Identifying top talent - back to basics, it's not rocket science!

Succession planning and selection - the costs of getting it wrong!

© Douglas Prior May 2015

McKinsey in its report ‘The War for Talent’ highlighted the scramble for and increasing importance of talent as long ago as 1997.  Talent, succession planning, and sound selection to key jobs has continued to be a critical area especially for large organisations.  The area has been at the top of the list of priorities, but few companies have been satisfied with their succession performance. 

KPMG research¹ in November 2014 revealed that “churn” (the percentage replaced in a year) among FTSE 100 CEOs was 23 percent in 2013/14, up from 14 % the previous year and the highest since before the 2008/9 financial crisis began.  For FTSE 100 FDs, the turnover in 2013/14 was somewhat higher: 24 % up from 13 % in the previous year.  Furthermore, over half of the board rooms in the FTSE 100 experienced at least one change of executive director, representing the highest proportion in the last five years.

Strategy& (formerly known as Booz & Company) have conducted for the last 15 years an annual report of the comings and goings of CEOs at the world’s top 2,500 public companies. Their 2014 report², The value of getting CEO succession right, considered that the rotation rate was speeding up and that the average tenure period was shortening. It showed that CEO departures were up on the five-year average of 13.9%. Some 70% of the changes at the top were planned; the remaining 30% resulted either from the CEO being forced out or from M&A activity.

Any change at the top will affect company performance. Strategy& calculated the median shareholder return at companies undergoing a planned change of CEOs fell to -3.5 percent (relative to the indexes on which companies trade) in the year after the change. Whereas for companies forced into appointing a new CEO, the drop in median shareholder returns was more severe: a fall to -13 percent in the year leading up to the CEO change, and -0.6 percent in the year after. It estimated that where CEOs were forced to leave the cost to each company was an average $1.8 billion loss of shareholder value.

It is disturbing that 30% of changes at the top related to CEOs being forced to leave or from M&A action, and that there was such a large loss of shareholder value. It seems likely that for one reason or another the succession planning processes and the mechanisms for selecting the CEOs in these companies were not working well. However, even those companies appointing their CEO from within as a planned succession are open to criticism. Rejchrt and Higgs (2014)³ argue that the majority of FTSE 350 CEOs were recruited internally on the basis of “similarity-attraction” to the detriment of the company's strategy. In other words, boards appeared risk-averse and sought to appoint successor CEOs on the basis of similar age profiles, values, and social characteristics, and the comfort of selecting largely in their own image and perhaps with a “better the devil you know” approach.  

Is greater sophistication needed?

Best practice and the psychological fundamentals of sound selection and effective succession planning have remained exactly the same for a long time. Putting the principles in place is not rocket science, but it does require clear thinking and a systematic approach.

The Peter Principle and succession plans

Too often executives believe that an individual is promotable simply because he/she is good at his/her job.  They ignore the Peter Principle!  They fail to understand why individuals often rise to their level of incompetence!  

Individuals get over-promoted by being judged by their immediate manager as good performers in their current job.  However, individuals performing well at their current level does not mean that they will be successful in a more senior role where different qualities, skills, and standards are required for acceptable performance.  For example, a good salesperson does not necessarily make a good sales manager where managerial rather than sales skills are at a premium. In other words, even though sales skills might be necessary in a sales manager they are not sufficient for managerial success.

Invariably, the views of the immediate line managers forms the basis of succession plans or nomination to a shortlist.  Given the Peter Principle, the manager’s boss – the so-called ‘grandparent’ – is in a far better position to judge accurately potential and ‘promotability’ as they know what is truly needed for superior performance at the higher level.  Sometimes in larger organisations, for more accurate decisions, executives who are even more senior – ‘great grandparents’ – may need to make the judgement call.

The need for a crystal ball

As change is a constant feature, we know that for survival and ongoing success businesses need to look ahead and, as appropriate, change their business model and strategy.  Therefore, in terms of appointments and succession, senior executives need to realise that what is needed in the future is most likely to be different from what was important and valued in the past. However, they may be comfortable with the way in which things have been done previously and familiar with the style and characteristics of executives who have performed well, and therefore not willing to consider fully the qualities and perhaps the novel thinking required for the future. It is easier for them to look backwards, go with the known, and with what has hitherto worked well.

Identifying the leadership skill set needed to steer a company in the years ahead is not easy, but it is essential to look forward and select the most suitable candidate(s) for the future.  As there is never actually a crystal ball to provide 20/20 foresight, time is usually needed to enable the leadership team to consider strategy, business trends, and emerging economic and political patterns to arrive at the qualities and skills needed in the years ahead.

Understanding leadership qualities

Companies understand that “leadership” at the top is concerned with being strategic, visionary, transformational, and inspirational, and know that “senior management” abilities, such as, performance orientation and customer/client focus remain vital, but identifying and defining specific crucial leadership qualities for the road ahead is usually a challenge. Each company’s circumstances and situation is likely to be unique; so there are no easy “one size fits all” standard solution. Amongst other qualities, entrepreneurialism, strategic thinking, cross cultural sensitivity and impact, analytical power, and ambassadorial skills can, at the top, be differentiating factors.    

Sound judgement and selection decision making

Once the leadership qualities for future CEOs or MDs are agreed and defined in operational terms, the next step is evaluating the capabilities of internal and/or external candidates and deciding on the most suitable person.

With internal candidates there is the danger of a decision being made or recommended on the basis of “similarity-attraction” as implied by Rejchrt and Higgs³. The risk is compounded by the use of a typical interview where the interviewers tend to ask about and focus on issues and problems that reflect common ground, shared values, and predispositions. This type of information can reinforce their attraction to candidates who reflect their own image and who are very much like themselves.

With a board decision there is also the problem that a consensus can represent a “group shift to risk”. Several executives together can make a combined, unanimous decision which is far more risky than individual decisions where each person is held individually accountable. It seems that individuals are happy to “shelter” behind a group decision, but that each person would back away from making the same decision on his/her own. 

It seems that if asked we all believe we are good judges of people. Senior executives are no exception. Some “macho” types, can act as if they are the best ever judge of people and have never made a bad selection decision or judgement errors!  The use of structured interviews can overcome these difficulties by providing the basis for sound, unbiased decision making for either internal or external candidates. A well-constructed structured interview will elicit behavioural evidence against the defined qualities that represent the criteria for selection, and research has shown that structured interviews are more accurate in assessing capabilities than a typical interview.    

Whilst structured interviews will compare and contrast candidates accurately, these days psychometric evaluations are often used to give additional useful information.  One interestingly popular and useful questionnaire examines the “dark side” of an individual’s personality which paradoxically are generally considered desirable attributes.  These characteristics under normal conditions are genuine leadership strengths that help promote success, but under certain conditions they can flip into a destructive mode if not managed well.  When the individual is under pressure, otherwise distracted or when his/her social guard is dropped, the characteristics can become exaggerated and risk leading to behaviour that can impede effectiveness, erode trust and undermine work relationships.  These risk factors are known to “de-rail” executives. For example, a “diligent” individual, known as being organised, hard-working and conscientious, can in some circumstances become a “perfectionist” and hard to please, unwilling to delegate or ‘let-go’, and demanding every task should be done equally well and to exacting high standards.

Insights into an executive’s psychological characteristics can help the executive manage his/her relationships better, but they also provide the boss/HR/mentors/coaches with valuable information which can be used to help guide the individual and improve contribution and performance. Furthermore, as it is rare to find a candidate who perfectly fits the specification, psychometrics can help by considering the balance of the top team and the need to insert/recruit individuals with complementary skills.

High flyers and the leadership pipeline

Talent management is not an exact science. Typically individuals with high potential emerge with a track record of success, attributable achievements, and speed of career progression. They will appear on the radar and will then be tracked by talent managers and line managers seeking able individuals with high potential. Often such individuals progress upwards by moving between organisations or by moving between different parts of one organisation.  They may stand out by looking for or applying for challenging opportunities. To realise potential they need to gain a variety of relevant experience and associated achievements, but this is not something that can be readily planned or “stage- managed” by a company or by an individual. Maybe luck comes into play at this stage!

Once a high flyer is identified by an organisation, especially a large one, he/she is likely to be placed on training and development programmes, possibly sent to business school, and be the subject of succession plans.  

Other than continued superior performance and achievement orientation, key indicators of high flyers at an early stage are likely to include:

o   successfully supervising more junior staff;

o   understanding the value of the informal organisation;

o   networking internally and externally; and

o   demonstrating an ‘internal locus of control’ whereby he/she tends to set his/her own agenda and does what he/she thinks is appropriate.   

At a later stage individuals with potential will be able to, inter alia:

o   successfully manage managers;

o   deal effectively with tactical matters and handle cross functional issues well; 

o   work within corporate politics and manage upwards; and

o   understand the nature of authority and leadership, and not rely on ‘power’ derived from a position to get things done.

Subsequently as they move towards the top, the star players will amongst other things:  

o   have had bottom line accountability for a substantial autonomous business unit; 

o   successfully earned the authority to lead and decide on the way ahead;

o   managed strategic issues within a division or a business unit, successfully communicated a vision of the future, and conducted effective “town hall” / Q&A types of meetings with managers and staff;

o   handled strategy across divisions or business units;

o   shown, at least in nascent form, the specific leadership competencies identified as being relevant at top level to the particular organisation; and

o   run a cluster of business units well before becoming a CEO.    

Catch 22 – open or confidential succession plans?

This is a dilemma.  Telling an individual that he/she represents promising talent and is part of a succession plan risks some very difficult dynamics, e.g., “why don’t you promote me now”, the person may decide to “lord” it over others, or just “sit back” and wait!  However, not saying anything may risk losing talent to other organisations.

Most organisations do keep their plans confidential and rely on retaining their talent by placing a high value on professional development, strong on-the-job development, stretching projects within the job, quick as possible progression, and most importantly, performance management processes and rewards geared to both business results and effective people management. 

Given the Catch 22 of secret succession plans, there will remain a precarious “cat and mouse” game with the organisation not declaring its hand, but hoping to keep its talent; and the individual wondering if his/her contribution and brand is valued by the organisation and whether or not to stay, or to use his/her “marketability” to move to another organisation.

Conclusions

With the level of “churn” and the number of CEOs forced from post, talent management and succession planning will remain at the top of the list of priorities, especially for large organisations under the gaze of City analysts who look to ensure the continuity of top management/CEO leadership.  

Identifying top talent requires putting fundamental principles in place, some clear thinking, and a systematic approach, but it is not rocket science!

Recognising young high flyers, developing them as part of a succession plan, and retaining them will continue to be important, but the careful selection of CEOs should increase their tenure and reduce the number of forced departures. © Douglas Prior May 2015

Liveryman Doug Prior

Chartered Psychologist & Director, Advanced Corporate Insights Ltd

28 May 2015

References

¹ KPMG’s Guide to Directors’ Remuneration 2014

² Strategy& and PwC (2015) The 2014 Study of CEOs, Governance, and Success The value of getting CEO succession right

³ Peter Rejchrt & Malcolm Higgs (2014) Who are our leaders? A study of CEO succession in the UK FTSE 350 companies. Journal of General Management Vol. 39 No. 3 Spring 2014