Already a Bloomberg.com user?
Sign in with the same account.
Here are seven questions corporate directors should be asking to determine how well career development and succession planning are being implemented
The global credit squeeze and resulting meltdown in financial markets have clearly taken over not just the headlines but corporate leaders' share of mind as well. However, boards ignore other issues at their peril. Global competition and the war for talent have reached a point that require corporate boards to be confident that their companies are focusing on talent management at the highest levels.
It has been 10 years since McKinsey & Co. issued its much-cited report, "The War for Talent," which stated that the U.S. was facing a long-term talent shortage. The U.S. Government Accountability Office estimated that half of 3.2 million baby boomers who turned 62 in 2008 would take early retirement. While that seems less likely given the recent hit most retirement funds have incurred, the underlying demographic trend of an aging workforce continues to haunt corporations.
There are other factors at play as well. For example, the recent spate of mega-mergers will have long-term talent implications. At the outset, merged companies, in search of economies of scale, lay off employees. Post-merger, these companies frequently face talent shortages in critical areas where the scale of operations have been greatly increased. The global span of large corporations, an inability to bring professional and technical workers into the U.S. because of visa limits, and a dearth of U.S. graduates in such critical specialties as engineering also underscore the need for increased diligence in managing human capital.
To determine how well career development and succession planning are being implemented at the senior executive level and below, there are seven key questions directors should be asking about the companies they govern:
1. What C-level succession-planning process is in place?
There are generally three levels of succession planning for senior executives (including the CEO, CFO, CIO, CHRO, and business-unit leaders). The first is an orderly succession plan based on the executive retiring at a specific age. The second is an intermediate succession plan that anticipates that a key executive may leave prior to an orderly retirement. The third is an emergency plan that can be immediately enacted if an executive is suddenly incapacitated or leaves the company precipitously. Boards should ensure that all three plans are in place and should spend time getting to know the individuals named as next-generation successors.
2. How is the company assessing competencies of its senior executives and those immediately below them?
The board should know the strengths and weaknesses of the senior team and the methodology used to create those assessments. These evaluations should include both assessments and other sources of data, as well as external benchmarking. As a result, HR should have a list of internal and external candidates who can take over any mission-critical job. There should be a seamless transition if a critical member of the team needs to be replaced.
3. How much time do senior executives spend on succession planning at the senior executive level?
It is one thing to say a company has a thorough succession plan and another for senior executives to implement it on a programmatic basis. Companies like General Electric (GE) and PepsiCo (PEP) spend considerable time on talent development. HR facilitates, helps with assessments, and coordinates the activity, but it is not HR's job to make final decisions. That is the role of line managers. Their boards, in turn, are kept fully informed on succession plans for mission-critical roles and are assured that key line managers are also developing successors. Indeed, GE and PepsiCo are considered to be among the country's top leaders in talent development. Their alumni have spread the gospel of talent management through Corporate America. Increasingly, boards of best-practice companies delve further into the talent pool.
4. Who owns leadership/career development and succession planning below the CEO, and how are they being run?
The head of human resources should report regularly to the board, or the relevant board committee, to answer this question. If not, as General Electric's CEO Jeff Immelt says, "The HR executive should find another job because the company doesn't value HR strategically enough."
5. How is the company approaching global workforce planning? What are the critical talent gaps the company faces over the next five years, and what programs does the company have in place to fill them?
These questions involve not only identification of critical jobs globally, but issuance of regular progress reports on how they are being filled. Directors should be aware that global companies with sophisticated HR departments are developing workforce planning. Boards needn't know the details of workforce plans, but they should be asking questions to make sure appropriate planning is being done.
Unfortunately, many companies have not yet taken an advanced approach to this issue. Most companies know in a global economy their growth will be in emerging markets where they need new workforces. Exporting managerial talent to these markets is a temporary solution and frequently, not ideal. Companies need to develop local human capital, but with competition for workers and, especially, managers, that isn't easy. Directors should understand the challenges.
6. What is the company doing to retain mission-critical and high-potential talent?
It is generally less expensive and more productive to keep the people you have than to recruit new talent. Because the U.S. is facing a long-term shortage of critical talent, workers can move more easily from job to job. Directors should know how the company is ensuring long-term competitiveness by keeping critical people in place.
7. Is the HR function providing the critical leadership needed to drive these key questions?
This is a sensitive topic but one that directors should consider. In a global, multicultural market, HR is called upon to function in ways it never did before. To find, develop, and retain human capital, especially leaders who can thrive in global companies, is a role of major importance. The top HR leader needs both a global and local outlook—a strong sense of the overall human capital needs of the corporation, and specific knowledge of those needs by geography and function. It is a difficult, demanding, and delicate position. The increasing importance of the top HR role may result in demands exceeding the capabilities of executives running the department.
Twenty years ago, HR was an administrative function with a host of process-oriented tasks that needed to be done to recruit, train, and deploy workers, and it didn't have a seat on most senior leadership teams. In many companies, especially those that understand the importance of talent and increasing complexity of global enterprises, that is no longer true. Boards should consider human-capital management as important as fiscal and risk-management. The future of enterprises in a fiercely competitive world depends on finding leaders who can deploy capital, assets, and people innovatively.