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HEIDRICK & STRUGGLES LETTER HEIDRICK & STRUGGLES GOVERNANCE LETTER The talent strategy questions every board should ask Too often, boards of directors neglect the impact of talent strategy on corporate health. Here is what the board should focus on to help ensure sufficient competencies and smooth transitions. By Nina Naerby

eadership capabilities are (The 2014 report is the latest iteration success, and failure could put often only noticed in their of ongoing research. Data was gathered a ’s overall strategy at risk. For absence, but by then it may from 15 countries and the top 400 pub- instance, a company may lack the capa- be too late: strategies have fal- licly listed in each country. bilities needed to meet corporate goals or tered and opportunities are For more, see “Towards Dynamic Gov- successors might not be ready when they Llost. A company’s talent strategy is cru- ernance 2014” on www.heidrick.com.) are called to fill key positions throughout cial to performance, and boards of direc- While this survey was focused on the . When problems arise, tors must be confident that the company Europe, the need for greater board over- the response might be crisis is promoting, recruiting, and retaining sight of talent strategy is global. For ex- rather than . competent leaders. While many directors ample, we’ve seen that a primary obstacle As part of their feel ineffective in guiding talent strategy, to board members questioning a compa- mandate, boards of directors should be- posing the right questions to the top ny’s talent strategy is a general lack of ex- come more active in talent management. leadership team can support more vig- perience. Our analysis of board appoint- They must ask top executives key ques- orous — and effective — talent manage- ments to Fortune 500 companies showed tions to discover whether there are any ment and help avoid shortfalls. that between 2009 and 2013 about two- capability gaps, how any gaps are being Heidrick & Struggles’ reports on Euro- thirds of the newly appointed directors addressed, and how the company can pean corporate governance, for instance, were sitting or former CEOs and CFOs. prevent gaps from developing in the fu- have uncovered a significant gap between While such board members are comfort- ture. In addition, they should ensure that the importance of talent management able diving into the minutia of strategy a review of talent strategy is included rou- and a board’s ability to influence it. In and , without a tinely on the board’s formal agenda and our most recent report, 92% of the board background they are often reluctant to discussed at least once a year. Without members surveyed placed great impor- delve into talent issues. explicit interest from the board, senior tance on “a comprehensive review of top Conscientious board members, howev- executives can also become complacent talent performance and engagement in er, must overcome this reticence in order around these issues and a company’s tal- succession planning.” Yet only 55% said to satisfy themselves that the company has ent management and strategy can suffer. board performance was at least satisfac- a human resource strategy that matches tory on this aspect of governance. The corporate objectives. Establishing and Uncovering leadership gaps gap was the largest exposed by the survey. developing the right team is vital for all A crucial aspect of overseeing talent management is identifying gaps in lead- Nina Naerby leads the Copenhagen office of Heidrick & Struggles (www.heidrick.com). She ership competencies. Corporate strategy is a member of the global Leadership Consulting, Private Equity, Consumer Markets, and is dynamic, changing with the shifting Industrial practices. She focuses on searches for CEOs, strategy officers and other senior industrial and economic landscape. Yet positions, and consults with clients on organizational development, assessment, succession internal capability development is often planning, and talent management. very static, focusing on an unchanging

42 DIRECTORS & BOARDS HEIDRICK & STRUGGLES GOVERNANCE LETTER HEIDRICK & STRUGGLES GOVERNANCE LETTER

set of skills and competencies. senior managers. One measure would be Boards of directors should know what to ensure that the human resources de- capabilities are needed to implement cor- partment, together with specially trained porate strategy and whether these needs line managers, properly assessed available are being be met. Directors don’t need leadership competencies across a wide to become experts in human resources, spectrum of attributes that included, for identifying for themselves the competen- instance, familiarity with industry best cies that best match the company’s stra- practice, relationship building, driving tegic needs. Rather, they should ask the results, and innovative thinking. Mapping company’s top leaders, led by the chief strengths and weaknesses in these areas human resources officer, to report on the can highlight deficiencies that might need competencies required immediately and to be addressed before they threaten the in the future. ability to execute on strategy. Key questions board members should Board members should also under- be asking around competencies include stand the framework used for assessing the following: individual and corporate capabilities. Too • What leadership, functional, and often, for instance, when a leadership va- Without explicit industrial competencies are needed to cancy needs to be filled, boards are pre- interest from the board, achieve our corporate strategy? sented with a truncated list of suitable • What kind of framework would en- candidates. How the candidates were se- a company’s talent sure high-quality assessments of our cur- lected for the list might be unclear: is management and rent leadership competencies? this a reward for successfully completing • What competencies do we have? a single project, or is this based on a full strategy can suffer. • Who is responsible for closing any assessment of a broad range of compe- — Nina Nearby gaps that are identified? tencies backed up by various documented When senior managers don’t have con- examples of relevant behavior over time? versations with their boards around these CEO was tasked by the board to improve questions, companies may find themselves Closing the gaps the company’s leadership talent program, at a disadvantage. A global professional After uncovering any deficiencies in lead- but the initiative faced two crucial obsta- services company that needed to become ership competencies, boards can also be cles. First, when 25 select global leader- much more commercially oriented, for effective in pushing measures to close ship candidates were brought together for example, revised its overall strategy in a these gaps. Corporate toward training and networking, the company way that required a major cultural change. internal promotion and training and ex- discovered that only three were willing Yet for a successful transformation, the ternal hiring are crucial aspects of talent to relocate and, of those, one didn’t have company’s leaders needed the ability to strategy that can boost leadership skills the necessary English-language skills to generate organizational buy-in — a gen- where needed. progress. And, second, country managers eral belief that the changes were both nec- Key questions surrounding this di- mutinied against the initiative when they essary and beneficial. However, company mension of talent strategy include the realized it meant their top people might leaders were never assessed on this leader- following: be transferred elsewhere. ship dimension, and the new strategy had • Should talent management include To help foster employee loyalty, cap- a rocky start as the company scrambled to all employees or focus on select individ- ture the benefits of investment in talent develop this competency. uals or groups? development, and build a strong compa- At another organization, drastic chang- • What’s the appropriate balance be- ny culture, the at an- es in technology created a greater need for tween internal promotions and external other company decided that 80 percent innovative solutions. Unfortunately, the hires, and are we measuring it properly? of vacancies should be filled by internal company’s talent strategy had not em- • What is the framework for develop- promotions. But when they looked into phasized creative thinking or risk taking. ing internal talent, and how transparent the situation more closely, they found There were no incentives, programs, or a should it be? that fewer than half of the vacancies were supporting culture in place to encourage • What is the company’s value proposi- currently being filled internally, and, innovative thinking, and the company was tion for internal staff and external hires? given the size of the company’s “bench” caught unprepared for the new challenge. • How does the board ensure that any of high-potential leaders, it would take Both these situations might have been needed changes are implemented? seven years to develop the internal talent anticipated and mitigated if the board Internal and external solutions to com- necessary to meet their ambitious goal. In had taken a more active role in under- petency gaps can reveal unexpected ten- the meantime, the company would have standing the capability gaps the company sions and organizational shortfalls. For to continue to rely on high-caliber exter- faced and kept the issue on the agenda of example, at one global organization, the nal recruits and, in particular, streamline

SECOND QUARTER 2015 43 HEIDRICK & STRUGGLES GOVERNANCE LETTER

and improve its practices. ations. Veteran employees are the stew- nities. Several international studies, in- One global company we worked with, ards of corporate culture, passing along cluding research by Gallup, suggest that headquartered in the Nordic region, had the company’s approach to performance employee engagement rises significantly recently completed an extremely success- and success to younger leaders. with company guidance and attention, ful , and staff right- Yet in our experience, retention pol- and our experience suggests that a great fully celebrated the triumph. But board icies are frequently the most neglected many staff departures could be prevented members became worried that the success dimension of talent strategy. Among the if leaders were more attentive to issues of would make the company complacent, questions boards of directors should be career development and good leadership. risking its competitive advantages. As asking regarding retention strategies are For their part, board members should in- part of the solution, the board identified the following: sist on periodically seeing data from these competency gaps around intelli- • What is the company’s position on exit interviews and review the reports to gence and instructed top executives to fill staff turnover, including targeted levels? detect any ongoing problems. those gaps with, for instance, initiatives to • How do retention policies support Ironically, a hidden challenge to staff benchmark best practices within the in- corporate strategy? retention arises when top talent is pro- dustry and to seek lessons from unrelated • Why do talented people leave, and moted or recruited to positions of new industries that could be relevant to the how do we address these problems? responsibility. Transition plans are often company’s own future. Going forward, the • When a leadership position is filled, abandoned as daily tasks accumulate, top leadership team put “benchmarking” either by internal promotion or exter- which can lead to frustrations and low down as one of its routine agenda points nal hire, what is done to ensure smooth performance. Surprisingly, the risk can in- at its quarterly top leadership meetings. onboarding? tensify with internal promotions, because Directors can also ensure that the Recently, Heidrick & Struggles worked managers can assume erroneously that company has a clearly articulated value with one corporate board that ques- transition plans are less important when proposition for current employees and tioned whether workers who had been moving someone within the company. potential recruits. Every single point of identified as high potentials and likely Considerable research, including work contact in the organization — from non- successors for leadership positions had by Boris Groysberg at Harvard Business executive directors to the most inexperi- actually been promoted. Most hadn’t. On School, finds that competences are not enced junior staff — should be able to the contrary, the board found that the automatically portable and that care- state what is special about working for majority of these rising stars had left the ful plans for transitions into leadership the company. If the company does not company. After the global economic cri- positions, or onboarding, are critical to have a clear and unique employee value sis, the company had suspended its train- success — even for very senior leaders. proposition, the board should require ing and leadership programs, expecting Such plans should include formal intro- the top leadership team to create one. its stars to understand. Instead, they be- ductions to all relevant business and sup- Directors should also ensure that the came easy targets for other companies port areas, as well as quarterly 360-degree company has detailed metrics and goals that believed investment in top talent is feedback from superiors, peers, and sub- for talent recruitment and retention. necessary in all economic climates. ordinates. For senior leadership positions, Such topics should be discussed at least Of course, some turnover is expected the process often requires a full year. annually at board meetings, to track and even needed to bring in fresh ideas progress in closing competency gaps and challenge legacy operations, but ex- A crucial component and to underscore the importance of cessive turnover creates uncertainty, ad- Leadership talent and competencies will the company’s talent strategy. The chief ditional training and recruitment costs, always be critical to corporate success. Un- human resources officer should be held and an unnecessary loss of resources fortunately, boards of directors often feel accountable for any shortcomings. invested in capability development. One unprepared to explore their company’s retail company reduced annual staff talent strategy. But talent strategy is a cru- Avoiding leadership gaps turnover to 37%, from 55%, by recruit- cial component of corporate strategy and Ultimately, the best way to solve the ing staff members who were older and by and cannot be neglected problem of gaps in leadership competen- creating working conditions more con- by boards as they fulfill their responsibil- cies is to avoid them entirely. Developing venient to staff with young children. No- ities. By asking the right questions, agree- internal talent and recruiting external tably, as employee satisfaction improved, ing how to measure progress, and ensur- candidates are expensive and time-con- customer satisfaction increased as well. ing regular high-level reviews, the board suming activities. A critical aspect of any Professional exit interviews are in- not only underscores the importance of company’s talent strategy is its retention valuable for understanding the strengths talent strategy to corporate health but can program. By keeping long-tenured lead- — and weaknesses — of a company’s also uncover risks and weaknesses before ers, a company preserves not only the retention program. Often the problem is they affect company performance. ■ competencies it has helped develop but not pay or benefits, unless these are well also the institutional memories that sup- below industry standards, but rather a The author can be contacted at port smooth and effective business oper- scarcity of career development opportu- [email protected].

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