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The Looming Leadership Crisis

Many companies will be facing a critical shortage of top executives in the next few years.

September 1, 1999
Related Topics: Retention, Workforce Planning
About five years ago, the human resources professionals at Motorola realized their company was facing a problem - a huge problem - one that if left untended could affect the competitiveness, profitability and future growth of the technology giant.

    The problem involved nothing less than the CEO and many members of the senior management team. The problem had nothing to do with how well those executives were doing their jobs, but rather who would do those jobs once they retired. You see, like many large, established companies, Motorola’s most senior people - the strategists and visionaries who run divisions and manage critical functions - are in their late 50s and set to retire in the next few years.

    According to Susan Hooker, director of global organizational learning and development at the Schaumburg, Illinois-based company, if Motorola’s HR department didn’t turn up the heat on the company’s leadership-development efforts, there would be no qualified successors ready to step in when the company’s key executives retire. Fortunately, Motorola has done just that, and is now planning for the retirement of key executives with confidence. Other companies, unless they act now, may not be so lucky.

    A recent study by Development Dimensions International Inc. (DDI), an organizational development firm based in Bridgeville, Pennsylvania, reveals that one-fifth of this country’s large, established companies will be losing 40 percent or more of their top-level talent in the next five years as senior executives reach retirement age. This, on its own, wouldn’t be so bad. What makes this a potential crisis is that - thanks to a lack of planning and a lack of people - there’s a severe shortage of qualified replacements.

    To date, companies faced with executive retirement have simply recruited experienced leaders from other companies. But stealing talent from the competition is no longer a viable option. Not only is this costly, but studies conducted by the Center for Creative Leadership reveal that a staggering 66 percent of senior managers hired from the outside usually fail within the first 18 months. The smart way for HR professionals to combat the looming leadership crisis is to identify and develop the internal talent needed for key executive positions - and start now. 

What’s behind the numbers?
    Before we talk about the work HR needs to do in terms of executive development, let’s elaborate on the reasons why this has become such an urgent matter. Byham explains that because of large-scale hiring during the Eisenhower years, companies are now finding that many senior executives are reaching normal retirement age at the same time. In addition, there are also many younger executives who are retiring early thanks to money gained from stock options and investments. These widespread retirements are coming at a time when the demand for executives is actually on the increase due to ongoing economic growth. Together, these factors are creating a lot of holes at the top levels of many companies.

    Unfortunately, these openings are occurring at the same time there are statistically fewer people to fill the jobs. “Over the next 15 years, there will be a 15 percent decline in the number of 35- to 44-year-olds,” explains Tom Saporito, senior vice president, RHR International in Chicago. “This means there will be fewer people available for the top management slots and high-performance executive talent will be in demand.”

    Furthermore, there are no significant countervailing trends on the horizon. As a report by McKinsey and Company explains, women are no longer surging into the workforce, white-collar productivity improvements have flattened, immigration levels are stable, and executives - at this point - are not prolonging their careers.

    Sadly, even younger managers who are available and eager for more responsibility are not, in many cases, prepared to take on that responsibility. This is because downsizing caused many companies to eliminate the middle managers who were the traditional source of executive talent.

    The imbalanced supply-demand ratio is challenging enough. But the numbers tell only half the story. Not only will companies need top-level executives, but they’ll also need executives who possess a more sophisticated set of skills, including global business acumen, technological literacy, multicultural fluency and the ability to manage non-hierarchical, ever-changing organizations.

    Yet there are so few of these qualified individuals out there that those who do have the right skill mix are being aggressively sought out by companies of all sizes, from the high-tech start-up to the established manufacturing giant. Consequently, even if you do manage to snare a talented top dog from another company, you may not be able to hold that individual for long. “Poaching from other companies has already pushed up salaries,” Byham says. “I’ve even heard that some top executives are getting agents to negotiate deals for them, much like sports figures and movie stars.”

    Put all this together and you begin to realize that the only way to combat this looming crisis is by growing the talent you need from within. Sure, you may already be doing some succession planning and leadership development, but it’s time to shift those efforts into high gear. 

Succession planning calls for a new approach.
    Traditionally, succession planning was a simple matter of moving people through positions on an organizational chart. Because the business environment was stable, companies could tell employees, with relative certainty, where their careers would be in 15 years, given the achievement of certain business objectives.

    But today, the organizational chart doesn’t exist anymore. Business is changing so rapidly that companies are having a tough time forecasting what industry they’ll be in five years from now, let alone what kind of executive positions and leaders they’ll need. For this reason, forward-thinking companies like Motorola, American Express Financial Advisors, Medtronic and Kraft Foods have replaced traditional succession planning with ongoing business planning and leadership development. By staying abreast of business changes and continually growing the leadership skills of existing employees, these companies are making sure there are people ready to step into executive positions at a moment’s notice.

    While the planning process differs slightly at each of these companies, there are some similarities in how they go about ensuring their need for top-level talent will be met. The six steps listed below summarize these similarities:

  1. Forecast business and leadership needs. “It’s impossible to build talent if you don’t know what business you’re going to be in,” explains William Rothwell, author of Effective Succession Planning, (Amacom, 1994). Because of this, companies must start with a thorough assessment and planning process, even if they don’t have a clear vision.

    Motorola actually has three very institutionalized strategic planning processes: a long-range planning effort, a technology review, and an organization and management development review. “These are annual processes that start at the grass-roots level with managers identifying changes in structure, uncovering business issues and developing the business strategies necessary given the current environment,” explains Susan Hooker. Once these things have been identified, managers and HR make sure the organizational structure supports these initiatives. Once the organizational structure has been revised to support the business goals, the current and future leadership needs for each sector, unit and division become apparent.

  2. Generate a list of competencies. Once the business goals and leadership needs have been identified, companies can begin to assess what competencies will be needed by employees in those leadership positions. American Express Financial Services, based in Minneapolis, creates leadership profiles based on three different kinds of competencies. According to Laureen Braaten, vice president of field leadership development, these include: leadership competencies such as the ability to lead change; functional competencies that include technical knowledge about such things as recruitment and marketing; and personal competencies such as resilience and achievement drive.

  3. Assess internal talent and identify gaps. Once you know what competencies are needed - and where you need them - you can begin to compare those needs against the existing talent pool. This will not only show you what talent already exists, but also where the developmental needs are. American Express relies on 360-degree assessments and feedback from managers to identify existing competencies and uncover the gaps. Additionally, the company’s managers routinely have conversations with employees about their career goals and their interest in leadership. After all, it doesn’t make sense to groom employees for positions they aren’t interested in.

    A similar process at Kraft Foods in Northfield, Illinois, helps individual managers assess the performance and potential of employees throughout the organization. “Once individual managers have identified their high-potential people, the managers get together in their functional areas and determine the highest trajectory employees within each function,” explains Charlotte Damron, director of management and organization development. “We do this at all salary levels in the organization so that over the long term our key executives be coming from deeper and deeper in the organization.”

  4. Provide developmental opportunities. Once you have an understanding of who the high-potential employees are, you can compare the performance and skill level of those individuals against the necessary competencies. Then, you can provide opportunities for ongoing development. Although development can occur in a number of ways, including mentoring, coaching and skills training, when it comes to developing future leaders, many companies agree that job-based activities are the most effective.

    “We create action-learning experiences in which groups of individuals become steeped in important issues and are chartered with figuring out solutions,” explains Hooker. One group may focus on understanding emerging markets, for example. Another may try to project the future software needs of the market. Assignments like these stretch employees in such a way that they are actually preparing themselves for the next level.

  5. Hold people accountable for their own development. A key issue involved with developing high-potential employees has to do with whether or not those employees should be told they’re being groomed for higher-level positions. In the days when business was relatively stable, successors typically were told what jobs they were being prepared for. But in the wake of downsizing, many companies gave up this practice out of fear of making an implied promise of employment.

    “Our leaders tell people what they should be doing is putting themselves in a position where they can be offered opportunities when those opportunities arise,” explains Braaten. “Although we know how many leaders we’ll need and when, we don’t make any promises of advancement to employees. We encourage them to keep themselves developed so that when opportunities arise they can make the choice whether or not to go for it.”

    By framing the issue in this way, companies are, in effect, holding employees accountable for their own ongoing development. But to make sure employees continue to develop the necessary skill sets, all employees should be evaluated based on the successful completion of individual development plans that are updated on an annual basis. At Medtronic, for example, a medical technology company based in Minneapolis, 75 percent of people in the company have development plans to which they are held accountable during the performance review process.

  6. Make succession planning an integral part of business planning. A key to making executive-level succession planning a success is to make internal talent development an integral part of the business planning process. Just as individual employees are held accountable for their ongoing development, managers must be held accountable for projecting leadership needs and identifying available talent.

    Though HR has a key role to play in the succession planning process, line managers must have final ownership of the executive development process. “They’re the ones building their organizations for the future, so they must be the ones to take responsibility for thinking about how to develop their people,” Damron explains. 

Don’t forget retention!
    Any discussion about how to battle the upcoming leadership crisis would be incomplete without talking about the vital need for retention. Companies should be doing everything they can to retain current leaders with incentives that mean something to them - be it job-sharing, added vacation benefits, higher incentive pay or the ability to work from home. “To retain key employees, you have to listen to what employees say they need,” explains Diane Gherson, a principal with Towers Perrin, located in Irvine, California.

    But retention is still only half the battle. You can retain all the employees you want, but if they aren’t prepared to lead the company, your company won’t prosper. By starting now to assess and develop your internal talent pool, you’ll be in a much better position to fill the shoes of retiring executives. Like so many other issues in business today, the leadership crisis can be averted but only if HR acts now. Top executives aren’t created overnight. They’re developed through years of careful planning and forethought.

Workforce, September 1999, Vol 78, No 9, pp. 72-79  Subscribe Now!

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