It’s lonely at the top for a reason. The demands of today’s global business climate are such that individuals with the breadth and diversity of skills to lead an organization through cycles of often disruptive change and unprecedented competition are few. Companies across the world confront a genuine leadership crisis.
And as board directors appreciate all too well, those executives who do make it to the top are often only partially equipped for the challenges that await them. Annual CEO turnover across the globe has increased 53 percent since 1995, according to Booz & Co.’s annual study, cresting at 15.4 percent in 2005. Moreover, boards are removing CEOs at nearly three times the rate they were a decade ago. In 1995, forced turnover—cases in which CEOs were fired or pushed out—accounted for 1.1 percent of CEO succession events; in 2007, 4.2 percent of CEOs were dismissed. When you look more closely at the numbers, what’s interesting is the fact that more CEOs weren’t forced out for performance- related reasons.
For the first time, in 2008 Booz & Co. evaluated the stock-price performance over the past two years of all 2,500 public companies surveyed and found that extremely poor short-term results—the bottom 10 percent of absolute and relative (to market) stockprice performance—did not correlate strongly with CEO dismissal. In other words, boards are not firing CEOs who don’t deliver short-term results. The good news for new CEOs is that they now have more time in which to demonstrate results. The bad news lurking beneath, however, is that boards don’t have the option to unseat a poor-performing chief executive because there is no one ready and able to succeed him or her.
Our experience working with companies confirms what our research suggests: Companies around the globe are not adequately prepared for CEO succession because they have not developed a strong set of internal candidates ready to assume the mantle of leadership.
CEO Turnover Has Risen Over the Past 10 Years
Most companies today would reluctantly concede that their leadership bench is sparse. While they train people for functional excellence and management capability, they have not cracked the code on developing the leadership talent necessary to lead their companies through the turmoil of today’s hyper-competitive markets.
As a result, inside candidates rarely gain the skills or experience necessary to lead. For example, in functional organizations, insiders may never get access to the general management and operations experience necessary to be a future CEO. In organizations with a dominant incumbent CEO, candidates never get the chance to emerge from under his or her shadow and develop their own leadership capabilities. When the business then hits a strategic inflection point, one that requires a company to rethink its very fundamentals, there’s no one ready to step back with an objective eye and make those hard choices.
What should companies be doing in such scenarios? First, they can build an organizational architecture that provides an abundance of general management opportunities across small and large business units. They can give potential CEO successors assignments far from headquarters that allow them to emerge from the shadow of a “great oak” CEO. And they can create a strategic renewal capability within the organization by initiating ongoing strategic-change campaigns and charging prospective CEO candidates with running them.
But how do you get from here to there? How do you build this sort of institutional leadership development capability? Or, as is more often the case, how do you jump start the leadership-development activities already in place in your organization and align them into a coherent program?
Here’s how: First, perform a quick assessment of the current situation. Next, execute a program of short-term fixes—some in sequence, some in parallel. Finally, develop an institutionalized process of rapid and ongoing leadership development and training.
So, assess, repair, transform. That’s how to jump start what we call LEAP: Leadership Experience Acceleration Pathway.
Phase I: Assess
Start by interviewing key executives on the specific strengths and weaknesses of the leadership team viewed as a cohort.
Do you have enough leaders—individuals of high integrity with the breadth of industry insight, depth of company knowledge, and strategic and organizational skills to take the company to a new level of competitive success? Are leaders prepared for business conditions that depart dramatically from those of the past? Are leaders sufficiently objective and independent-minded to assess strategic business needs and the consequences of ignoring them? Is leadership development and mentoring valued in the executive assessment processes? Are outsiders successful in the company? Why or why not? Does the culture value constructive disagreements and different points of view?
Conduct a formal evaluation of the career-development processes that are already in place. You should focus on:
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Annual executive reviews Ensure these assessments are carried out by line executives supported by staff. Draw distinctions. Bland, generic feedback is useless; it must be specific, concrete, and actionable.
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Personal development plans Convert reviews into customized plans. Remediate weaknesses with targeted programs and assignments, as well as coaching. Identify and advance candidates that demonstrate high potential.
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Business plan tie-in Measure against plan, not only the business, but also the manager. Accountability is important, but be realistic. Don’t let someone off the hook, but don’t punish them for mistakes that are beyond their direct control.
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High potentials Avoid the temptation to treat everyone the same way. Prioritize the identification and accelerated growth of truly talented individuals. Get them into general management jobs as soon as possible.
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Metrics Extend your focus beyond the all-important bottom line. For example, how well has the individual being evaluated developed the skills and prospects of others?
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Compensation Align short- and long-term compensation with your strategy. In the end, people do what they are paid to do. Reward people when they commit and succeed. Withhold rewards and provide lots of coaching when performance slips.
As board directors looking specifically at CEO succession, you can quickly appreciate how important leadership development is to the succession planning process. What is the CEO and his/her team doing to cultivate a cadre of qualified candidates? How are individuals identified early in their careers and how are they groomed to lead?
The ideal CEO candidate is one who combines the cultural understanding and strong relationships of an insider with the objective perspective and willingness to change of an outsider.
The ideal CEO candidate is one who combines the cultural understanding and strong relationships of an insider with the objective perspective and willingness to change of an outsider. You don’t typically find this rare breed of person; you have to develop them. And the sort of system that cultivates winning candidates encourages diversity and constructive dissent. An organization that builds leaders views lateral moves as promotions, as that is the way managers develop the cross-functional experience and expertise to break silos and orchestrate many moving parts. In looking across your organization, you should be seeing developing talent in positions of responsibility and high-potential managers taking on strategic campaign initiatives designed to transform parts of the company.
Phase 2: Repair
The objective of the above assessment is to assess at-a-glance where the gaps and hurdles are in your leadership development model, so they can be addressed immediately. No organization has the luxury of time in repairing this fundamental capability.
Consider the following examples of what not to do. One well-regarded company we studied took the view that training was for operating managers only. Top executives were considered to be above that sort of exercise. Instead, executives modeled their behavior on that of the larger-than-life chairman. Promotions invariably went not only to those who performed well, but also to those who fit in. Not surprisingly, the company suffered from a dearth of strong, independent-minded potential leaders when the time came to consider succession.
At another company, we saw the consequences to leadership development of a culture that discouraged risk-taking. A high-potential executive of the company weighed the prospects of a new-product initiative and determined that the chances of success were 50/50. He suggested to his tough, numbers-oriented boss that, on balance, the potential benefits merited the risk. When the product failed to capture enough market interest, he was summarily fired. Within two years, this once successful company’s pipeline of new products was dry and, shortly after, the company was on the ropes. Executives had learned from their colleague’s example not to take risks.
Of course, we’ve also studied companies that have successfully “repaired” their leadership development program, recognizing its importance to the future of the organization.
One company, for example, had a reasonably good executive-development program in place, but the courses had long since become stale and attendance had become a ticket punch, rather than the price of admission to the executive team. A new CEO, recognizing the critical importance of leadership development, directed that the courses be revitalized as part of a multi-faceted leadership-development program that was tailored to the contemporary challenges facing the company. Not surprisingly, being selected to attend this program became a badge of honor and a key form of recognition for talent on the way up.
Phase 2 is all about dismantling the immediate barriers to success in leadership development, essentially removing those roadblocks that divert the career paths of promising candidates, often taking them to other companies. In this phase, you are focused on quick fixes. You want to remove, or at least sideline, the curmudgeon blocking the progress of promising talent. Meanwhile, you need to flag the high-potential employees and ensure they receive active mentoring and high-visibility assignments and recognition.
A quick way to assess your talent development is to compare its degree of alignment with the budgeting and strategic planning processes. Is your money where your mouth is, not only in terms of rewarding performance, but in terms of developing those executive skills that will deliver desired results? The annual process of strategic planning and budgeting is, in many respects, the ultimate schoolroom for learning the leadership trade.
Phase 3: LEAP
The exercise just discussed marks the beginning of the process to embed leadership development into the performance culture of your company. But to institutionalize that capability, you need to overhaul the company’s leadership-development engine. You need to take a giant leap forward and build a Leadership Experience Acceleration Pathway.
In our experience, most companies have stalled in their efforts to build future leaders. They know how to train managers— individuals who can run and fix a business—but they are less adept at building leaders. Most corporate career-development programs emphasize the skills necessary to deliver reliable and accountable short- to medium-term results. They are good at producing a set of middle managers who know how to optimize administrative efficiency, oversee operational improvement, and monitor and adjust all of the details of the business on a day-today basis.
What these companies lack is the inherent capability to grow great leaders—individuals who can sense environmental change and shift the entire organization’s direction to capitalize on it. Leaders do not incrementally adjust; they drive transformation. They empower and engage the organization to deliver on a vision they alone are able to articulate. These rare individuals set the course and culture of the enterprise.
To jump start your company’s leadership engine, the organization architecture (see chart, opposite) needs to feature the following leadership-development processes and make them a corporate priority: Recruiting, Career Progression, Planning and Budgeting, Evaluation and Feedback, and Campaign Leadership.
Levers in Developing Future Leaders
Recruiting should emphasize the longterm leadership needs of the company, not immediate gaps. Diversity of thought is key and leads to “creative abrasion,” a mix of opinions and styles that creates innovative problem-solving without descending into open conflict or inbreeding.
Career progression should include lateral as well as upward promotions to develop a cadre of leaders who are well-versed in all aspects of the enterprise. Moreover, candidates should rotate through corporate, functional, and business-unit assignments.
Planning and budgeting should serve as a mirror to talent development. In other words, the two processes should be fully aligned, so that what is measured truly matters.
Campaign leadership is where future CEOs are forged. Business transformation initiatives change the way value is created, so they are a true test of an insider’s ability to see beyond the current business model and drive change. They are a leadership laboratory for up-and-coming executives, requiring them to adopt a market-oriented strategic perspective that will prove invaluable in preparing their organizations for step-by-step change.
What ends in the boardroom with CEO succession discussions begins in the yearly planning and budgeting discussions of the company. Leadership development is not an event; it is a process. A CEO’s dismissal or retirement should not provoke the spontaneous creation of a capability that takes years to master.
How you manage leadership development is a reflection of how you manage your company. A top executive’s job in today’s competitive and fast-changing global markets is a daunting challenge. He or she must hone their ability to work within the system, while retaining the ability to challenge the status quo. Companies need to learn how to identify emerging talent in far-flung locations and then cultivate these individuals by providing them with challenging assignments that span the gamut.
Executive talent management is no longer relegated to HR conferences. It is a boardroom agenda item and will define how and how well companies compete for years to come. Editor’s Note: Booz & Co. has analyzed annual CEO turnover at the 2,500 largest public companies in the world for more than 10 years, specifically 1995, 1998 and 2000 through 2007. The 2008 report, “CEO Succession 2007: The Performance Paradox,” was based on 2007 data. This year’s 2009 report, based on 2008 data, will be made available at www.directorship. com/CEOsuccession once it is published in May.
Editor’s note: Booz & Co. has analyzed annual CEO turnover at the 2,500 largest public companies in the world for more than 10 years, specifically 1995, 1998 and 2000 through 2007. The 2008 report, “CEO Succession 2007: The Performance Paradox,” was based on 2007 data.
This year’s 2009 report, based on 2008 data, will be made available at www.directorship.com/CEOSuccession once it is published in May.