Book Excerpt..
An agenda for the
talent-first CEO
In
tumultuous times, a company’s talent is its most valuable and reliable asset.
What does it take to lead an organization that truly unleashes its human
capital?
In our combined
90 years of advising CEOs and their boards,
the three of us have never come across a moment like this, when virtually every
CEO we work with is asking the same daunting set of questions: Are my company’s
talent practices still relevant? How can we recruit, deploy, and develop people
to deliver greater value to customers—and do so better than the competition? How can I be sure that I
have the right approach to talent—and the right HR—to drive the changes we need to
make?
We sought to answer these questions in our
new book, Talent Wins, which explores what
it takes to build and lead a talent-driven organization. The list of critical
priorities, which includes everything from continual, agile reorganization to
the reinvention of HR and the creation of an external M&A strategy, is
long—and it creates a complex set of challenges for the CEO. The experiences of
CEOs at talent-driven companies such as Amgen, Aon, Apple, BlackRock, Blackstone,
Facebook, Google, Haier, Shiseido, Tata Communications, and Telenor suggest
that meeting those challenges requires a distinct set of mind-sets. As we show
in the book, leaders at talent-driven companies are as focused on talent as
they are on strategy and finance. They make talent considerations an integral
part of every major strategic decision. They ensure that their own focus on
talent is woven into the fabric of the entire company. And they are comfortable
leading flattened organizations—often centered around the work of small,
empowered teams—built to unleash the talent that will drive outsize value.
How do you become such a leader, and lead
such a company? This article focuses on four key priorities for the CEO. The
first two are moves the CEO must make to secure alignment at the top of the
organization. Misalignment at the top is trouble for any company, but it is
disastrous for talent-driven ones, where HR and finance must work in tandem and
the CEO must oversee a complex, fluid structure. With that foundation in place,
CEOs can turn their attention to the two most critical aspects of leading a
people-first company: finding, recruiting, developing, and deploying key
talent; and ensuring that talent is truly integral to every major strategic decision
across the organization.
Lead
with a G-3
The talent-driven organization needs a
central brain trust, and all that we’ve seen argues for it being a “G-3”
consisting of the CEO, CFO, and chief human resources officer (CHRO). Why these
three executives in particular? Because deploying financial capital and human
capital together is the key to success. “People allocation is as powerful as
financial allocation,” explains Aon CEO Greg Case, who works closely with CHRO
Tony Goland and CFO Christa Davies to make sure the company has the right
talent to meet the challenges of the future.
By putting talent and finance on equal
footing, the G-3 will change the way and sequence in which critical matters are
discussed. This trio of top executives doesn’t turn to personnel and
organizational issues only after having reviewed financial results and
strategic initiatives across each business unit, as typically happens today.
“We work together to make talent decisions and integrate solutions,” says Case.
“Pure capital allocation is essential, but that’s not enough. Do we have the
right talent in place? How should we think about talent development? If you
have an opportunity to acquire a company, do you have the right people in place
to do the deal and operate it afterward? It’s not a matter of getting input
from my team so I can make a decision. The three of us work together as peers
and answer those strategic questions as a team.”
“People allocation is as powerful as financial
allocation.” —Greg Case, Aon CEO
The G-3 isn’t just focused on talent as
some discrete item on the agenda. Instead, the G-3 ties talent to every item
on the agenda. Consider the turnaround over the past few years at McGraw-Hill.
In 2010, Wall Street was punishing then-CEO Terry McGraw’s company. The
reputation of its S&P ratings service had been damaged in the financial
crisis, and investors didn’t see any synergy with the conglomerate’s other
assets, an educational publishing arm and a collection of media properties.
McGraw relied on his new CHRO and CFO, John Berisford and Jack Callahan, to
evaluate the company from their perspective as outsiders and tell him how to
unlock value.
Working together and meeting constantly,
both formally and informally, Berisford and Callahan were able to evaluate the
company holistically. They discovered pockets where paternalistic practices had
fostered bureaucracy at the expense of innovation. They also discovered that
Wall Street was right—there were no real synergies between the divisions. With
McGraw, they decided that the only way to unleash the talent within was to
engineer a breakup—S&P as one company, education and media as another—and
sell assets that didn’t fit. It was a plan that McGraw, who had been at the
company since 1980, might not have been able to design without his CHRO and
CFO. Once the board agreed, Berisford and Callahan led the exercise of
splitting the company. Again and again, their respective experiences came
together to deliver unified solutions to tough problems: compensation levels at
both companies, the bottom-line impact of key personnel in critical roles, and
a leadership structure for the stand-alone education business. Callahan got the
facts, Berisford figured the human equation, and together with McGraw they
arrived at holistic solutions. “If finance and HR aren’t talking,” says
Callahan, “they aren’t creating new value.” While the education company is
privately held, the market cap of S&P is four times higher than the value
of McGraw-Hill in 2010, when Berisford and Callahan joined.
As the example suggests, CEOs in a G-3
will demand much of their CHRO, perhaps more than they ever have. Ed Breen, who
turned around Tyco before signing on as CEO of DuPont, says, “You’re going to
be more brutally honest. The CHRO and the CFO might have to tell the CEO that
someone he’s very close to in the organization isn’t an A-plus player. That’s
how you’ll come to better decisions.” Breen’s former CHRO at Tyco, Laurie
Siegel, believes the CHRO of a talent-driven organization must be a great
business person, not just a great people person. “The conversation with a
CHRO,” she says, “is not, ‘We can’t do it.’ Instead it’s, ‘Here’s how we can
get there.’ What you want is a CHRO who is a problem solver, not a deal
killer.” That’s why line experience should become a central part of the career
path of any HR executive who shows real leadership potential. And just as the
CHRO must understand the key financial drivers, the CFO must understand the
human drivers of value creation.
One word of caution: the success of the
G-3 depends on the CEO’s commitment, attention, and care. It doesn’t just
happen because the CEO hires a great CHRO and a great CFO. McGraw elevated the
CHRO, set a tone of openness and intellectual honesty, fostered a close rapport
in informal chats and formal weekly meetings, and gave the G-3 a mandate that
was as broad as his own. The CEO is the lynchpin of the G-3. With his or her
strong leadership and support, a G-3 is the best way to ensure that the value
of talent is represented in every major decision.
Align
the board of directors
One of the ironies of today’s agile,
flatter structures is that they can’t succeed without commitment and alignment
at the top. Transforming a company to be a talent-driven organization requires
a top-down revolution. CEOs who try to drive this kind of change must have the
alignment of both senior management (starting with the G-3) and the board of
directors.
The talent-driven CEO wants the board to focus on two
forms of “TSR”: not just total shareholder return, but also talent, strategy,
and risk.
The role of the board is often underplayed
in discussions around talent. That’s because so many boards focus on strategy
and compliance first, and limit talent discussions to the question of CEO
succession and executive compensation. But CEOs running a talent-first
organization must help the board see that talent is the value
creator and therefore belongs at the top of its agenda. The talent-driven CEO
wants the board to focus on two forms of “TSR”: not just total
shareholder return, but also talent, strategy, and risk.
It’s a profound change, but most directors
will welcome the shift. According to a recent McKinsey survey of corporate directors,
most believe they are effective on strategy, yet very few feel they are doing a
good job developing people and ensuring that the company has a strong, healthy
culture.
How to drive this shift of mind-set? A
critical move is to transform the mandate and scope of the compensation
committee. Just as many audit committees have evolved into bodies focused on
strategic financial allocation, the compensation committee must evolve into a
group focused on the recruitment, deployment, and development of talent. That’s
why it should be given a new name, such as the talent and rewards committee, or
perhaps the people committee.
The name change has symbolic value, given
that most compensation committees are noteworthy only when they overpay their
CEO. A talent and rewards committee, on the other hand, promises to focus on a
wider group of executives and to look more holistically at how to maximize the
quality and effectiveness of talent throughout the company.
The talent and rewards committee can lead
activities that are of great value to the talent-driven CEO: everything from
recruiting to regular evaluations of the critical talent-development system.
Talent will no longer be an afterthought. Instead, every meeting of the board
of directors must include a discussion of not just CEO succession but also the
health of a wider swath of top talent (which one might call the “critical 2
percent”) and diversity.
The board of Telenor, the Norwegian
telecom, offers a good example of how a board that is focused on talent can support
a people-first CEO. Just 22 percent of the company’s leaders are women, but CEO
Sigve Brekke hopes to increase that number to 30 percent by 2020. Directors are
updated on diversity at every meeting, and they engage at a deep level:
chairperson Gunn Waersted, like three of the other nine directors, is a woman.
Waersted also leads the people and governance committee, which used to be
called the compensation committee. This kind of involvement is how directors
can help an “HR issue” such as gender diversity become a competitive advantage.
“What we see,” says former chief people officer Jon Erik Haug, who left the
company in December 2017, “is that by focusing on gender we stand out in some
markets, like Asia, because our competitors are not focusing on it.”
Constantly
develop your top talent
In his former role as operating partner at
Blackstone, Sandy Ogg often worked with the leadership of the private-equity
giant’s portfolio companies. One company’s value agenda was to increase
earnings from $600 million in earnings before interest, taxes, depreciation,
and amortization (EBITDA) to $1 billion, while shifting the multiple from eight
to ten. Using an approach that he had developed while working with other
companies in the portfolio, Ogg identified the pivotal roles in the
12,000-person organization. He boiled it down to 37 critical positions, one of
which could single-handedly generate $60 million in EBITDA. The men and women
in those 37 critical roles held the fate of that investment in their hands.
Ogg, along with the company CEO and the rest of the Blackstone team, then took
the time to ensure that those positions were filled with leaders who were up to
the task ahead.
Thirty-seven people in a 12,000-employee
company! In almost every organization, success depends on a small core of
people who deliver outsize value. The success of the talent-first CEO largely
depends on how he or she leverages this critical 2 percent of people. (That 2
percent figure is merely a guideline; in big corporations, the “2 percent” may
be a group of fewer than 200 people.)
Knowing where to look is important.
According to one McKinsey study, about 70 percent of senior executives are
wrong about who is most influential in their organization. The G-3 must
pinpoint the company’s crucial decision nodes, the places in the organization
where important choices are made by people who can drive tremendous value. Who
is really exercising power at those key points? (Often, it’s not the official
decision maker.) How do decisions at those nodes create or destroy value? The 2
percent is most definitely not limited to group of employees with the fanciest
titles in the company. Instead, this high-leverage group can include key
designers, scientists, salespeople, up-and-coming leaders, influencers, integrators,
and support staff tucked away in unglamorous corners of the company. Jony Ive,
Apple’s chief design officer, is obviously one of the 2 percent at the company,
as is Steven Nissen, star cardiologist and chairman of cardiovascular medicine
at the Cleveland Clinic. But so, for that matter, is the navigation team at
United Parcel Service, whose software, which encourages drivers to take as few
left-hand turns as possible, saves the company millions of dollars each year on
gas.
Identifying the 2 percent is just one part
of the continual process of talent development. At a talent-first company, pay
scales and new opportunities are often rewarded “unfairly.” As Laszlo Bock,
Google’s former CHRO, writes in his book, Work Rules!, “At Google,
we . . . have situations where two people doing the same work can have a
hundred times difference in their impact, and in their rewards. For example,
there have been situations where one person received a stock award of $10,000,
and another working in the same area received $1,000,000.” While this isn’t
typical, bonuses for the best performers can be five times higher than for the
rank and file. High-performing workers at junior levels in the company can earn
more than average performers working at higher levels.
This devaluation of hierarchy in favor of
meritocracy opens up opportunities for the most talented people at any level of
the company. Tadashi Yanai, CEO of Fast Retailing, whose brands include Uniqlo
and Compte des Cottonniers, believes that digital changes everything for anyone
selling anything. To prepare Fast Retailing for that future, he isn’t relying
on his most experienced people. As he puts it, “To tell the truth, my
high-level executives are very good in the day-to-day nitty gritty, but we need
a fresh perspective.” Instead, he’s turned to 38 young workers from all corners
of the globe and all levels of the company.
CEOs of talent-driven companies use every
tool at their disposal to develop their critical 2 percent. When a company
doesn’t have the skill sets or the innovation firepower it needs for the
future, it’s up to the CEO to go out and recruit “people who can generate
better ideas than other people,” as Shiseido CEO Masahiko Uotani says. The CEO
must ensure that the company has cutting-edge analytics software that can help
track the progress of these key executives, and even evaluate the likelihood of
success in the next steps on their career paths. The CEO must be sure that the
company is constantly creating the next generation of leaders. At BlackRock,
for example, one criterion used in evaluations of top executives is their
ability to create new leaders. As chief talent officer Matt Breitfelder
explains, “By design, we create some social pressure in the organization by
asking our managers, ‘Yeah, you think of yourself as a leader, but what’s your
track record? Name the people that you’ve developed.’ We call it positive
paranoia.”
Unleash
talent and strategy with agility
When CEOs of talent-driven companies
launch new initiatives, they make sure to have the right talent on hand before
going too deeply into strategic and financial planning. Agile, team-based organizations are
the best way to ensure that these companies constantly and nimbly match the
right talent to the right strategic initiatives.
Facebook is an organization that
consistently aligns its top talent with its most critical strategic
initiatives. When CEO Mark Zuckerberg decided that the company had to make a
dramatic shift from a desktop business model to a mobile one, the vision was
clear as could be: Zuckerberg told his product teams, “Come in with mobile. If
you come in and try to show me a desktop product, I’m going to kick you out.”
That clear vision, of course, guaranteed nothing: the CEO graveyard is full of
visionaries who fell back to earth when their teams couldn’t deliver. But
Zuckerberg delivered, with the help of top executives such as COO Sheryl
Sandberg and CHRO Lori Goler. Facebook launched a full-scale attack on mobile.
Every product team got a mobile developer. Desktop products in development were
simply dropped. The teams delivered a slew of mobile offerings. Not all were
hits, but enough made the cut for Facebook to overdeliver to its members, who
were growing increasingly dependent on smartphones. By the end of 2016, mobile
accounted for 84 percent of the company’s ad revenue.
Agile, team-based organizations are the best way to
ensure that these companies constantly and nimbly match the right talent to the
right strategic initiatives.
What was it about Facebook’s culture that
fostered that success? Goler, who joined the company in 2008, describes a
culture of autonomy and initiative, where different kinds of leadership can be
found at every level. People find their way to projects that interest them.
Some teams stay together for years, others disband after just a few weeks. Star
programmers can get rich without ever having to join management, while the
management ranks get filled by people who actually enjoy overseeing and
developing talent. This kind of structure is agile enough to ensure a continual
connection between talent and strategy. The organization can move talent
quickly to support a clear, steadily communicated vision, but new products
emerging from those teams can modify the vision, creating strategic shifts. The
company is constantly organizing and reorganizing itself to optimize its
deployment of talent and to adapt to today’s unpredictable market and technology
shifts.
Haier CEO Zhang Ruimin says that today’s
CEOs must learn how “to lose control, step by step.” That’s a somewhat
frightening idea for anyone accustomed to top-down leadership. But note the
second half of Zhang’s quote: “step by step.” Leading a talent-first
organization is something that must be managed incrementally. The steps it
requires—alignment at the top; continual development of talent; a commitment to
link talent and strategy; an agile, flexible corporate structure; and others
that we discuss in our book—are each important. But built one upon the other,
they trigger a multiplier effect that can exponentially increase the value that
talent delivers to the organization. And that, of course, is the great promise
of leading a talent-first organization: seeing new ideas lead to even better
new ideas, watching the creative thinking that’s been enabled amplify itself
across divisions and varying levels of seniority and expertise, and reaping the
benefits of explosive value that arises from expected, and unexpected, parts of
the company.
McKinsey Quarterly March 2018
By Dominic Barton,
Dennis Carey, and Ram Charan
https://www.mckinsey.com/business-functions/organization/our-insights/an-agenda-for-the-talent-first-ceo?cid=other-eml-alt-mkq-mck-oth-1803&hlkid=e59e0931415b45598d7b1fe27eab0ad2&hctky=1627601&hdpid=cd7c202e-ac8b-407c-bb0c-4c2e3f9501ae
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