BOARD TALENT SERIES
Three Critical Talent
Conversations for Every
Board of Directors
THREE CRITICAL TALENT CONVERSATIONS FOR
EVERY BOARD OF DIRECTORS
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Contents
Executive Summary
3
Eight Talent Questions Every Board Should Ask 4
Overview: A New Talent Agenda for Boards
5
Conversation 1: Expanding the Perimeter Beyond Leadership
8
Conversation 2: Increasing Executive Accountability for Talent Outcomes
11
Conversation 3: Strengthening CEO Succession Strategies
14
Getting Started
16
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Executive Summary
Scrutiny over executive compensation and governance is crowding out board
focus on critical talent issues that impact corporate performance. As a result, most
boards lack a deep understanding of talent issues outside executive leadership
(executive compensation, CEO succession, and CEO performance). The best
boards seek more understanding of talent issues and higher levels of assurance
about critical talent risks.
CEB research finds that boards at top-performing companies are twice as likely
to have a deep understanding of talent issues as boards at lower-performing
competitors. CEB’s benchmark shows the best boards improve talent assurance in
two ways. First, they expand the perimeter of talent issues they monitor beyond
executive leadership to include issues that impact other critical talent segments,
such as engagement capital, the employee value proposition, and workforce
planning. The best boards also reshape and deepen conversations on executive
performance evaluation and succession in the following ways:
■■
CEO and Executive Performance Evaluation—Treat talent measurement like
financial measurement: require robust analytics and clear links to business
value.
——
——
——
■■
THREE CRITICAL TALENT CONVERSATIONS FOR
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Instead of “ready-now” successors, evaluate leadership potential,
benchmark with competitors’, and differentiate leaders who are
“developable” from those unlikely to change.
In addition to business performance, reward improvements to
engagement capital, particularly future-oriented workforce engagement.
Instead of tracking compliance violations, hold CEOs accountable for
boosting integrity capital by building a culture of integrity.
CEO Succession Planning—Readiness is a red herring. Don’t try to predict
the competencies a leader will need when succession is triggered or assume
the competencies are the same as the ones your leaders have now. Increase
optionality by asking the CEO to broaden the experience profiles of direct
reports and rising leaders.
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Eight Talent Questions Every Board
Should Ask
Five Questions from the Board to the CEO
■■
■■
■■
■■
■■
Beyond leadership, which talent segments at the company are most critical for
success? Where do we face the most scarcity?
What are the top one or two talent-related levers management is pulling to
drive business performance?
How well are we doing on talent (e.g., leadership potential, quality of hire,
engagement) relative to our competitors?
How are we differentiating our value proposition for talent relative to
competitors?
Do we have the right talent bench for the next three to five years?
Three Questions the Board Should Be Asking Itself
■■
■■
■■
THREE CRITICAL TALENT CONVERSATIONS FOR
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Are we spending enough time on talent matters as a board?
Is management working toward the right talent outcomes and metrics, and are
we getting the visibility we need?
Do our current committee agendas allow us to focus on the most important
talent issues? For example, does the audit committee cover talent risks? Does
the compensation committee use both talent metrics and financial metrics to
assess the health of the business and accomplishments of leadership?
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Overview: A New Talent Agenda for
Boards
Talent is an increasingly critical differentiator of corporate performance. The best
companies realize that talent—more so than capital or technology—is a scarce resource
at large companies today and poses one of the most significant barriers to growth. As
companies increasingly rely on knowledge workers, the ability to source, develop, and
retain talent becomes a critical differentiator.
We see clear evidence of this when we look at the quality of leadership benches across
companies. CEB surveyed over 3,000 leaders on their perceptions of peer effectiveness
at key leadership activities. This analysis found that organizations with the most
effective leadership benches experience nearly double the rate of revenue and profit
growth as competitors with weaker benches.1
Figure 1. The Talent Premium
Ratio of Annual Profit and Revenue Growth at Businesses with Strong Leadership
Benches Relative to Companies with Weak Benches
2.0
2.0
1.9
1.0
0.0
Profit Growth
n = 3,409 leaders at 203 business units.
Revenue Growth
Source:CEB analysis.
Talent risks are on the rise. As talent becomes an increasingly important
performance lever, the likelihood and severity of downside performance risks related
to talent mismanagement are also growing. Eighty-three percent of business leaders
believe business risks associated with talent decisions have increased substantially
across the past five years.2 Another recent survey reports that more than 43% of firms
failed to achieve financial targets as a result of ineffective people management. A
similar percentage reported that ineffective talent management had reduced their
companies’ ability to innovate.3
Perhaps the biggest risk stems from the lack of robust talent analytic tools, which
remain a decade or more behind financial analytics at most large companies.
The growing complexity of talent decisions—which are increasingly global,
multigenerational, and matrixed—is outpacing firms’ ability to apply data and analytics
to evaluate them. Even at the most progressive companies, many critical talent
decisions remain largely uninformed by rigorous data or analysis. In a recent CEB
survey, more than three-quarters of business managers reported relying on intuition
alone, rather than on data provided by HR, to make critical talent decisions.1
THREE CRITICAL TALENT CONVERSATIONS FOR
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1
CEB analysis.
2
CEB 2013 Global Labor Market Survey.
3
AICPA and CIMA, Talent Pipeline Draining Growth, 2012.
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Figure 2. Lack of Rigor in Key Talent Decisions
Percentage of Business Leaders Who Use Data from HR for Key Talent Decisions
24%
Use Data
76%
Don’t Use
Data
n = 9,528 business leaders.
Source:CEB analysis.
Crowding Out
“The amount of time we spend on
issues related to exec comp and
governance has ballooned. It’s
crowding out time we used to spend
on critical talent issues.”
Chairman
Professional Services
Boards need more assurance about key talent risks. Two factors prevent
CEOs and boards from gaining a better understanding of critical talent risks.
First, increasing external scrutiny on executive compensation and governance
issues consumes disproportionate amounts of board time, crowding out time and
focus on other critical talent issues. New regulations to improve proxy access
for investors—such as SEC rule changes related to Dodd-Frank in the United
States—are causing a sea change in how boards spend their time. Although these
governance reforms are undoubtedly well intentioned, they increasingly distract
boards from their core job of monitoring the business for investors.
Second, when boards do focus on critical talent issues, the data and analysis they
receive from management tend to provide limited insight. Compared to data and
analysis on financial and customer performance, most companies lack robust
talent metrics and analytics. In fact, CEB research found that data from HR is the
least trusted functional data in the company: only 36% of employees trust data and
insight from HR, versus 50% who trust data from Finance and 47% who trust data
from Legal. Among leaders, the picture is even worse: only 18% trust data from
HR.4 Furthermore, the metrics most commonly reported to the board tend to have
limited direct or measurable impact on performance.
Figure 3. Talent Metrics Reported to Boards Shed Limited Light on Business Performance
Top Metrics Reported to Board of Directors by Percentage of Organizations Reporting
■■
■■
■■
■■
Compensation competitiveness benchmark (56%)
Candidate acceptance rates (56%)
Gender distributions (55%)
Performance rating distribution (55%)
Source:CEB analysis.
4
THREE CRITICAL TALENT CONVERSATIONS FOR
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CEB analysis.
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As a result, boards lack sufficient understanding of key talent issues facing
the companies they oversee. For example, only 40% of boards have a
strong understanding of employee engagement, and only 19% have a strong
understanding of the employee value proposition. Interestingly, we find that
boards at high-performing companies—as measured by total shareholder return—
are much more likely to have a strong understanding of these types of key talent
issues.5
Figure 4. Top-Performing Companies Twice as Likely to Understand Talent Issues
Percentage of Companies Reporting Strong Understanding of Talent Issues by Board
60%
60%
30%
30%
0%
Top-Performing
Companies
Bottom-Performing
Companies
n = 81.
Source:CEB analysis.
5
Talent issues considered in this analysis include CEO performance, CEO succession, diversity, employee
engagement, ethics and compliance, employee value proposition, and workforce planning. Each of these
issues was individually significant at a 90% confidence interval. These talent issues were then grouped
together to form a new variable, which was used to compare high- and low-performing companies.
Performance was defined in terms of total shareholder return based on data compiled from Bloomberg.
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Conversation 1: Expanding the Perimeter
Beyond Leadership
To achieve higher levels of talent assurance, boards need to expand the focus of
talent monitoring. Most boards tend to focus disproportionately on talent issues
related to executive leadership. In particular, the vast majority of board time
spent on talent is dedicated to executive compensation, executive performance,
and CEO succession. Increasingly, we find that the best boards look beyond these
issues to understand how critical talent, not just leadership, impacts performance.
Figure 5. Expanding the Perimeter of Board Talent Monitoring
Talent Issues the
Board Needs to
Understand
Employee
Engagement
HighPotential
Employees
Core Board
Talent Concerns
■■ CEO Performance
■■ CEO Succession
■■ Executive
Compensation
Diversity
Employment
Value
Proposition
Ethics/
Compliance
Workforce
Planning
Source:CEB analysis.
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Boards need to expand their understanding of critical talent risks beyond
executive leadership issues and do so in a targeted way. Given the high
opportunity cost, it is neither practical nor desirable for boards to have a deep
understanding of every key talent issue. Figure 6 shows the talent areas that
boards tend to focus on by industry (outside executive compensation and CEO
evaluation).
Figure 6. Areas of Focus by Industry Sector
Finance/
Insurance
Talent Area
Oil and
Gas/
Mining/
Utilities
Industrials
Technology
Health
Care
Customer
Durables
Consumer
Staples
Employee
Engagement
Employment
Value
Proposition
Ethics/
Compliance
Workforce
Planning
Diversity
HighPotential
Employees
Succession
Planning
Less Common
(Less Than 20% of
Boards with a Strong
Understanding)
Most Common
(More Than 80% of
Board with a Strong
Understanding)
Source:CEB analysis.
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Regardless of industry, the best boards work back from strategic priorities to
pinpoint talent areas that have the greatest impact on strategy. Figure 7 uses firms’
strategic priorities to highlight key talent areas for focus.
Figure 7. Working Back from Strategic Priorities to Prioritize Critical Talent Areas
Key Talent Areas Board Needs to Understand
Strategic
Priority
Key Talent
Performance
Lever
Key
Question for
CEO
Employee
Engagement
Employment Value
Proposition
and Talent
Attraction
Ethics/
Compliance
Workforce
Planning
Cost and
Efficiency
Manage
margin
sensitivity to
labor costs.
How should
we scale
talent with
the business
growth?
Employee
productivity
drivers
Leading
indicators of
misconduct
Workforce
distribution
and cost
structure;
talent
forecast
accuracy
Innovation
Attract and
retain top
talent to
innovate.
How are we
competing to
attract and
retain the top
talent?
Engagement
and retention
of top talent
Differentiation of EVP
relative to
competitors’
Specialization
Manage
graying
workforce
and transfer
of specialist,
unique-tofirm skills.
How are we
managing
the transfer
or specialist
unique-tofirm skills?
Engagement
and retention
of critical
talent
segments
EVP for
critical talent
segments
Globalization
Grow
leadership
and critical
talent
capability
in the right
locations.
Is our
leadership
bench
aligned with
the growth
of the
business?
Identifying
key drivers of
engagement
across
different
geographies
and cultures
Creating
leadership
positions for
local talent
Compliance
risk exposure
in emerging
markets
Risk
Optimization
Build a
culture of
integrity.
Are we
building a
culture of
integrity?
Screening
out highrisk talent in
hiring
Leading
indicators of
misconduct
Diversity
HighPotential
Employees
Executive
Leadership
and
Succession
Leadership
bench
strength
Attraction
and retention
strategies for
diverse talent
Knowledge
transfer
from retiring
specialists
Inclusiveness
of work
environment
HIPO
identification
and retention
Leadership
bench
alignment
with
strategy
Specialist
career
ladders
Sunsetting
noncritical
roles,
unclogging
blocked
pipelines
Global HIPOs
Bench
strength
and talent
pipeline by
market
Ethical
leadership
Source:CEB analysis.
Although Figure 7 provides a general framework, specific strategic objectives
and talent levers will vary from company to company. Good CHROs (and CEOs)
should be able to pinpoint for boards the most important talent levers that impact
the company’s ability to drive performance and achieve strategic goals.
In addition to expanding the perimeter of talent conversations beyond leadership,
the best boards also recenter and deepen conversations with the CEO and
management on performance evaluation and succession.
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Conversation 2: Increasing Executive
Accountability for Talent Outcomes
Boards play a critical role in evaluating CEO and executive performance, especially
in compensation decisions. Forty percent of CHROs listed “executive performance”
as one of the top five issues on which they routinely spend time with the board.
Boards are increasingly concerned with both what financial results the CEO
accomplished and how those results are accomplished. Boards are also more
interested in ensuring performance evaluation captures not only short-term results
but also longer-term value creation. Unsurprisingly, talent metrics have become a
more important part of a CEO’s overall performance scorecard.
However, the relative lack of rigor and objectivity applied to talent metrics has
limited the ability to hold CEOs and executive teams accountable for talent-related
performance. The best companies are developing robust talent measures with clear
links to business value. We have discovered three metrics every board should ask
management to report on and should consider evaluating CEO performance against:
■■
Succession—Instead of searching for ready-now successors for key leadership
positions, evaluate potential, “developability,” and strategy fit of the leadership
bench.
Boards recognize the importance of an organization’s supply of leaders: 85%
receive updates at least annually on the company’s leadership bench strength.
However, these reports tend to focus on metrics such as the number of readynow successors.
Unfortunately, leader readiness metrics are fraught with problems. Because
they rely on a static view of both an organization’s leadership needs and the
successor bench’s potential to grow and develop, leader readiness metrics
provide a distorted view of bench strength relative to the organization’s evolving
needs. A better approach is to scientifically measure potential, developability,
and strategy fit.
Potential. Companies are now bringing more science and rigor to the
measurement of leadership potential. In response, CEB—through its SHL
Talent Management Solutions—has developed two key metrics of leadership
bench strength:
——
——
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L
eaders for Today have the strongest potential to be effective leaders.
They are most likely to respond to leadership development and realize
the investment through performance in a leadership role. They are strong
in the more transactional, managerial, and operational behaviors that
build effective relationships with people; can drill down to the essence of
a problem and evaluate the data to identify a solution; can organize and
mobilize resources; and can adapt to challenges and change effectively.
Slightly less than 7% of managers, professionals, or executives globally are
Leaders for Today.
L
eaders for Tomorrow exhibit strengths in many of the same areas as
Leaders for Today but lack fully rounded profiles. They tend to be strong
in some of the transactional facets of leadership and can deliver against
time, cost, and quality expectations but lack strength in areas such as
communication, influencing, and lateral thinking. Leaders for Tomorrow
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may lack strengths in the areas that turn ideas into effective strategies.
Globally, one in three managers and professionals have this level of
leadership potential—six times the amount of Leaders for Today.
Leading organizations use data-driven assessments of leadership bench
strength to evaluate their supply of leaders against competitors’ and to
understand the contours of their internal supply of leaders. These new
metrics also give boards measures with the same rigor as financial metrics to
evaluate the performance of their CEOs.
Development ROI. Leading firms are also starting to look not only at
potential but also at the developability of senior leaders. Substantial
development resources are often wasted on leaders who don’t change. One
significant root cause is the “I’ve Arrived Syndrome” among talent at more
advanced stages of their careers. CEB research found that this condition
causes only 47% of leaders to actively seek feedback, according to their direct
reports.6
CEB has also found that too few leaders (43%) have high levels of “learning
agility”—effectiveness at learning new skills and knowledge. And even fewer
(33%) have “application agility,” or the ability to apply skills and knowledge
in new and unfamiliar situations.6 So although leaders may have potential
for advancement in the current environment, many will struggle to adapt if
future roles involve a significant change in circumstances or direction.
Firms are increasingly able to distinguish developable talent at the senior
level from those less developable to better direct development resources and
accurately determine the strength of their successor bench.
Strategy Fit. Leading companies are also focusing on senior leaders’ bench
alignment with strategy. As business strategy shifts, leadership bench
capabilities can become misaligned. In the past decade, misalignment has
increased significantly: the percentage of organizations reporting they would
replace members of their senior leadership team if given the opportunity has
increased from 12% in 2003 to 32% in 2013.
The best firms reevaluate their benches for fit with future priorities by assessing
the alignment of each individual with key strategic priorities of the business. For
example, if growth in a new adjacent industry is a critical growth play, how well
aligned are members of the leadership team to help the organization move in that
direction?
Figure 8. Instead of Ready-Now Successors, Use the Three Alternative Dimensions
for Evaluating Leadership Bench Strength
Potential: Measure and benchmark leadership potential.
Development ROI: Distinguish developable leaders
from leaders who are unlikely to continue growing.
Strategy Fit: Evaluate alignment of the leadership bench
with strategic priorities.
Source:CEB analysis.
6
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CEB analysis.
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■■
Engagement—Instead of measuring past distributions of workforce
performance, measure and benchmark engagement capital—particularly
future-oriented engagement.
CEB defines engagement capital as the amount of commitment, discretionary
effort, and intent to stay that employees exhibit given the combination of
their past experiences, present events, and expectations about the future.
Engagement is more than just another way of viewing employee motivation;
employees’ commitment and effort translate into real improvements in
company performance. CEB research finds that companies with highly
engaged workforces achieve:
——
——
——
Three times higher EBITDA growth than industry peers,
23% higher performance against revenue expectations, and
Higher stock prices over a three-year period than industry peers.
Conventional notions of engagement tend to measure how employees
perceive past events and view engagement as simply another way of capturing
the employees’ prior performance levels. Eight out of every 10 chief human
resource officers report engagement levels to their boards, and the vast
majority share only past or current engagement levels.
Engagement capital, however, recognizes that employee expectations about
the future are also a critical factor in driving performance. Whereas the
past and present influence performance today or in the near term, future
expectations are a reserve of effort that CEOs can use to achieve longerterm business goals. The best CEOs actively manage and build these capital
reserves through their organization’s performance management and rewards
systems and use measures of engagement capital as key input for critical
business decisions.
■■
Integrity Capital—Instead of measuring observed ethics and compliance
violations, assess the CEO on creating a culture of integrity.
Although organizational culture takes many forms, a culture of integrity
has an especially significant impact on company performance. Over the
past several years, CEB has extensively researched the value of integrity
capital and how to measure it. Integrity capital is a key talent metric for
CEOs because of its impact on total shareholder returns: companies with a
higher culture of integrity have 10-year total shareholder returns that are 16
percentage points higher than companies with lower integrity scores.
Integrity capital consists of seven readily measurable components that boards
can use to assess the extent to which CEOs are building a culture of integrity
in their companies. These components range from employees’ comfort with
speaking up about misconduct to the tone the CEO and senior leadership team
set at the top of the organization. A full list of components and the metrics for
assessing a company’s integrity capital can be found at www.cebriskclarity.
com.
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Conversation 3: Strengthening CEO
Succession Strategies
Most board members will experience at least one CEO transition during their
tenures, as they occur relatively frequently. Eighty-three percent of the Fortune
100 had a CEO transition between 2001 and 2012, and the average company had
1.16 CEO transitions during that period.
Outside of turnaround situations, boards strongly prefer to source CEO successors
internally due to the heightened cost and failure rate associated with external
hires. In fact, 72% of CEO transitions between 2001 and 2012 for Fortune 100
companies were internal promotions. Given the likelihood of a CEO transition
and the preference for internal successors, boards are rightly focused on ensuring
sufficient depth in the leadership bench.
In planning for succession, boards face both supply- and demand-related
challenges. On the supply side, the CEO’s direct reports have less experience than
before. Compared to direct reports a decade ago, the CEO’s direct reports today
have three years less tenure. In 2001, 45% of senior leadership team members
were “lifers” at the company; in 2012, it was only 22%.
Figure 9: Potential Successors Have Less Experience
Percentage of CEO Direct Reports at Fortune 100 Companies Who Are Company “Lifers”
45%
50%
22%
25%
0%
2001
2012
Source:CEB analysis.
On the demand side, it is increasingly difficult to predict what the right “successor
profile” should look like. The profile of the ideal CEO necessary to lead the company
today will likely be outdated by the time the current CEO departs. Evolving business
conditions and competitive dynamics make it difficult to plan for a specific profile.
Furthermore, the nature of leadership is evolving as work becomes increasingly
matrixed and information intensive. CEB research suggests that leaders increasingly
need to:
■■
■■
■■
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Create conditions for teams to collaborate across geographic and organizational
matrixes,
Drive engagement across a multigenerational and global workforce, and
Quickly and effectively synthesize increasingly vast amounts of information
about business performance and competitive dynamics.
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Rather than trying to predict the leader profile needed when succession is triggered
or assuming it’s the same as the current CEO’s, boards are asking CEOs to actively
broaden direct reports’ experience profiles and increase the optionality of the current
leadership bench. In particular, CEB recommends taking the following steps:
■■
Broaden the experiences of the leadership team to develop potential successors.
■■
Consider CEO contenders from nonobvious roles.
■■
Increase senior leadership diversity to expand the options for potential
successors.
As talent becomes an increasingly important differentiator of corporate
performance, the bar is rising both for management and boards to manage and
monitor risks arising from talent. Boards at the best companies differentiate
themselves from boards at competitor companies based on their depth of
understanding of critical talent issues that impact strategy and performance.
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Getting Started
Three Steps to Begin Shifting the Talent Agenda
■■
Assess. Add an agenda item to the next board meeting on critical talent risks.
——
——
■■
■■
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Ask the CHRO to lead a discussion on the critical talent risks to your
business performance.
Provide guidance on questions that the board hopes to answer (e.g., How do
our talent priorities link to the firm strategy?, Where are we most in danger
of not having the talent we need?).
Plan. Assign a compensation or talent committee member to propose talent
topics the board should consider moving forward with in addition to CEO
succession and executive compensation. Discuss with the full board, and agree
on a recurring talent agenda at board meetings.
Act. Ask the board secretary to create a calendar addressing critical talent
issues, and work with management to define appropriate materials to support
conversations.
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