规定对企业的影响却鲜有研究关注。本文从公平理论视角分析我国非高管员工股权激励对上市公司创新的影响,并依据中国上市公司股权激励计划与专利数据实证检验了非高管员工股权激励有效性假说与不公平假说。研究发现,总体上我国股权激励计划能够显著促进企业创新,但非激励员工因薪酬不公平而产生的消极行为在一定程度上削弱了股权激励计划的激励效果。具体而言,在国有控股上市公司以及激励与非激励员工收入差距小的上市公司中,非高管股权激励弱化企业创新的影响明显小于其他公司;而在非高管员工覆盖比例较高的公司中,非高管股权激励计划弱化企业创新的影响不存在。因此适当提高员工股权激励覆盖的范围可以减少激励员工与非激励员工之间因激励错配导致的薪酬不公平问题,有助于提升我国上市公司股权激励计划的创新激励效果。     

How to Tie Equity Compensation to Long-Term Results

Companies, investors, and regulators around the world are now seeking to tie executives' payoffs to long-term results and avoid rewarding executives for short-term gains. Focusing on equity-based compensation, the primary component of top executives' pay, the authors analyze how such compensation should best be structured to provide executives with incentives to focus on long-term value creation.
To improve the link between equity compensation and long-term results, the authors recommend that executives be prevented from unwinding their equity incentives for a significant time period after vesting. At the same time, however, the authors suggest that it would be counterproductive to require that executives hold their equity incentives until retirement, as some have proposed. Instead, the authors recommend that companies adopt a combination of "grant-based" and "aggregate" limitations on the unwinding of equity incentives.
Grant-based limitations would allow executives to unwind the equity incentives associated with a particular grant only gradually after vesting, according to a fixed, pre-specified schedule put in place at the time of the grant. Aggregate limitations on unwinding would prevent an executive from unloading more than a specified fraction of the executive's freely disposable equity incentives in any given year.
Finally, the authors emphasize the need for effective limitations on executives' use of hedging and derivative transactions that would weaken the connection between executive payoffs and long-term stock values that a well-designed equity arrangement should produce.