What else do we know about changes in the executive suites? As has been so often highlighted by the press in recent years, executive turnover is frequently precipitated by poor performance. A recent study about the relationship between corporate performance and top executive dismissal confirmed that top executives are indeed fired for poor performance. Ac- cording to this same study, however, only truly wretched performances trigger top executive dismissals. In other words, corporate performance has to plummet, dramatically, to precipitate a senior executive job separation. 4 And finally, we know that when changes at or near the top happen, they usually set off a cascade of changes at the next several rungs down the ladder. Top-level turnover increases markedly around times of CEO turnover. In particular, the departure of a long-tenured CEO increases the chances of managerial turnover at the next organizational levels. 5 When and Why Change Should Happen Our firm has conducted several studies of state-of-the-art executive ca- reer management. The consulting firm McKinsey & Company has con- ducted similar studies on a parallel track. Both sources of research confirm that most companies fall far short of best practice when it comes to making people decisions. To me, the results are astounding. More than three-quarters of the executives surveyed believe that their organizations: • Don’t recruit highly talented people • Don’t identify high and low performers • Don’t retain top talent and assign the best to fast-track jobs • Don’t hold line managers accountable for people quality • Don’t develop talent effectively That’s worth underscoring: Three out of four respondents said that their own companies came up short in these critical areas! Even worse, Knowing When a Change Is Needed 89 ccc_people_085-116_ch04.qxd 4/3/07 1:07 PM Page 89 more than 90 percent of executives reported that their organizations aren’t good at removing low performers quickly. 6 As I noted in Chapter 3, human nature inclines us to procrastinate in our people decisions. Even when things are going badly, we move slowly. And perversely, we become especially risk-averse when things are going well (if it ain’t broke, don’t fix it). All of this adds up to one thing: In good times and bad times alike, we tend to postpone making important people decisions until it is too late. But this simply isn’t good enough. As the world moves faster and faster around us, we can’t keep moving slowly, or fail to move at all. We have to be proactive. “Leaders relentlessly upgrade their team,” Jack Welch observes, “using every encounter as an opportunity to evaluate, coach, and build self-confidence.” 7 Inept managers not only do their own jobs badly; they also destroy the performance (and potential) of the people around them. In their re- cent book about what they call “evidence-based management,” Jeffrey Pfeffer and Robert Sutton reviewed the findings of research on organiza- tional climate over the past half-century. They report that “60 percent to 75 percent of the employees in any organization—no matter when or where the survey was completed, and no matter what occupational group was involved—report that the worst or most stressful aspect of their job is their immediate supervisor.” “Abusive and incompetent management,” Pfeffer and Sutton con- tinue, “creates billions of dollars of lost productivity each year.” And study after study, they conclude, “demonstrates that bad leaders destroy the health, happiness, loyalty, and productivity of their subordinates.” 8 Again, the focus of this chapter is problem finding. Given our very human tendency to procrastinate, how do we build in a bias toward action—toward rooting out problems and acting on them? I believe the first step is to be aware of, and on the lookout for, the kinds of situations that tend to call for change more urgently or more powerfully. 90 GREAT PEOPLE DECISIONS ccc_people_085-116_ch04.qxd 4/3/07 1:07 PM Page 90 Acts of God, Acts of People Sometimes, the need to change horses arises out of a dramatic, even hor- rific, event. I will always remember the day in May 1995 when José Estenssoro’s private jet crashed in the Andes. At the time of his death, Estenssoro was highly respected in the international business community, in large part due to his remarkable restructuring and privatization of YPF, Ar- gentina’s largest oil and gas company. His unique leadership had achieved a very impressive initial turnaround (which included cutting staff by 90%), which was followed by a successful international expan- sion. The story was so remarkable, in fact, that Harvard Business School produced a series of five cases about the transformation of YPF, from its revitalization in Argentina to the successful acquisition and turnaround of a troubled U.S. oil company, on the company’s road to becoming a global enterprise. 9 At the very peak of all this success, Estenssoro’s plane went down. The company never regained its momentum, and it was ultimately taken over by Repsol, Spain’s largest oil company. The damage wasn’t limited to YPF alone: Most analysts believe that the lack of leadership at YPF following Estenssoro’s death caused a significant decline in oil explo- ration and a resulting failure to scout out additional oil and gas reserves in Argentina. By definition, we can’t head off, or even anticipate, acts of God. The best we can do is understand that these events, if and when they hit us, may have a devastating impact on our organization. Does our com- pany have a robust succession plan in place? At the very least, do we have a consensus candidate to step in and take the reins if the “hit-by-a- bus” scenario actually comes to pass? I’ll return to these subjects in later chapters. But acts of God are the rare exception. In business, as in most of life, acts of people are what we have to worry about. So, what are the Knowing When a Change Is Needed 91 ccc_people_085-116_ch04.qxd 4/3/07 1:07 PM Page 91 man-made scenarios that are likely to call for people changes, and which we can successfully anticipate and respond to? Some scenarios, especially those that originate outside the com- pany, are pretty straightforward. People changes have to be made with increasing frequency in response to macro-level forces, such as globaliza- tion and the rapid evolution of technology. In its February 2006 article on “The Toughest Jobs in Business,” Fortune pointed out that while yes- terday’s managerial headaches were mostly generated by challenges like sourcing, making, and marketing goods in a manufacturing-based econ- omy, today’s headaches grow out of continually altering business models in an information-based economy. In the past, you needed massive mar- ket power in commodity businesses; today, you have to contend with greatly increased customer and investor power in all businesses. In the past, Fortune pointed out, you had to know how to negotiate with unions; today, it’s all about attracting and retaining top talent. 10 Where does your company’s leadership—including your board—fit into this picture? Are they looking forward, or backward? In addition, people changes often have to be made in response to industry-level forces. Some of these forces are implied in the macro-level changes outlined above, for example, technology shifts within your in- dustry. But they can also be viewed from the opportunity side of the in- dustry ledger. A study by Wasserman, Nohria, and Anand that attempted to measure the impact of leadership on company value also focused on the conditions under which leadership matters the most. 11 They con- cluded that senior leadership has a much higher impact on company value when (1) the organization has abundant resources (including low financial leverage and high organizational slack), and (2) opportunities in the industry are scarce. If your company meets these two conditions, the potential benefit of making the right people decisions, including peo- ple changes, is likely to be very high. Finally, people changes often have to be made in response to discon- tinuities. In this category I include things like launching new businesses, doing mergers and acquisitions, developing and implementing new 92 GREAT PEOPLE DECISIONS ccc_people_085-116_ch04.qxd 4/3/07 1:07 PM Page 92 strategies, dealing with performance problems, and coping with growth and success. Let’s look at these five discontinuity scenarios in turn, with an eye toward the need for people changes that may be presented by each. Launching New Businesses As a rule, companies must grow or die, and one of the critical growth paths for most companies is the development of new businesses. But as the research from CCL clearly indicates, the failure rate of executives in startup situations is very high in the case of both internal promotions and outside hires. Even the organizations with the best leadership-development skills may decide to hire from outside when entering new businesses. When GE Medical Systems entered the ultrasound business, for example, the company chose to hire a highly qualified number-two prospect from a key player in the market. Why? Because, as Jack Welch explained to me, that individual “built a $1 billion business from nothing over 10 years, whereas before that, we had failed in that business at least three times.” 12 Industry knowledge counts for a lot. An analysis of GE “graduates” who signed on as CEOs of other companies confirms the fact that those individuals were much more effective when they took the reins of a com- pany in a similar industry. So the technical, regulatory, customer, or sup- plier knowledge unique to an industry is an invaluable asset for performance, and a particularly valuable one when launching a new business. 13 If you don’t have this talent inside, you’ll have to go outside. On the other hand, it’s not always a great idea to go with an out- sider when launching a new business, even if all of the desired industry wisdom is not resident inside your existing businesses. Why is this so? Be- cause in order to successfully launch a new business, an executive team needs to be able to deal effectively with political, social, and cultural is- sues within the parent company, and this is a task at which (only) inter- nal candidates tend to excel. In short: When the launch of a new Knowing When a Change Is Needed 93 ccc_people_085-116_ch04.qxd 4/3/07 1:07 PM Page 93 venture calls for a people change, both types of candidates—internal and external—should be properly considered. A frequent people-decision mistake that companies make in the context of new ventures is putting someone of limited competence or se- niority in charge. This consciously or unconsciously reflects the small initial size of the venture, but it can be a self-fulfilling prophecy. The point, as Jack Welch indicated in the same conversation mentioned ear- lier, should be to put the best people where the most potential is. Making the right people decisions when entering new businesses is critically important, not only because of the significant challenges and low success rate of startups, but also due to the company’s lack of famil- iarity with the new sector. Among other challenges, monitoring perfor- mance is usually harder in an unfamiliar context, and the warning lights may not start flashing until it’s too late. Doing Mergers and Acquisitions Five years after joining Egon Zehnder International, I found myself deal- ing with a market that was practically exploding with unprecedented de- mand for managerial skills. The setting was Argentina in the early 1990s, when a new govern- ment sparked a wave of privatizations of state-owned companies in major sectors, including telecommunications, electricity generation and distri- bution, water distribution, oil and gas, airlines, and several others. Col- lectively, these industries comprised a major proportion of the country’s gross national product and domestic employment. The leaders of the businesses within these industries were faced with the massive challenge of simultaneously adjusting to the new de- mands of a deregulated market, increased competition, and fundamen- tally different shareholder objectives. From the outset, it was clear that achieving a much higher level of productivity and effectiveness in these industries would be critically important. But it would not be easy. Some of the companies were plagued by 94 GREAT PEOPLE DECISIONS ccc_people_085-116_ch04.qxd 4/3/07 1:07 PM Page 94 incredible levels of ineffectiveness, beginning (but not ending!) with phantom employees. (In more than one case, 10% of the payroll simply vanished when proper ID checks were put in place.) Most of these com- panies lacked not only the necessary telecommunications infrastructure, but also the data that would be needed to fuel the business once all the fiber-optic cables, routers, and servers were finally in place. I’ve already cited the case of YPF, the oil and gas enterprise that José Estenssoro helped transform. As a result of the efforts of Estenssoro and others, which included substantial restructuring, spinoffs, and some acquisitions, productivity at YPF multiplied tenfold. A crucial step in combining and transforming those companies was determining the skills that would be critical to succeed in the new envi- ronment, identifying those existing managers who could reasonably be expected to develop them, and also agreeing on which positions could be filled only through external recruitment. Equally important, and perhaps even more vexing, was the merger- related challenge of dealing with the “two bodies for each slot” phenom- enon. (For example, when two companies merge, the combined entity needs only one CFO.) Fortunately, the shareholders in those businesses quickly recognized the benefit of a specialized and independent appraisal process in order to decide whom to retain, develop, and replace. This gave me the opportunity to participate in a number of major management appraisal projects in the context of mergers and acquisi- tions. Based on those and subsequent experiences, I learned that mergers and acquisitions almost always prompt a host of critical people deci- sions—and all too often precipitate corporate malpractice. A case study published in the Harvard Business Review captured the essence of these challenges. 14 It describes the hypothetical merger between two pharma- ceutical companies, which caused predictable anxiety among both groups of employees, up to and including the senior ranks. The CEO of the merged company had to decide who would stay, and who would go— against the backdrop of a sagging stock price and the outmigration of some of his most talented executives. Knowing When a Change Is Needed 95 ccc_people_085-116_ch04.qxd 4/3/07 1:07 PM Page 95 In cases like this, it’s especially important to avoid playing politics or playing favorites. But it’s also important to avoid the phenomenon of “horse trading”: I’ll take a less qualified candidate from that group because I just took a strong candidate from this group. All of these are direct paths to poor people decisions. At the risk of sounding like I’m advancing the interests of my own industry, here’s where an objective, specialized, and independent assess- ment of the key managers can prove invaluable, especially when it comes to deciding who goes and who stays. One of the first cases of this type in which I participated involved the privatization of a large service utility. Meeting the investment and service targets within a tight timeframe constituted an extremely tough challenge. At the same time, the organization completely lacked a re- sults orientation, and was totally divided internally as a result of a poly- glot management team, representing the different partners of the joint venture that was awarded the privatization: local managers from the for- mer state-owned company, other managers from a new local shareholder, and foreign managers of two different nationalities. The managerial challenge was dramatically compounded by the po- litical games of the various shareholders, who defended their own repre- sentatives while bargaining for the key managerial positions. Because of all of these difficulties, the owners of the enterprise decided to conduct an objective and independent appraisal of the senior management team in order to confirm the key people decisions. The result of this appraisal is summarized in Figure 4.1. The CEO decided to act on these assessments at a juncture when approximately half of the most critical positions were filled with a highly suspect manager—either in terms of general competence, or of experi- ence that might be relevant to the position. Obviously, this corporate overhaul was far from easy. But as a result of this CEO’s willingness to bite the bullet and do the hard thing in the short term, the company very rapidly achieved remarkable levels of growth and profitability. In fact, for several years it outperformed the other large competitor in the 96 GREAT PEOPLE DECISIONS ccc_people_085-116_ch04.qxd 4/3/07 1:07 PM Page 96 same market, which had none of the complexities of a joint venture with two technical operators and several partners representing three different nationalities. Developing and Implementing New Strategies By any meaningful measure, the pace and scope of change in organiza- tions has grown enormously over the past several decades. I’ve already touched on the impact of powerful global economic and technological forces that push companies to reduce costs, change business processes, improve the quality of products and services, locate new opportunities for growth, and increase productivity. Very often, the scope of change extends even to the core corporate strategy. A recent book, Breaking the Code of Change, presents a very com- prehensive review of change in human organizations, including purpose, leadership, focus, and implementation issues. It includes a chapter by Jay Knowing When a Change Is Needed 97 Critical area with questionable manager Less urgent to act Critical area with qualified manager FIGURE 4.1 Short-Term Actions for Top Positions ccc_people_085-116_ch04.qxd 4/3/07 1:07 PM Page 97 A. Conger, who convincingly argues that—depending on the magnitude of change and the risks and investments that are involved—senior exec- utives are the best-positioned individuals to lead successful organiza- tional change efforts. 15 That may sound obvious enough. But shortly after starting my ex- ecutive search experience, I began focusing on the logical extension of this premise: that different strategies require different managers. The pre- vailing myth of the “universal manager” who could manage anything, under all circumstances, was just that: a myth. When you change strate- gies, you very often have to change horses. One of the first clients I worked for was a major conglomerate that had all sorts of businesses within its portfolio. In the upper-middle ranks of this sprawling enterprise was a very impressive young manager, who recently had completed a major turnaround in a situation where success seemed almost impossible—so much so that many seasoned executives had refused to take on the job. The details are relevant to our story. This outstanding manager had taken over a business that was recording losses in excess of 30 percent of its sales, which was in a highly leveraged financial position, and where— due to the influence of an extremely powerful union—layoffs appeared impossible. Despite these very real obstacles, our young star was able to dramatically cut expenses while still growing sales and restoring the company’s profitability. In the end, against all expectations, he was able to sell the business for a modest profit. So far, so good; based on his success, however, he was promoted to manage one of the stars in the portfolio: a highly competitive consumer goods company in a rapidly growing market. A year after this glorious ap- pointment, the manager was fired; his performance was so poor that he had gone from hero to goat. What happened? You can probably antici- pate the answer. His ruthless, iron-fisted managerial style—outstanding for cutting costs and extracting productivity in a very limited market— didn’t fit the new context, which required skills in competitive analysis 98 GREAT PEOPLE DECISIONS ccc_people_085-116_ch04.qxd 4/3/07 1:07 PM Page 98 [...]... out where you stand Later chapters in this book will analyze in much more detail what to look for when making people decisions, where to look for candidates, and how to appraise people Before you can take those steps, however, you have to make sure that you invest enough time and effort in objectively assessing your management In circumstances of change and discontinuity, external advice can be particularly... damage friendships by making people decisions? Almost certainly Will people respect your decisions, if they believe you ve made them honestly? Almost certainly So acting wisely and promptly when it comes to tough people decisions is a precondition both for organizational performance and for your own personal success Implementing Change In order to properly implement change, you first need to confirm the... process in advance, so that it will be as disciplined and objective as possible I’m assuming, of course, that you aren’t being driven by inappropriate motivations, and that you truly want the best outcome for your organization Well, if that’s true, then your real challenge is to make your processes transparent and predictable—in other words, to reflect your ccc _people_ 085-116_ch 04. qxd 4/ 3/07 1:07 PM Page... a clear strategy and a skilled ccc _people_ 085-116_ch 04. qxd 4/ 3/07 1:07 PM Page 1 04 1 04 GREAT PEOPLE DECISIONS implementation of that strategy But looking into the future and changing a business calls for different kinds of resources and skills A recent book by George Day and Paul Schoemaker addresses this challenge.23 They make the case that most senior managers in the United States and Europe have... Monitor and Assess Alternatives Assess Costs and Opportunity Management Appraisal Outcome and Actions Forces that Fight Change Let’s assume that you know exactly where you stand, and (based on that understanding) you know exactly what you need to do, in terms of the people changes that are required to move your organization forward Unfortunately, that’s still not good enough It’s one thing to know, and. .. and ambitious executives How would the company choose? What was it looking for? Figure 5.1 profiles the six internal candidates It summarizes the Ranking E A 1 A 2 C 3 B F E 4 E B F 5 D 6 F Experience C B C D D A Leadership and Relational Skills FIGURE 5.1 Choosing the CEO’s Successor, Part I Profiles of Six Internal Candidates IQ ccc _people_ 117-156_ch05.qxd 4/ 3/07 1:11 PM Page 120 120 GREAT PEOPLE DECISIONS. .. consultant some 20 years ago was that you get hired on experience and you get fired on personality What is personality, and how much does it matter, and when? Personality refers to the unique organization of characteristics that define an individual and determine his or her pattern of interactions with the environment These characteristics include thoughts, feelings, and behaviors Obviously, these are fairly... direction they would willingly follow,” four characteristics come up consistently: 1 Honest 2 Forward-looking 3 Competent 4 Inspiring ccc _people_ 085-116_ch 04. qxd 4/ 3/07 1:07 PM Page 1 14 1 14 GREAT PEOPLE DECISIONS Since 1987, the first time the survey results were published, these four characteristics have come in at the top, in this order People really do want honesty in their leaders Will you bruise egos and. .. were beyond any individual’s control Are you experiencing a bumpy ride in your car? Well, is it the car? If so, get a new car Is it the road? If so, don’t dump the car Consider a broader range of options Coping with Growth and Success Sometimes people are surprised to find this scenario included on my list of reasons why people changes may be needed But not everybody can deal successfully with success... implemented When ccc _people_ 085-116_ch 04. qxd 4/ 3/07 1:07 PM Page 115 Knowing When a Change Is Needed 115 Jim Collins was asked how “good to great companies decide who should get off the bus, and how they implement those difficult decisions, this was his answer: They are rigorous, not ruthless To be ruthless means hacking and cutting, especially in difficult times, or wantonly firing people without any . builder. 1 04 GREAT PEOPLE DECISIONS ccc _people_ 085-116_ch 04. qxd 4/ 3/07 1:07 PM Page 1 04 Fortunately, the company’s vastly improved public image enabled it to attract a much higher caliber of candidate. look for candidates, and how to appraise people. Before you can take those steps, however, you have to make sure that you invest enough time and effort in objectively assessing your management. In. critically important. But it would not be easy. Some of the companies were plagued by 94 GREAT PEOPLE DECISIONS ccc _people_ 085-116_ch 04. qxd 4/ 3/07 1:07 PM Page 94 incredible levels of ineffectiveness,