Developing the talent gene pool

With high-potential talent becoming a scarce resource, Andrew Olivier and Margaret Wright discuss the board’s role in building sustainable talent.

Talent development is pushing its way up the board agenda. The leadership “gene pool” has always been one of the top five contributions of an effective board, closely aligned with CEO succession.

However, it often struggles for space on the board agenda behind monitoring the company’s health, performance and risk, deciding CEO compensation and ensuring the right strategy.

A Booz & Company report attributes both better long-term financial outcomes and longer CEO tenure to planned succession.

Organisations are taking notice and promoting insiders is making a comeback.

Identifying and developing internal talent is key to building the leadership gene pool that supports planned succession.

Talent is also the “new black” for other reasons. As technology subsumes factory floor and back office tasks, organisations need people who understand the business end to end, relate to others, solve difficult problems and take the initiative.

As the rate of change accelerates, organisations need leaders who add value to their people – not just track boxes and numbers.

Effective boards pay attention to how their organisations find and develop talent.

Developing and retaining talent requires a combination of effective leadership, empowering structure and understanding the required capability.

Leadership inspires and encourages the right talent, knowing where it is needed and deploying it in empowering structures that support organisational intent.

Complexity is key to defining the level of talent required. The complexity the organisation must deal with drives the required combination of capability, leadership and structure.

Ashby’s Law of Requisite Variety states: “As external complexity increases, internal complexity must also increase if an organisation (or organism) is to handle the external environment effectively.”  The required talent is directly linked to the organisation size and the complexity of its strategies and intent.

Managing complexity effectively requires organisations to have deliberate hiring, development and promotion strategies that ensure managers and leaders have the innate skills required to manage the complexity associated with their role.

Scale can create unnecessary complexity. Unfortunately as companies grow, promotion is often ad hoc. Organisations haphazardly add new roles and layers to manage unexpected scale and product or service diversity.

The same happens during a boom when new people are introduced to handle unexpected volumes of work.

Existing staff move into management. In the process, organisations inadvertently build in bureaucracy and unnecessary process complexity. This leads to inefficiencies, excess cost, frustration and stress.

Research indicates that the maximum number of required layers is seven – necessary only for the largest organisations, for example Shell, BHP Billiton and the US Army.

Most local companies require two to three, national companies four or five and multinationals six.

Many organisations end up with more or fewer layers than they need or the wrong people in management roles, resulting in micromanagement or conversely over-delegation, causing lower level staff to flounder.

Time spans, or the time required to complete the most complex task given by managers or agreed by the board, are critical.

Longer time spans require greater ability to deal with an uncertain future while maintaining direction and simultaneously responding to changes.

Institutional investors and traditional measurement and reward systems add to the pressure on CEOs to deliver short-term results to remain in the job.

Thus the board must increasingly provide the balance and support for long-term thinking.

This echoes the call by fund manager Simon Marais for executive pay to be based on corporate performance over more than just one year.

We have seen numerous examples of CEOs appearing effective in the very short term, but acting to the detriment of an organisation over the medium or longer term.

A glaring example was Al Dunlap and Sunbeam. 

Leaders of complex organisations need the ability to manage that complexity if they are to be successful. If people move upwards too quickly or above their natural ability, they may struggle to add real value to the efforts of their teams.

Managerial leaders need the capability to work at one level above their team (n+1). If they cannot cope with the requisite complexity (n-1), they cannot add value.

This applies from bottom to top. This means the board composition must have the inherent capability (with the appropriate mix of knowledge, skills and experience) to deal effectively with the required level of organisational complexity.

In a recent address to the Australian Institute of Company Directors, Mike Hawker, director of Aviva and Macquarie Bank, observed: “Not only do board directors need to have the right qualities to be a director, but they also need to be of the right capability… I am a proponent of the concept of ‘levels of work’. If you have a board of directors with less capability than its management team or the company’s business portfolio, then you have a recipe for disaster. Likewise if the CEO does not have enough capability, he or she is unlikely to stay very long.”

So what does this mean for boards looking to ensure effective CEO succession, preferably from the inside? And what does it mean for boards and CEOs looking to maximise the acquisition and development of talent throughout the organisation?

The ability to deal with complexity is innate and while it emerges at different rates for individuals with maturity, it is a capability that can be identified and developed.

Research has shown it is possible to predict this capability over time, which follows a set of non-linear mode curves.

This enables organisations to identify high-potential people and plan their career paths to maximise their value.

Much of this thinking comes from the work of Dr Elliott Jaques.

Organisations using the operating model (RO or “requisite organisation”) range from behemoths like the US Army, British National Health and BHP Billiton to small not-for-profits like the Sydney-based Good Return.

Some have used this operating model for more than five decades. It has remained in constant usage because it provides a framework for directors and executives to build organisational ability to deliver on their strategic intent.

A simple dashboard can plot role complexity, overlaying individual capability. When people are matched to their work challenges, they are often “inflow” and feel their work is valued, recognised and their decision-making is intuitive.

Most often causes for things not to flow are found in faulty structural design or leadership incompetence.

The practices are particularly pertinent at board level with boards being accountable for ensuring the continuing development of the executive team, determining its remuneration and making provision for succession planning.

Effective managerial leaders new to the practices often find they may have informally adopted similar practices unconsciously.

One practice that chairmen in particular find useful is the “manager once removed” role (colloquially known as MoR or skip level reporting). This complements and builds on the role of the CEO as direct manager, but gives the chairman a unique value add.

This leadership role has a whole different function to that of a line manager and applies specifically to all skip level reports.

Ray Grigg, a director of South Australian motoring group RAA, describes how he applies it. “As an MoR, I meet with each of the executive team … after they have had their performance meeting with the managing director. I take a standard approach with each general manager, encouraging general discussion in a relaxed and informal manner. I ask them seven questions including:

• Are you comfortable with the way the CEO and the board are leading the organisation?
• What are your aspirations – where do you see your career heading?
• How can I assist you in your professional development?
• General managers say they value the opportunity to engage with the chairman, build better relationships with the board, operate in a more collegiate manner and gain support for the future.”

MoR has no authority for performance review or setting work tasks. Distinct from coaching, it provides four key value adds:

• Builds talent pool capability - brings a wider perspective of the organisation in managing career development. Supports broad based succession planning at all levels, enabling managerial leaders to assess development priorities and capability gaps.
• Ensures fairness and objectivity - provides a forum for board members to understand how the executive team perceive the CEO, chairman and board are leading the organisation and allows for a consistent understanding of intent, strategies and risk.
• Ensures quality of leadership - provides a first-hand opportunity to form views on the quality of leadership at the skip level and possibly to mentor executives.
• Tests alignment of understanding - by identifying different perspectives across the team, including emerging issues/challenges not previously obvious to the board.

MoR also assists in reviewing performance in close collaboration with the CEO and informs the remuneration committee.

Using the MoR process for the first time, chairman of South Australian aged care provider Life Care, John Stock, observed: “The opportunity of meeting as an MoR with our key executives was particularly meaningful for them and for me… The executives relished the opportunity of discussing directly with the chairman their perceptions of the organisation; of their roles and perceived contribution; and their professional development aspirations. We were able to share some of the key challenges facing the board and the leadership of the organisation and its impact for them. Future MoR meetings - at all levels – will enhance our talent management and human resource planning.”

In conclusion, talent attraction and retention depends on having an effective structure and employees who are inflow with the complexity of their roles.

The more complex the enterprise, the greater the requirement for boards to ensure this alignment.

The board’s role is increasingly critical in ensuring an understanding of the leadership gene pool, because high-potential talent is a scarce resource.