September 2005 - Top companies for leadership

Succession planning for the role of chief executive is never easy. When Jack Welch was chief executive of General Electric he kept his immediate subordinates guessing right up to the day he announced his departure, knowing that headhunters were forever circling his top team, looking for an opportunity to move for the unsuccessful candidates.

Annointing a successor too early would have deprived the company prematurely of some of its most formidable executives. At the same time it would have removed the stimulus of competition as a motivating force.

Misys, the banking and healthcare software services group, believes it can go one better than GE and keep each of its two leading contenders for the chief executive position when Kevin Lomax, the existing incumbent splits his executive chairman role within the next three years.

This is why it created attractive share bonus schemes worth up to £1.2m each for Tom Skelton, head of healthcare, and Ivan Martin, head of banking. The remuneration committee believed that performance targets were tough enough and attractive enough to retain the services of both men beyond the changeover.

Opposition from shareholder bodies, however, led to the withdrawal of the so-called “retention incentivisation plan” before Tuesday’s annual meeting. Misys argued that its plan had been in the best interests of the company but investor bodies had complained that the payments would be setting a precedent.

The investors were right. Had the Misys plan been approved it could have led to a flurry of other succession payments in other companies amounting to little more than the inflationary practice of throwing money at people in order to keep them.

Moreover, in creating something unusual that risked the disapproval of investors, the company drew media attention to its two contenders. If headhunters had not previously taken note of the company’s dilemma, they will have done so now.

While the retention plan may not have been the cleverest scheme to emerge from a remuneration committee, it at least demonstrated that Misys was trying to think ahead. Companies that ensure their chief executives are involved intimately in succession planning are likely to outperform their competitors according to new research carried out by Hewitt Associates, the human resources consultant.

Its Top 10 Companies For Leaders* (see table) list drawn from a survey of 101 large public and private companies in nine European countries found four consistent indicators of effective leadership development:

• Active involvement of chief executives and their boards in leadership development programmes, including selection, recruitment and performance reviews.
• Differentiated development of those earmarked as “high potentials”.
• Consistent delivery of programmes.
• Formal accountability – supported by metrics – of the development teams responsible for leadership programmes.

In short the study found a strong correlation between long term financial success and well executed leadership programmes.

“The best companies take great pains to track their best people. They know who they are and treat them as the life-blood of the organisation,” says Mark Hoyal, head of Hewitt’s European leadership consulting practice. “They tend to have well thought out plans that are tailored to their own businesses and don’t just copy from others,” he adds.

He also says that the leading companies in the survey regularly review their identified talent pools, moving people in and out of them at intervals depending on individual progress.

One of the starkest differences that appeared to differentiate the way the best companies looked at leadership was the use of measurement. Some 70 per cent of the top performing companies in the survey measured the way people on their leadership programmes relate to their companies compared with just over 35 per cent of the rest in the survey. Similar results were recorded for measures of programme effectiveness.

The Hewitt survey was last carried out in 2003 and not every company that participated then was included in the latest research. Three companies, however, have maintained consistently impressive business performance over time in line with their leadership scores. They are L’Oreal, BMW and Vodafone.

My only concern with such research is the way that it concentrates on good companies and the work they do to make themselves effective. You would think that so much of this material is in circulation by now that the vast majority of businesses would be following suit.

But another piece of research conducted jointly by the London School of Economics’ Centre for Economic Performance and McKinsey & Co, looking at 730 manufacturing companies in France, Germany, the UK and the US, shows just how broadly management practices vary.**

The researchers interviewed managers selected for their knowledge of shopfloor practices. The managers were not informed of the exact nature of the study. This led to some interesting informal observations such as the manager who said: “If you work here you drew the short straw.”

The study looked at various management practices - lean manufacturing, performance monitoring, target setting and the use of incentives - that earlier work by McKinsey had identified as significant differentiators in productivity levels. As might be expected US companies faired best, followed by those in Germany and France with the UK bringing up the rear.

The research found that older companies tended to have some of the lowest scores particularly in industries where there is little competition. High levels of labour market regulation also appeared to have an adverse impact on the quality of management although not enough to place Germany and France behind the UK, in spite of its comparatively lighter regulatory regime.

These findings, like those of the Work Foundation in another recent study where it measured corporate performance against a set of indicators in its Company Performance Index, are doing much to identify the management features that can be identified or measured in order to rank companies on the quality of their management. But participating companies are still afforded anonymity in return for their co-operation.

Secondary schools in the UK are no longer afforded anonymity in performance rankings. If differences in management practices can, as the CEP study suggested, account for between a 10 and 20 per cent variation in productivity, it is time that company management was subjected to the same kind of public scrutiny. Who is going to do it?

*reports can be obtained from Alita McGuinness (alita.mcguinness@hewitt.com)

**http://cep.lse.ac.uk/management/