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Know Your Talent

How boards should be thinking about executive capability
March 2013

In a world in which the pace of change frequently calls for stronger, more visionary leaders than in the past and markets are volatile, complex or unpredictable, the ability of boards to make astute judgments about internal leaders is critical.

Even as boards find themselves with increasing responsibility for succession planning, they often lack the insights with which to thoroughly assess their company’s rising executives, make the discerning judgments needed to understand whether a candidate will be ready when the time comes or know when to seek an outside leader.

One reason is that directors’ exposure to likely CEO candidates tends to be fairly informal, coming through such vehicles as board presentations and social gatherings. In addition, much of their insights and information has likely been gleaned from HR or from company executives such as the CEO. Such information may be a good indication of executive performance to date, but may not necessarily be the best predictor of future achievement.

Given that the ultimate accountability for CEO succession lands squarely in the board’s court, what should directors be doing to ensure they are informed about internal talent? How can a board be confident that any candidate, internal or external, embodies the skills and characteristics that will be needed in 18 months — or even three to four years — to move the company forward?

We see succession planning as a sort of race — a long-term one if all goes well — that requires extensive preparation and attention to detail.

Get ready

The right succession process will be different for every business. Many organizations have a dedicated and rigorous succession-planning program, for example, while others take a less formal approach. No matter the process, we see an increasing need for proactive and iterative succession management: the assessment and targeted development of internal leaders. The growing complexity of business today means that CEOs are required to tackle more novel and ambiguous situations than ever, situations in which they cannot necessarily rely on their previous knowledge or experience. More flexible, decisive leaders are required — leaders who can facilitate the creation of agile and innovative organizations, operate effectively with incomplete information and respond ahead of the competition.

Even the most innovative and committed of boards will usually admit they have room for improvement in the succession process. Some of their exposure to CEO candidates may be more limited than they desire, or they may not have the insights or the information they need to make the most informed decisions. Further, their assessment and development of promising executives may be sporadic or incomplete. To understand where they are today, a good litmus test for board members may be to ask themselves, “If we lost our CEO today, would we be confident the CEO heir apparent was ready to step into the role?”

Choose your driver

To ensure that the answer is “yes,” boards should begin by assigning clear roles and responsibilities to each of the parties involved — including the board itself, the CEO and HR. The board, increasingly at the forefront of CEO succession planning, has ultimate accountability for the assessment and development of prospective internal future-CEO talent. CEOs can best serve the process by providing a first-hand perspective on potential candidates and keeping an open communication channel with the board and HR. As one director told us, “The CEO might recommend someone, but the board owns the process and has to make the decision.”

HR, in turn, increasingly plays an active and strategic role in the identification and career progression of promising executive talent, informing the board about high-potential individuals and their development needs and potentially participating in any assessment panels. Their other ongoing role is that of keeping the talent pipeline well stocked for the future.

Specialist independent third parties such as Spencer Stuart can also act as partners to the board and HR, conducting objective assessments and providing advice on — and structure around — the assessment and development process. The use of such third-party advisers can bring a valuable outside-in perspective and insight into how internal talent compares against high-performing executives in the marketplace. Third parties can also bring fresh thinking about emerging roles and responsibilities, or about best-in-class competencies that go beyond the traditional criteria many organizations still use.

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Start your assessment engine

While they serve as good introductions to senior team members, traditional, more casual methods for getting to know potential CEO candidates do not offer the depth of insight needed for directors to feel completely confident in a given candidate’s ability to take the reins when tapped. It is important to establish a thoughtful and rigorous assessment process, one that goes deeper than the chance insights gained at social events or presentations, which provide little insight into such critical skills as strategic leadership or decisiveness.

Performance reviews and 360-degree feedback create a solid foundation for understanding an individual’s on-the-job strengths and areas of devlopment opportunity. Ways in which candidates may be even more fully evaluated include external benchmarking, psychometric evaluations and management assessments.

Whatever the choice, any thorough evaluation should include a rigorous review of an individual’s skills, experience and performance in current and past roles. Yet it is not enough to look at past accomplishments. Boards should also strive to gain an understanding of candidates’ decision-making ability and judgment under differing circumstances and in the face of any organizational challenges — skills that speak to an individual’s Executive Intelligence and ability to succeed in more complex and demanding contexts in the future. At Spencer Stuart, we have developed a proprietary methodology for measuring Executive Intelligence (ExI™), and work regularly with clients to provide increased reassurance and reduced risk in the internal development process.

In addition to providing deeper insight, one director we spoke with noted that a solid and professional assessment process also can help the executive team better understand themselves and the ways in which they interact, and give the board a better perspective on all of the company’s senior executives, not just those on the CEO track.

Importantly, such evaluations should not be one-off events, but part of an iterative cycle that reviews potential candidates every six months to two years, ensuring that the company always has fresh persepectives on succession candidates and regularly injects new talent into the mix.

Get on the right track

Whichever assessment methods a company chooses, the strongest candidate will always depend on the context. As one director noted, “Executives typically have a bias toward either optimization or growth. The board would need to match up the executive’s operating style with the strategic needs of the business.”

Boards can look at corporate goals, markets, products and other factors to identify the skills and characteristics the future leader will require — and focus on those factors in the assessment and development process. Desired functional and industry skills and experience should, if possible, be clear, measurable and unambiguous.

Other skills and characteristics may be harder to measure, but are equally if not more important. Many organizations focus on such universally desirable characteristics as executive presence, or gravitas; ethics and integrity; decisiveness; strategic ability; and sound judgment. All are essential. However, these traditional factors may not be the key differentiators in today’s increasingly complex and volatile marketplace. Today’s business environment calls for leaders who are also visionary and inspirational, exhibit a global mindset, work well with ambiguity, are able to help organizations go beyond their comfort zone, understand how to navigate new paths and can manage the increasingly complicated labyrinth of stakeholder relationships.

Mind the gaps

An ideal assessment process should not only uncover relevant and specific insights about an individual’s strengths, but identify development focus areas, or gaps, as well. Gaps may include a lack of specific knowledge or experience, traditional “hard skills,” such as experience with regulators or financiers or knowledge about a given market, or a deficiency in certain “soft skills” — behavioral skills such as decisiveness or the ability to motivate others. As executives we spoke with shared, some gaps may be deal breakers: Would the board consider a candidate who does not have impeccable integrity or ethics?

Hard-skill gaps may be remedied fairly easily by an operational or functional rotation or executive course of study. In contrast, gaps in soft skills can often require more time to develop. Boards need to know they can close the most important of these development gaps before they decide whether to invest in a promising internal candidate or go with an outsider who has done it before. Note that an objective outside assessment can be extremely helpful in such cases. Assessment and leadership experts may have tools that specifically address a candidate’s ability to accelerate his or her own development, analyzing the candidate’s thought processes, business aptitude, degree of motivation, resolve and willingness to learn. Such targeted assessment can be the key to giving the board confidence as to whether certain gaps can be filled.

Of course, filling development gaps requires effort, particularly when they involve soft skills. Companies should establish targeted, made-to-measure development plans for each candidate, including such components as one-on-one mentoring, shadowing and carefully monitored stretch assignments, which may take place either inside or outside of the organization.

One board member commented to us that leadership assessment and development intervention by an individual mentor can “transcend the leadership gap,” challenging candidates and motivating them to learn. Objective third parties may perform a similar role, co-creating development plans and performing regular check-ins to measure and stay in touch with progress. Whether internally or externally led, these regular check-ins are essential, providing milestones for each candidate and a way to measure and stay in touch with their progress, ideally every six months.

Head for your destination

In today’s challenging global markets, the assessment and development of internal leaders should be high on every board’s agenda. However, many companies still rely on informal succession processes that may not provide the best assurance of future executive success. In contrast, an ongoing, comprehensive and well-managed assessment and development process will allow a business to identify and gain powerful insights into its high-potential candidates and focus attention on the ones it wants to promote — closing knowledge gaps and facilitating the kind of development that accelerates executive capability and provides experiences to fit both the executive’s goals and its own. The results will help boards gain the confidence they need to feel that they are well-informed about their internal talent and have the right candidates to move the company forward when the time comes.

This article is included in Point of View 2013.