Developing and Evaluating Leaders
2.3 Developing and Evaluating Leaders Studies have shown that there are considerable advantages to devel- oping leaders internally instead of hiring from outside (Brant, Dooley, & Iman, 2008). While the talent pool of applicants can be impres- sive, external hires for leadership positions often fail. By the end of five years, two-thirds have failed. By contrast, the leaders of 10 out of 11 “good-to-great” companies studied by Collins in his book of the same name came from inside the company. The companies he exam- ined in comparison turned to out- siders six times as often yet failed to produce sustained great results.
In addition to having a higher risk of failure, recruiting external can- didates for leadership positions is more costly. Direct costs include search fees, interview costs, signing bonuses, relocation, and severance packages among others. By contrast, internal-development costs are far lower, com- prising training, education, program administration, and relocation costs involved with rotating assignments.
Finally, an organization that practices internal promotion is more likely to retain high-potential talent. Executive retention is positively correlated with formalized succession programs. In compa- nies having an executive turnover rate of 1–5% annually, 84% had formal development programs. At those companies reporting turnover rates of 6–10%, 24% had succession programs. Of busi- nesses experiencing turnover rates of 11–20%, only 11% had succession programs.
Developing the next generation of leaders is one of the most difficult challenges for a company. Companies committed to promoting from within can take certain measures to increase the pros- pects of success (Allio, 2009). First, they must have a good talent pool, which means hiring people with leadership potential in the first place. The organization must have a leadership-developmental
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There are considerable advantages derived from developing lead- ers internally. Hiring a candidate externally can often come at a higher cost than promoting internally.
Discussion Questions 1. Managers are often promoted to more senior positions with substantial leadership mandates.
What problems might they encounter in their first year in the new position? 2. Do you have what it takes to be a Level 5 leader? Why or why not? 3. Recount an experience you may have had that leads you to believe that you have leadership
potential. 4. What do you think a company should do to develop potential leaders when it has no budget for it?
CHAPTER 2Section 2.3 Developing and Evaluating Leaders
program that intentionally puts these people in challenging situations and as members of cross- functional teams. A good development program obtains feedback about them and their perfor- mance from those that see them in action (Fulmer, Stumpf, & Bleak, 2009). For example, GE is known for its strong entry-level leadership development, which offers experience in communica- tions, engineering, finance, information technology, manufacturing/operations, sales/marketing, as well as a range of programs specific to GE’s various brands (GE, n.d.).
While there are clear advantages to promoting from within and signaling to current managers that the career path in the company goes right to the top, there are circumstances in which hiring a CEO from outside makes more sense. For instance, there are occasions when a business requires a transformational leader to shake up a structured, risk-averse enterprise, as was the case with aerospace conglomerate Allied-Signal, or to revitalize a company by taking it in a completely dif- ferent direction as IBM recruited Louis Gerstner to do.
Hiring People with Leadership Potential Multinational producer of polymer products W. L. Gore & Associates valued people who showed initiative and leadership and were team players. To select suitable candidates it employed a novel recruiting system. Applicants for a job came to the company expecting to undergo several interviews before being selected or turned down. Instead, they were told on arrival to “look around.” Those who were nonplussed, kept looking at the clock, and asking who was going to interview them were shown the door. Others who were curious and got up to walk around and see what was happening, then offered to help and rolled up their sleeves, were immediately hired (Hamel & Breen, 2007).
Hiring future leaders is not as easy as it sounds. Imagine you are interviewing someone for a middle-management job, such as a project manager. The person could be very well qualified for the position, but how do you assess his or her leadership potential? There are a few things that almost every employer looks for in an applicant when recruiting potential leaders.
An obvious indicator is experiences in the applicant’s resume where he or she made a difference. As important to having achieved something tangible is the way it was accomplished, such as taking initiative, leading a group, or otherwise demonstrating leadership qualities. References can pro- vide information about the extent to which the person was assigned to do something important and delivered results that met or surpassed expectations. They can also reveal whether team- mates would work with that person again. In other words, a reference is a source that can help ascertain if the candidate has a record of successfully completing assignments and being unafraid to take on more challenging ones. During the formal interview, some employers put applicants into various calculated situations to see how they would respond. Such “mock simulations” can be very revealing. Finally, following the old adage, “it takes one to know one,” several people currently in leadership roles should interview the applicant to provide a balanced and complete picture before actually hiring the person. Allio advises that candidates for future leaders possess three attributes: (1) motivation and a need to achieve, (2) attitude and the ability to inspire, to evince optimism in the face of adversity, and (3) morality—the possession of positive values and benevolent motives (Allio, 2009).
By no means should all hiring decisions take into account leadership potential. Some people, as a result of their temperament, interests, and experience, are more interested in playing a support- ing role on the team; they lack the motivation or even interest to lead. There are many roles within
CHAPTER 2Section 2.3 Developing and Evaluating Leaders
an organization that do not require leadership competency. One important purpose of recruiting, however, is to keep the potential-leadership pipeline full.
Developing Leaders Good leadership depends primarily on what leaders do; thus, it is imperative that managers with leadership aspirations find ways to demonstrate their leadership abilities and actually practice what they’ve read in books. No amount of listening to lectures or attending leadership courses can realistically be expected to transform people into leaders. The only way to do so, it would appear, is to create opportunities in which people can practice being leaders.
Effective Leadership Development Some companies know how to develop leaders. General Electric Co. (GE) has for years been con- sidered one of the best incubators of leadership talent because its alumni have gone on to lead many other companies. The first step is to develop a short list of individuals with the most poten- tial as future leaders. Their development is then carefully monitored as they are given one chal- lenging assignment after another. Each assignment is documented (including team composition, objectives, timeframe, and budget) and formal feedback sought from group members and others that might have interacted with the group. The feedback is then examined and discussed with the individual, with special emphasis on what was done well and lessons learned. Because of this kind of attention to detail and the number of individuals involved, leadership development is managed as a program, with an experienced manager in charge. Individuals who build on their experience in this way and increase their stature with the organization become automatic candidates for senior- management positions as they open up.
In another example, Nike implemented Kouzes and Posner’s Leadership Challenge (Kouzes & Pos- ner, 2008) to develop senior managers for the apparel side of its business. This model involves modeling behavior, inspiring a shared vision, challenging the current process, enabling and empowering others, and encouraging the “human” aspects of leadership (such as celebrating community and recognizing individual accomplishments).
There are two more ways to develop leaders that complement a formal development program: Current leaders should be careful to model the behavior they expect potential leaders to emulate. Potential leaders should try to find a mentor, either in the same company or outside it, to help their development. Following model examples and having a mentor are immeasurably useful but are often overlooked aids to leadership development.
Leadership-Development Pitfalls Not all leadership-development programs produce desired results. According to Douglas A. Ready, a researcher on leadership-development efforts, organizations that experience difficulties imple- menting a successful development program or fail entirely manifest three “pathologies” (Ready & Conger, 2003).
Some companies display a control, ownership, and power mentality. This is characterized by a reluc- tance of those in positions of authority to give up control, to relinquish ownership of resources, or
CHAPTER 2Section 2.3 Developing and Evaluating Leaders
to share information. Identifying potential candidates and the right opportunities to develop them is seen by these kinds of managers as threatening, especially in large, complex organizations. This leads to reluctant or even zero cooperation with leadership-development programs.
Another pitfall is the “productization” of leadership development. This means creating a new pro- gram based on the latest management fad or the magical new offering promoted by a management- consulting firm, without regard to whether it has anything to do with the corporation’s strategy or future needs. To make matters worse, in tough economic times the leadership-development program is viewed as a cost and often curtailed. Over time, the disjointed efforts produce nothing of value.
Some organizations make the mistake of applying the wrong metrics. When the human-resources department promises an increased ability to deliver leadership-development programs at lower- than-expected costs, perhaps by using more e-learning technologies and new methodologies, the touted results sound impressive. In this situation it’s likely that the right questions aren’t being asked. Measuring the value of a leadership-development program needs metrics that can provide answers to questions such as, “Are we better able to fill key jobs when they arise?” “To what extent are potential leaders knowledgeable about and committed to our strategic direction?” Short-term savings may have long-term costs.
Evaluating Leaders and Succession Planning It’s evident that the most common measure to judge the effectiveness of leadership for a corporation, and in particular the CEO, is the company’s performance. Measures include beating its revenue and NIAT fore- casts and achieving an increase in the corporation’s stock price. How do we know this? The CEO’s compen- sation package is designed to motivate achieving such performance for the corporation. Raises and bonuses are awarded only when the corporation performs at levels that meet or exceed expectations. Performance objectives and incentives are specified in the contract when the CEO is hired.
A recent case confirms the above measures and also illustrates the fragility of using such measures. In 2010, CBS Corporation’s CEO Leslie Moonves received a total compensation package worth an extraordinary $57.7 million. Beyond his base salary of $3.5 million, he was awarded a $27.5 million bonus and nearly $23 million in stock and option awards. The company also provided an additional $3.4 million for his pension fund and reim- bursement for taxes paid in New York. CBS justified the nearly 34% increase in compensation from 2009 say- ing that Moonves’s leadership resulted in extraordinary
growth in shareholder value and outpaced both the industry and the company’s internal targets. CBS’s share price nearly doubled during 2010, and its revenue climbed 8% (James, 2011).
Associated Press/Reed Saxon
CBS Corporation’s CEO Leslie Moonves received $111.6 million in compensation in 2010. During his tenure, CBS share price nearly doubled and its revenue grew by 8%.
CHAPTER 2Section 2.3 Developing and Evaluating Leaders
Viewed in isolation these performance metrics indeed appear impressive; however, the resur- gence of advertising revenue in 2010 simply lifted the company to where it had been three years earlier. Its total revenues of $14 billion were largely unchanged when compared to 2007, before the recession. Moreover the company’s operating income of $1.8 billion was much less than the $2.6 billion in 2007. Shareholders may well ask whether such lavish compensation is warranted for performance for only one year.
Time and again, CEOs receive generous rewards for upsurges in company performance but are rarely penalized when corporate performance declines or cannot be sustained. For example, Rob- ert Nardelli, CEO of Home Depot, stepped down in January 2007 and took with him a $210 million severance package amid shareholder criticism about his “generous” compensation package rela- tive to the stock’s weak performance, slowing profits, and a regulatory probe about its options practices. On the announcement of Nardelli’s resignation, the company’s share price actually jumped 3% (Kavilanz, 2007). At the company’s final shareholder meeting before he resigned, he was the only director present, revealed no information, and allowed shareholders to speak for only one minute each (Nocera, 2006).
These examples illustrate that one measure to evaluate CEOs should be corporate success over an extended period of time. Another is the state and condition of a company at the end of a CEO’s tenure. For example, when CEO Carly Fiorina was forced out at Hewlett-Packard in 2005, the company’s stock price had declined by 50% during her tenure, and HP was still trying to digest the 2002 acquisition of its biggest competitor, Compaq, a move that was widely seen as a failure (Portfolio’s Worst, n.d.).
When long-time CEO Michael Eisner resigned in March 2005, a year before his contract was due to expire at Disney, the company’s performance had deteriorated on several fronts. Broadcast network ABC, acquired by Eisner, had lost market share over seven years. Disney had failed in a highly publicized attempt to build a historic American theme park near a civil-war battlefield. The company was widely criticized for the disastrous hiring of Michael Ovitz as his designated suc- cessor, who lasted just 16 months and cost the company $90 million in addition to stock options. Uncharacteristically, Disney had experienced a string of box-office movie flops starting in 2000, while over that same five-year period the board of directors had approved compensation pack- ages for him totaling $737 million (Gross, 2002).
In contrast, Steve Jobs, who relinquished operational control of Apple Inc. shortly before his death in 2011, left behind a company that he had led from near marginality in 1997 to being the largest high-tech company in the world. In place at the time of his departure were a successor and an innovative-design culture that will endure well into the future. The robust state in which he left the company reflects his performance as a leader and stands in stark contrast to Fiorina’s and Eis- ner’s leadership performances. A leader’s legacy really is important.
Succession Planning The quality of a leader’s successor also reflects on how people judge the leader. Is there a smooth transition at the top? Succession planning, especially at the top of an organization, is vital. It is too late to think about it when a CEO announces his resignation, even when the transition date is a few months away. The time to think about succession planning is years before the actual event. In other words, it should be done on an ongoing basis.
Good succession planning requires that a leadership pipeline be full at all times. This can be quite challenging especially for large corporations that employ over 10,000 people. There are
CHAPTER 2Section 2.3 Developing and Evaluating Leaders
four principal reasons why it is difficult to maintain a leadership pipeline (Brant, Dooley, & Iman, 2008):
Inadequate criteria. When asked to recommend individuals in their unit who had leadership potential, managers’ recommendations may be based on criteria that reflect local values but do not match standards used in other functions or parts of the company.
Assessing potential vs. performance. Sometimes leaders find it difficult to distinguish between current performance and evidence of perceived ability to handle a more responsible role.
Inadequate data to make an informed decision. Decisions about leadership potential may rely too heavily on performance-appraisal scores that are high and fail to distinguish between candidates. The assessments suffer from “leniency” and have less to do with raters’ ability to make accurate judgments than with their willingness to be candid.
Over-reliance on traditional training. Leaders felt that traditional training methods, such as mem- bership in cross-functional teams, were inadequate.
To ensure that potential leaders and successors are being developed, leaders should establish criteria for identifying talent throughout the corporation. Standard terminology is important so that everyone knows what is meant and what one is looking for and why. Identifying promis- ing candidates for a leadership-development program should be company-wide and begin with recruiting. A system needs to be developed that formalizes feedback data about a particular person after a given assignment so that multiple evaluations can be aggregated. This process will help identify the employee best suited to a particular position from among all the potential candidates. Finally, an aggressive schedule of assignments consistent with the company’s strat- egy options and business model should be devised to test these talented people for their devel- opmental benefit as well as the company’s interests. If a company’s management doesn’t have the skills to create such a leadership pipeline, it should engage consultants with the necessary experience and expertise.