in this chapter was designed to answer questions like these in a systematic and reliable manner. We wanted to find out just how companies are managing the development of their future leaders, from design through execution. In particular, we wanted to know how practices are evolving (and what practices are most effective) and where companies are still struggling to effectively grow the next generation of leaders.
Research Design
Phase 1 of the research consisted of a survey of current practices in the selection and development of future leaders. Since we were looking for fairly detailed information about current development practices, we knew that the length of the survey could be a problem. We piloted two different versions of the survey in the spring of 2003. One pilot survey was administered at a Business Week conference cosponsored by RHR International. The other pilot survey was administered at the annual meeting of an international trade association. The pilot questions were evaluated for clarity and for the utility of the responses they generated. We rolled out the final ExecutiveBench Survey in October 2003, administering the survey both online and in hard copy. The target audience for the survey included senior line executives, senior human resources executives, and HR and organizational development professionals responsible for leadership development.
As of April 2004, 115 companies had completed the survey. The research results that follow are based on analyses of those 115 respondents. Phase 2 of the research, which began in October 2004, involves a series of follow-up interviews with a subset of the companies that responded to the survey. The interviews are designed to understand how companies’ development practices evolve over time and how the current leaders and organizational culture shape the choices companies make in refining and augmenting those practices. At the time of this writing, data collection is still in progress for Phase 2, so we are unable to report those findings in full here. Where possible, I will draw on preliminary data from the interviews to further inform the results from Phase 1, the survey of the 115 companies.
Research Sample
The 115 respondents to the ExecutiveBench Survey came from nineteen different industries.2 The majority of the companies, about 90 percent, were based in the United States. But over half of these U.S. companies had significant international business operations. In terms of company size, responses were fairly evenly distributed between companies over $1 billion in annual revenue (54 percent) and under $1 billion (46 percent). About a quarter (27 percent) of companies reported revenues under $200 million, 19 percent reported revenues between $200 million and $1 billion, 34 percent reported revenues between $1 billion and $10 billion, and 20 percent reported revenues over $10 billion. It appears to be a fairly representative sample of American businesses.
Individual respondents came from a variety of backgrounds, with the largest proportion of respondents (43 percent) being senior vice presidents of human resources. CEOs comprised 20 percent of the respondents, while other senior line executives made up 22 percent of the sample. HR/organizational development professionals below the level of senior vice president made up 15 percent of the sample. All in all, we were satisfied that our informants were in a strong position to comment on their company’s practices.
Findings from the Study
State of the Talent Market
Although the popular press and, to a lesser extent, some consulting companies have been warning of a looming talent shortage, just how seriously senior managers are taking this threat has been less clear. Is this a burning issue to business leaders or some vague, ethereal concern about the distant future? We wanted to go beyond case examples and assess how much of a talent shortage companies across the board are anticipating. Thus, one section of the ExecutiveBench Survey explores how current leaders view their bench strength, the role of retirements at the top, and their level of concern around having the talent to meet their future growth needs.
The overall picture of projected leadership needs through 2010 is a sobering one (see figure 1.1). Companies anticipate significant departures within the senior management ranks (defined as the two levels below the CEO) by the year 2010. Half of the companies reported that they expect to lose 50 percent or more of their senior managers, while 15 percent said they expect to lose 75 percent or more of their senior managers.
Figure 1.1. Anticipated Departures of Senior-Level Executives
Virtually all companies are relying to some extent on outside hires to replace departing managers (see figure 1.2). By far the largest proportion of companies, or 41 percent of respondents, reported that they expect to hire one-quarter to one-half of their leaders from outside over the next five to seven years. In addition, 60 percent of companies expect to hire at least 25 percent of their leaders from outside. It appears that companies are looking externally for talent at a somewhat increasing rate: a 1998 study by the Center for Creative Leadership reported that only about 30 to 40 percent of all executive placements were recruited from outside the hiring company (Sessa, Kaiser, Taylor, & Campbell, 1998).
Figure 1.2. Anticipated Hires of Outside Leaders
It is unclear whether companies regard the increased reliance on outside hires as a good thing. Many companies struggle to know what is the “right” level of turnover for bringing in innovative ideas and needed strategic or culture change. The ExecutiveBench Survey attempted to shed light in this area by measuring the level of concern about a potential talent shortage. Companies were asked how confident they were that they would have sufficient high potential talent to meet their future growth needs. Only 25 percent of companies reported that they were highly confident in their ability to meet their future growth needs with high potentials. The remaining 75 percent were only “somewhat confident” or “not at all confident” about the state of their internal capacity to meet future leadership demands.3
Moreover, when the relationships between expected losses of senior leaders, anticipated numbers of outside hires, and confidence levels were jointly examined, a consistent pattern emerged. The number of senior leadership departures through 2010 and the number of anticipated outside hires were also both significantly correlated with confidence levels (Spearman’s rho = .262 and .330 respectively, p < .01).
Thus, companies that expect more senior leader departures and also anticipate having to rely on outside hires to replace senior leaders are the least confident that they will be able to meet future growth needs. These companies do not appear satisfied with the greater reliance on outside hires to fill key roles. And perhaps for good reason: the CCL study cited earlier found that external hires are much less likely to be successful than internal hires under a range of common conditions like highly volatile industries, when industry and product knowledge is vital, and in organizations with firmly rooted cultures (Sessa et al., 1998). This suggests that the anticipated mass changing of the guard at the top of companies will likely bring significant change and discontinuity as seasoned leaders depart and are replaced by a combination of less seasoned insiders and new external hires.
Figure 1.3. Company Confidence That High Potential Talent Will Address Future Growth Needs
Level of Preparedness for the Future
Experience building bench strength. Another goal of the ExecutiveBench Survey was to understand how prepared companies are to meet the challenges of managing and growing key talent. The survey explored how long companies have been formally identifying and developing future leaders. We found that formal attendance to the growth of future leaders is a fairly recent practice for most companies,