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Creating a formal program for developing new leaders can pay huge dividends, but many firms aren't reaping those rewards.
What would you do if all of the senior managers in your company departed unexpectedly tomorrow? Would the firm be thrown into a leadership crisis? Or would there be a group of successors ready to take the helm?
Bill Moore, vice president of organizational development at K. Hovnanian Enterprises Inc. in Red Bank, N.J., one of the nation’s largest homebuilders, asked those questions of his company’s CEO and senior management team last year. He got very few reassuring answers.
But, by asking the question, Moore did get the attention and the action he wanted. Within several months, the CEO endorsed a wide-ranging succession plan that all six top executives committed to push throughout the $2.6-billion company.
Under the year-old plan, successor candidates have been identified for group, region, division and area presidents companywide. At least 50 leader candidates have been tapped, and the company is confident that nearly half of them will be ready to move into senior management within one to two years, Moore says. (For more on K. Hovnanian’s succession planning program, see “Case Study: A Growing Business Needs More Managers.”)
While the successful efforts to groom leaders at K. Hovnanian are inspiring, they represent the exception, rather than the rule. Studies show that many organizations are not acting on the critical need to develop management talent.
Consider these recent findings:
Most companies are realizing only now that their sole competitive edge is the bench strength of current and future leaders, says Bobbie Little, senior vice president of global leadership and learning for DBM. As a result, many have no formal succession planning program in place.
That is troubling because there is evidence that succession planning can pay dividends in many ways, and not just for high-potential employees. By identifying the abilities and qualities needed to move up, and by communicating these to the workforce at large, employers may help to boost retention and corporate performance across the board.
In fact, according to a study of more than 100 companies by Hewitt Associates, an HR consulting firm in Lincolnshire, Ill., the companies that consistently use a formal process to help workers advance also are consistently high-performing firms, as measured by total shareholder return.
Formal Plans Are Best
Experts agree that formal succession management planning—except in the smallest of organizations—is vital.
The absence of a formal plan denies employers two critical levers for building great talent, says Marc Effron, global leader of the leadership consulting group at Hewitt Associates. Without formal plans in place, “you can’t proactively have leaders develop the skills they need to assume the next level of responsibility, because you don’t know what roles you might move them into,” he says. And, “you can’t communicate to leaders what their potential future is in the organization, giving the appearance that you either don’t care or aren’t strategic enough to know.”
The Hewitt study found that only 55 percent of firms consistently used a formal approach to identify high-potential leaders, Effron says. However, all of the firms in the top quartile of total shareholder return consistently used such an approach. (See Formal Programs Get Results).
“We are often asked by smaller firms: ‘Do I really need all these processes in place? I only have 500 people or 1,500 people.’ Our answer is that the fundamental rules apply no matter the size of your organization; it’s simply much easier in a smaller organization,” Effron says.
For example, when a Fortune 100 company gathers its succession planning data each year, it might take months and involve thousands of hours of HR investment, he says. “In a smaller company, you can do this around the conference table in an afternoon, but the basic steps still need to be in place for it to be successful.”
However, management succession plans at most companies aren’t as well-established as they should be, concludes a study based on responses from 908 directors from 209 boards of Fortune 1,000 companies conducted last fall by executive search firm Korn/Ferry International in New York. Directors say having a “formal management succession process in place” is one of the most important factors in good corporate governance, but only 64 percent have a management succession committee or process—and only 50 percent believe they’re effective, the study found.
Why don’t more companies have successful succession management programs? Experts say such programs often fall prey to several common traps.
For example, among companies that actually commit to a succession plan, few follow through with the rigorous implementation required. In fact, 70 percent of succession plans fail due to execution errors, according to a 2002 report, “Succession Planning for Results,” from business research firm Cutting Edge Information in Durham, N.C.
Lack of executive-level support is another challenge to a successful program, says Bill Byham, co-author of Grow Your Own Leaders (Financial Times Prentice-Hall, 2002) and CEO of Development Dimensions International Inc. (DDI), an HR consulting firm in Bridgeville, Pa. “Succession management has to be a senior management program” driven by all senior leaders, he says.
Moore, whose program at K. Hovnanian Enterprises Inc. has been so successful, agrees that top-level commitment is vital. “To assure the success of the succession planning process, you must have 100 percent support and buy-in of the CEO,” he says. “He or she must be the driver of your entire process.”
However, buy-in from the top alone is not enough. Effron says an over-designed process can be the death knell for succession management programs.
“This is normally a ‘textbook’ design that incorporates every possible bell and whistle into the process,” he says. “Many times this means lots of forms, too many criteria for evaluating potential, extensive training on the process and a high time demand on the manager.”
Managers perceive this as simply more bureaucracy, he says, andparticipate only grudgingly—even if the CEO supports the process.
“When we see succession planning work, it’s integrated into the yearly performance review process, so that managers are evaluating current year performance and future years’ potential—succession likelihood—at the same time,” he says.
As demands for leadership development grow—due to changing market conditions, corporate growth or the impending retirements of large numbers of baby boomers—HR’s role becomes increasingly important. While consultants and practitioners disagree about the best level of HR involvement, most succession management efforts evolve and grow from HR’s urging.
And while HR needs to guide the process, it also needs to involve others. Hewitt’s Effron says HR should:
“Succession management must be spearheaded by HR—it is the only logical choice,” says George Cauble Jr., SPHR, director of human resources for Henrico County, Va., which has a workforce of nearly 4,000.
Faced with rising numbers of employees eligible for retirement and dwindling numbers of younger employees to replace them, Cauble two years ago led the implementation of a succession plan that created an organizational culture of learning and development at all levels. The plan also created a structured developmental process for upper managers and provided practical tools for advancement.
Cauble and his staff conducted information sessions for all department heads, deputy county managers and assistant department heads. The group identified key leadership positions, and HR followed up with additional training on implementation.
The results have been “spectacular,” Cauble says. For the fiscal year that ended in June 2003, the county filled 57 percent of all openings internally through promotions and career advancements, including seven upper management posts. (For more information about the county’s program, see “Case Study: Filling Soon-to-be-Empty Jobs,” left.)
Finding the Unsung Heroes
Where do companies start to identify employees who should be targeted for advancement? DDI’s Byham advocates forming what he has dubbed “acceleration pools.”
Much like a championship athletic team that first finds the best available players and then decides where to put them in the lineup, this strategy pulls candidates from a wide range of leadership levels.
“Given sufficient resources and attention, an acceleration pool provides the leverage to both respond to the immediate talent gap and grow outstanding talent for the future,” he says. “This is a startling change from those heady days when corporate America deluded itself into thinking it could predict an individual’s career path.”
Candidates chosen for their basic skills are developed through training and job experiences to maximize their potential contributions to the organization at large, rather than to a specific position, Byham says.
“Companies like this better than ‘high-potential pools’ because that term implies that people not in the pool don’t have high potential,” he says. Rather, an acceleration pool indicates that a worker’s growth is being accelerated, not that others lack potential.
With its Leadership Potential Index, DDI rates an individual’s potential by measuring four core factors and gauging strengths in each:
To Tell or Not to Tell
The question of whether or not to tell high-performing workers they’ve been tapped for executive grooming is a subject of continuing debate.
There are advantages and disadvantages to each choice, says William J. Rothwell, professor in charge of workforce education and development at Pennsylvania State University’s University Park campus and author of Effective Succession Planning (Amacom, 2000).
An advantage to not telling is that employers keep their options open. “As business conditions change, managers may feel that a different kind of person is needed to fill a key vacancy or do the work,” Rothwell says. The key disadvantage: “Superstars may leave the organization because they don’t see a future for themselves.”
By contrast, when top performers are told they are being considered for advancement, they are more likely to stay because they see a possible future for themselves, says Rothwell. The key disadvantages to sharing such information are that star workers may stop performing because they believe a promotion is “in the bag” or that managers may inadvertently commit themselves to an oral contract to promote the worker.
Rothwell predicts that more companies will be forced to tell promising leadership candidates about their selection as a retention strategy. However, companies must consider how to do that.
“The telling must be done in a legally defensible way,” says Rothwell. “Managers need coaching from HR and from the legal department.” For example, managers “must, above all, avoid promising anything in a blanket way to mollify an otherwise outstanding performer so as to retain him or her,” Rothwell says.
There are two potential legal risks here: First, employment-at-will laws in most states give employers the freedom to dismiss an employee at any time for virtually any reason. Employers should not surrender that right with direct promises, he says.
Second, employers need to avoid making any implied promises that could unintentionally create a job contract.
Bottom line: A succession program should never pledge job security or guarantee promotions; it merely indicates that a worker’s potential has been noted.
The potential drawbacks of communicating succession planning status have prompted many companies to keep the process secretive, says Tom McKinnon, executive consultant at Novations/J. Howard & Associates, a diversity consulting and training company in Boston.
A recent Novations/J. Howard survey showed that 37.5 percent of companies tell executives they have been targeted for potential advancement, while 45.8 percent do not. Only 16.7 percent of employers polled make the criteria for inclusion known throughout the organization.
Such corporate secrecy has its down side, McKinnon says.
“If employers truly seek to develop their leaders, criteria for advancement must be made clear,” he says. “If employers don’t define the criteria or help people develop the skills, the only ones who will get promoted will be those who remind leaders of themselves.” (For more information on promoting diversity in management succession plans, see this month’s Diversity Agenda, “Moving Past Mini-Me.”)
The Hewitt study of 100 companies showed that 64 percent of high-performing employers tell employees of their status as up-and-coming leaders—and that 75 percent of these companies also tell employees when they’re no longer considered for advancement.
Effron says deciding whether to tell has generated more discussion than any other finding in the study.
“While higher-performing companies tell their best talent that they are high potential and the benefits of that status, there’s more to this than just the conversation,” he says. “At the companies that tell, most of them are very committed to having a great working environment for all employees. They don’t want a two-class system to emerge because certain people will get some extra attention, so they start with the fundamental premise that everyone is treated well and everyone will know where they stand regarding performance.”
Knowing where you stand on the performance curve and what you need to do to be considered leadership material helps prohibit retention problems, Effron says. Clear communication about status and future in the organization is important.
“Also, the companies that are best at this also tell high potentials what this status doesn’t mean. It doesn’t mean that you’re going to be CEO next year. It doesn’t mean you permanently have this designation,” he says. “It likely means you’ll have increased burden placed on you to prove the potential you have.”
Because smart companies are also confident they’ve accurately assessed potential, there’s little danger of having to revisit the conversation.
In the end, succession work is never done, notes DBM’s Little. The good news: You can see results from a succession plan in the first year.
“You know your program is working when line managers take ownership over from human resources and senior managers are driving the process regularly and consistently,” she says.
Susan J. Wells is a business journalist based in the Washington, D.C., area with 18 years of experience covering business news and workforce issues.
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