CHAPTER 1

Talent Rules

Of all the factors that go into the creation of long-term value, talent is the most important one for boards to be talking about. More than any financial goal or stratagem, talent—people—determines a company’s success or failure. People create and execute strategy and manage the associated risk. They conceive new business opportunities. They allocate resources. They are accountable for sustaining competitive advantage. Indeed, companies don’t compete. Talent does.

The priority for talent starts with the CEO, the person of final accountability. So the appointment of the CEO, and oversight of the CEO’s tenure, is the board’s most important task. That responsibility includes the CEO’s top team—the people whose opinions the CEO most respects. This group may number twenty-five or fewer, but their mindset and abilities, and the way in which they invest energy in their work and keep informed, are crucial to the program of the CEO. These people also demand the attention of the board.

Smart companies look for talent everywhere. They vie for talent not only with counterparts in their own business but also with companies in other industries. Established companies compete with startups as well. Around twenty years ago, Amazon CEO Jeff Bezos recruited the chief technology officer of Walmart. That anomalous hire should have been a wake-up call for Walmart, and for Kmart, too. In 2019, Walmart returned the favor and recruited an Amazon staffer to be its chief technical officer. Competitors like Target and Home Depot need to anticipate such moves.

To do so, they have to establish a flow of information about talent. They must follow emerging trends in middle- and upper-level talent, in technology management, in risk and regulatory functions. What trends are new, and what trends are coming? Who is thinking about novel ideas? Such intelligence is second nature in the fashion business, where the move of a designer from one house to another becomes news that spreads instantly throughout the industry. It must become the norm throughout the corporate world.

Yet few boards have this external focus. Exceptional companies like Microsoft recruit regulatory people ahead of time and get them ready to deal with the next wave of oversight. By contrast, the talent development process at old-line players like GE, IBM, Ford, and other Fortune 500 corporations has failed. These companies could not produce their own successful candidates despite billions of dollars of development investments. What went wrong?

If talent is to be the board’s principal focus, boards need a new approach to its management and oversight. Until recently, most companies had a compensation committee that might meet once a year for half a day, flipping through candidates for top positions, and that would be the end of its scrutiny.

It’s time for radical change. Boards at smart companies look at talent every time they meet. At General Motors, CEO Mary Barra opens all board meetings with an executive session that has a human resources management topic on the agenda. She says, “There’s always something happening related to talent and people movement or development that I want to keep the board up to speed on.” She dedicates one board meeting a year to talent, focusing on CEO succession and development, and discussing in detail the performance of every senior officer of the company.

Others should follow her lead. Companies must lift oversight of talent management to the level of the board, just as they did for audit management. They can start by folding talent development into the ambit of the compensation committee, rechristened as the talent, compensation, and execution committee (see chapter 5). And the board can insist on a greater HR presence in the boardroom, with frequent updates from management and time to make its own observations.

In this chapter, we will present the lessons of leaders who have made talent their priority. (See figure 1-1.)

A CEO for the Long Term

No job of the board is more important to the creation of long-term value than selecting the CEO and the leadership team. Their capabilities must align with both where the company is today and where it is headed. The CEO does more than run the business. The CEO is your long-term visionary. As former WSFS Financial Corp. chair and CEO Mark Turner says, “The CEO is developing into not just a leader of the organization but a leader of leaders—an external champion and explorer for the organization and a serial disrupter.”

But first, boards must disrupt the old way of choosing the CEO. Gone are the days when the board could simply nod through the incumbent’s pick for the job, perpetuating yesterday’s rule. In choosing the CEO, whether from inside or outside the company, the board must focus relentlessly on the long-term needs of the company.

To meet these needs, the board can start by deepening its understanding of the company’s talent pool. It should also determine the qualities the CEO will need in the years ahead based on emerging trends in the marketplace. And the board must take into account the vagaries of succession, ranging from a planned retirement to a sudden departure. Among the questions the board should ask: What is the second-generation pool? What is the generation below that group? Will the company have three or four candidates ready in five or ten years?

The board must know these candidates and follow their development path. If every year the CEO says she’s going to stay for the next five years, the board must search for candidates deeper in the corporation than the person in the office next to the CEO because the CEO might outlast the person next door. That’s why smart companies make talent development part of their agenda. For instance, J.P. Morgan Asset & Wealth Management takes the top team away for a week every summer and dedicates an entire day to talent. All boards should consider asking their CEO to do the same.

This sort of strategic thinking is key to managing for the long term. Throughout the process of evaluation, boards should look forward, not backward, which means letting go of assumptions about the candidates they are trying to assess. A lot of boards fall into the trap of confusing familiarity with actual assessment of a candidate. It’s ironic that at a time of so much transformation in business, boards don’t challenge themselves to look at transformational CEO candidates wherever they happen to come from. Elena Botelho, senior partner at leadership advisory firm ghSMART, says, “When you see a board making the wrong decision, it’s typically because they thought they were making a ‘safe choice.’”

Familiarity is not data. To move in the right direction, start by jettisoning the old system of internal assessments. From where we sit, the board has too often simply taken the recommendation of the outgoing CEO without getting data on up-and-comers. Enlisting the help of an outside consultant can give you more perspective on future needs.

The boards that succeed at CEO succession link their requirements to strategies. They step back and take a fact-based, analytical view on a broad range of candidates. Often the best candidate for succession turns out to be an outlier instead of the obvious choice. Data-driven analysis of company needs will encourage greater objectivity and let boards come to a reckoning with their unspoken assumptions before an outsider forces the issue.

Some companies are using simulations to test how a candidate would act when presented with scenarios that a CEO might face on the job. Simulations also let companies benchmark candidates against one another. Humana, for instance, used simulations before appointing Bruce Broussard CEO in 2013. Doing so gave the outgoing CEO and the board a window on how the various candidates would respond to different challenges, based on hard data beyond interviews alone.

To make a choice for the long term, consult the team below the CEO, which often knows a lot more about the candidate pool than the CEO does. Inevitably, the CEO wants their lieutenant to be the successor. The board has a fiduciary responsibility to understand who out there might be a better pick.

At GSK, when Jean-Pierre Garnier was retiring as CEO in 2008, three insiders were in the running for the job, and the board formed a clear bias to anoint the person who was sitting in the office just next door to him. So one of us (Carey) identified fourteen executives within the company who had interacted with all three candidates, flew around the world to interview them, and asked which of the three they thought would be the best choice for the future. And nearly 100 percent of them recommended the same person—Andrew Witty, one of the other two insiders. Witty got the job.

This model is one that every company can adopt to vet an internal CEO candidate. At GSK, the data from the review changed the decision of the board that had already made up its mind to accept the recommendation of the CEO. Listen to the people who have worked with your internal candidates. Conduct a systematic, thorough canvassing of close colleagues and customers who have worked with them. In so doing, you will turn a rote anointment of a CEO’s recommendation into a hard-nosed selection process.

If you are nearing a decision on an internal successor, give the candidates a chance to show how they might manage the agenda of the future. Then you can base your decision on real-world information, like quality of decision making in a fast-changing world. One approach is to put your candidates through their paces in different parts of the company. Then you can see how they operate in challenging circumstances and cope when confronted with competitive issues. And the board can become confident that the next CEO will know how to build an effective team, make good and timely decisions, and lead the company in the right direction.

Just before Mark Turner of WSFS stepped down as CEO, he spent three months on the road looking for opportunities to ally with innovative companies. He took advantage of his time away to field-test his heir apparent. (For more on his sojourn, see chapter 2.) For the previous three years, he had moved his number two, Rodger Levenson, through various roles, from chief commercial lender to chief financial officer to head of corporate development working on mergers and acquisitions. The natural progression would be for Levenson to become chief operating officer, with responsibility for Turner’s direct reports. Turner put that plan in motion just before he left.

Turner says, “While I was gone, he ran the organization. He stepped into my role. He did the earnings calls, did the weekly staff meetings, did the monthly strategy meetings, ran two board meetings as the effective CEO, and did everything that was necessary to keep the organization moving forward.” The period was an active one for the company, involving the negotiation and closing of three small acquisitions. So his role was more than stewardship. Turner adds, “It became a way for me, for the board, and for him to decide if this is something he can do and something he wanted to do.”

The tryout also demonstrated the strength and cohesiveness of WSFS’s team. Turner says, “While it was a contained test of leadership, it was also a test of the model we’d been using for a while, which is dispersed leadership. Rodger and his team stepped up and did incredibly well because they were used to being leaders. This was not an abrupt change in authorities or responsibilities.”

What is more, Turner’s absence from the office helped other leaders develop. He says, “We had a couple of very new members of the team, one a very young CFO, and he blossomed during that time because he was lifted and asked to do more than he otherwise would have. Had I been there, he would have been two steps from the top. Now he was only one step away and was asked to do much, much more.”

Field-testing CEO candidates has become a hallmark of long-term planning. Any venture that lets board members see candidates in a live environment is invaluable. How do the potential leaders deal with stress? How do they perform with the full weight of responsibility on their shoulders? Only then will you be able to see if they can act calmly and thoughtfully when the shells are exploding around them.

CEO Succession Is a Judgment Call

For the wreckage that can ensue when the board gets succession wrong, look no further than Ford’s performance over the past twenty years. After a period of good returns and market share, in 2001 the board asked CEO Jacques Nasser to resign after he clashed with chairman William Ford over strategy and corporate values. Ford, the great-grandson of the founder, had become chair two years before, and with the family trust holding 40 percent of the vote, the CEO role was his for the taking. He took it.

What followed was a period when the board’s passive approach to CEO succession resulted in a string of failures. Ford, not a natural chief executive, relied heavily on his COOs. He, and the board, cycled through three in five years, a huge turnover rate for the executive wing. Collectively they racked up $22 billion in debt. Ford finally told the board to hire a new CEO.

It delegated the job to two board members with a good track record in selecting CEOs—Irv Hockaday, CEO of Hallmark Cards, and John Thornton, co-president of Goldman Sachs. In 2006, they recruited Alan Mulally from Boeing, where he had overseen the creation of the 777, the top-selling wide-body jet, and demonstrated his ability to execute strategy and lead large teams. One of us (Carey) conducted Mulally’s vetting.

There was no purge when Mulally arrived. He succeeded because he was a good leader. On his first day, in a meeting with two dozen executives, someone asked him why he should be CEO of Ford. He said, “You’re a great team, and you’ve taken this company to disaster. I’m going to work with you to take this company to new heights.” Over his eight-year tenure, he paid off most of Ford’s debt; sharpened the company’s focus by unloading Jaguar, Volvo, and Land Rover; built up market share; and restored the stock price. He stepped down in 2014.

In the years since, however, the board repeated the mistakes that had sent the company to its nadir. Hockaday and Thornton were gone from the board by the time Mulally stepped down. The board appointed his choice for successor: Mark Fields, the COO. He was an able executive, and Ford’s profits were good on his watch, but sales declined 25 percent, a steeper fall than the industry average, and share price fell by 35 percent. The board asked him to leave after only three years.

Next came Jim Hackett, a former CEO of Steelcase, the furniture maker. His experience might make him seem a strange choice to lead an automaker. Ford’s chair—still company scion Bill Ford—didn’t think so, and he gave Hackett the job without much input from anyone else or a systematic search. Three years later, after billions in losses and a 40 percent decline in share price, Hackett was fired.

Ford’s board chose a new CEO in late 2020, its third in six years, and still doesn’t have a settled strategy. The board, and the chair, failed in their most important job: selecting, developing, and retaining a CEO. Collectively the board destroyed shareholder value and, through plant closures, the lives of employees, suppliers, and whole communities.

What a difference the board can make when it gets things right. A prime example of an expertly conceived and executed succession plan culminated in Coca-Cola’s 2016 appointment of James Quincey. Few were surprised by the choice of this high-performing company veteran. But what outsiders didn’t know was how deeply the board was involved in developing him and the next generation of leaders.

Two decades before, Coke had been caught short when longtime CEO Roberto Goizueta suddenly died. The ones who came after him were not terribly successful, exposing gaps in a leadership team that the board had assumed was strong. Even worse, the board had been disconnected from the succession process, ceding the job to the incumbent. As former senator and long-serving Coke board member Sam Nunn observed, “When things are going well, it’s easy to become a little complacent. You assume you will continue to have strong leadership, until you find out too late that there are gaps.”

To help ensure that potential leaders would get the opportunities they needed to grow, in the early 2000s the board created a management development committee to oversee talent for senior positions and CEO succession, with investor Herb Allen as its chair. The primary focus of the committee was on the twenty top positions, but the committee looked several levels down in the company, too.

The committee members told the incumbent CEO, Muhtar Kent, that they wanted to get to know key people around the world. Kent arranged for one leader to attend each committee meeting, where the visiting leaders discussed the business and answered questions about their part of the world. Nunn says, “I always wanted to know what the person thought about political changes in the region and chances for conflict. I was trying to gauge their grasp of things beyond how many bottles of Coca-Cola were sold.”

The committee also ventured into the field to see leaders—and potential CEO candidates—in action, sometimes spending a whole day on these visits. While visits to headquarters revealed how leaders related upward, the site visits showed how they related to their team. As Nunn explains, “A leader who interrupts or edits everything means one of two things. Either they don’t have confidence in their people or their ego is too big for their position.”

Throughout this process, the board was able to get a close look at a handful of potential successors years before Kent’s scheduled retirement. Especially important was the interaction between the development committee, the full board, and the CEO. No party pushed a favorite onto the others. Allen says, “As we continued to meet with the candidates, Muhtar never said or implied, ‘This is the person who is about to be my successor.’” Rather all parties pooled their judgment to identify leaders and assess their potential.

When the board met candidates who it liked, Kent became their champion. Kent saw the company as a living organism, which means the leader must be able to change it. “That requires testing leaders in new roles to see how they adapt,” he says. “So we created those assignments, and quickly made a change if it didn’t work out.” For example, Kent elevated two people to new roles with a much greater degree of complexity. Within two years, he concluded that neither would be right for the top job.

By then, Kent’s retirement was two years away and the list of potential successors was shorter, so the board focused on the essential criteria for the job. One of the central characteristics of the beverage business is the centrality of the bottlers, each of which is a multibillion-dollar business in its own right. So a key requirement of the CEO—and one reason the board preferred internal candidates—is having the right background, credibility, and intellectual heft to influence the bottlers, for if the bottlers don’t invest, Coke’s business cannot grow.

That criterion would prove crucial to Quincey’s ascension. Kent first met his eventual successor in 2005, when Quincey was in Argentina as president of Coke’s South Latin American division. With the development committee’s blessing, Kent moved him to Mexico. “That’s when I really started noticing,” says Kent. “Every time I visited the country, I saw that the bottlers were happy, customers were happy, and results were good.” By 2013, Quincey was running the company’s European operations.

Coke also needed someone who could react quickly to shifting circumstances, such as changing views about diet and health. Here Nunn’s firsthand observations of Quincey proved invaluable. He recalls, “When James did a tour of one of the bottling plants and we were talking to people, I saw in him a willingness to confront reality.” Especially with a brand that has been so successful for such a long time, the ability to see that the company now needed new products to thrive would be essential.

With the development committee and the board in agreement, Kent made Quincey president and chief operating officer—his final test. There he proved that he could make smart decisions about new products, think strategically, identify talent, and act like a leader. In December 2016, the board announced that he would be the next CEO.

Allen observes, “I have been through five CEO successions. This is the best selection process I’ve seen. We had all the data we needed and were able to bring the best judgment to bear.” The process was natural and rigorous and, above all, patient and well thought out. Most of all, the plan worked because the board devoted years to getting it right.

Keeping the CEO on Track

In its role of overseeing CEO performance, the board must be predictive, watching for signs of faltering leadership, especially short-termism. CEOs are good at looking forward and back six months. That is not long-term thinking. How to check this from the boardroom? Look for anomalies in the operating statements. Did management shift marketing expenses from one quarter to the next to help meet its numbers for analysts? Or book sales from the next quarter to this one? Or forgo investment necessary to build for the future? Or fail to face up to the need to remove a high-level person, or contemplate a questionable acquisition? These are all red flags.

Those are the moments for the board to sense what is happening, step in, and advise—say, by encouraging the CEO to tell the truth if execution has failed or if the company has borrowed from next year. Roger Ferguson, CEO of insurance services provider TIAA, says, “The board is rethinking its function to serve more as coach, with more engagement below CEO, more informal communications between meetings, and more data.”

Smart boards are remaking the way in which they deliver performance assessments. A common practice has been to evaluate the CEO via a set of questions, perhaps twenty or so, on which the directors rate the CEO on a scale of one to five. The chair of the governance committee would then meet with the CEO to deliver the compiled results, along with written comments. It’s a process that is often offensive to the CEO, and quite ineffective.

A better approach is to generate a list of suggestions from the independent directors for how the CEO can improve performance. The chair and head of the compensation committee would then discuss these ideas with the CEO. The suggestions must be insightful and constructive. For instance, “Your CFO is a good person, but maybe you ought to rethink the role.” The message is not that the CEO must fire the CFO but that the CFO is not performing well; perhaps the CEO has a blind spot here. The CEO would then be primed for a fruitful discussion with the CFO.

Other observations from the directors might involve judgment about a project, external trends or relationships, a lack of investment, concerns about human resources, customer issues, or inattention to a new regulation. Such feedback can be a gift to the CEO. It is the sort of advice a CEO wants—congenial and collegial, independent but like a partnership.

Don’t base decisions about the CEO’s future on factors unrelated to performance. For example, boards are also social organizations, which can complicate efforts to replace the CEO. As a result, often an amiable but mediocre performer is allowed to stay in the post. If the CEO and the board members are friends, and the CEO has treated the directors well, making a change will be very difficult for the board and require a lot of fortitude.

Difficult or not, if your CEO is under fire, the best course is to be honest about it in public. Don’t say that you have total confidence in the CEO, only to fire that person three months later. Your board, and your company, will lose credibility. Such was the case at beleaguered aircraft manufacturer Boeing, where chair David Calhoun became CEO within weeks of expressing support for then-incumbent Dennis Muilenberg.

The board mustn’t shrink from the hard choice or make a new appointment out of fear. Michele Hooper, CEO of the Directors’ Council and board member at PPG and UnitedHealth Group, says, “There’s always a leap of faith when you select somebody to sit in the CEO chair. But you have done enough homework, and you keep your fingers crossed that over time your decision proves correct.”

Creating the Leadership Team

The development of talent throughout the organization is a much bigger part of the CEO’s responsibility than it was twenty or thirty years ago. The board can help by ensuring that the company is organized to support the CEO in this role. If the head of human capital isn’t a direct report to the CEO and one of the top two or three highest-paid people in the company, you probably aren’t putting enough emphasis on talent development.

The best CEOs think of their senior team members as partners. One of us (McNabb) used to welcome new members of the leadership team by saying, “Congratulations. Your day job is partnering with me to run Vanguard. Your night job is leading HR,” or whatever unit the person had been hired to manage.

For that reason, talent at levels below the C-suite should be a major focus of the board. As we describe in our book Talent Wins (by Ram Charan, Dennis Carey, and Dominic Barton), the most important task is to identify and cultivate the critical 2 percent—or the critical two hundred, in larger corporations—those crucial leaders responsible for managing the great preponderance of a firm’s value-creating activities. The work and vision of these people will determine your strategy, direction, and success. Successful organizations thrive by relying on this key talent.

As with the CEO, boards must be forward-looking in evaluating talent throughout the company. Ed Garden, founding partner of investment firm Trian Partners, points out that the compensation committee deals mainly with the top twenty executives in the corporation, but the companies Trian invests in might have 50,000, or 100,000, or 300,000 employees. He asks, “How do you ensure across the organization that you’re attracting the best people, identifying the real talent, and moving them up and giving them blue sky? And who is developing them? And how do you do that at the board level? What core competence must go? What new core competence is needed? What is the transition?”

One failing of many development programs is that they are designed to teach about and celebrate past and present successes instead of preparing executives to meet new competitive challenges. Management and the board then end up assessing who they need based on where the company is now and not where it should be in the future. If the requirements of the corporation are changing, boards must identify the skills and experiences they will need tomorrow. And they have to ask whether the current leaders can make the transition to a new way of thinking and operating.

Smart companies are employing new techniques to make just this sort of determination. Some startups have used short, interactive simulations to assess candidate performance and behavior. Companies hiring technical talent increasingly rely on public competitions to identify high performers who traditional recruitment methods would miss—say, those living in another country. And larger players, including Google, McKinsey, and Korn Ferry, are investing in performance analytics to develop predictive talent algorithms like the ones that sports teams have used with great success to identify players likely to be high performers in their position.

Other companies are jettisoning old ways of performance evaluations. For instance, the current popular system of 360-degree assessments—which entails feedback from subordinates, colleagues, and supervisors plus a self-evaluation—is internally focused and not very good at predicting how an executive will perform in the next role up. We recommend a 450-degree assessment, with the final 90 degrees conducted by a neutral party that gathers data confidentially about executives to predict how they would likely perform in advancing the company’s strategy in the years ahead and meeting its major challenges and goals.

Given the fast-changing nature of business in a time of emergency, skill development is apt to be the biggest part of the talent budget. Companies should gear some training initiatives to the moment and focus others on the future. Each should get a separate line of the budget. The CFO and the chief of HR should collaborate on the appropriate amount to allocate.

If need be, the board should challenge the leadership budget. GE did not provide a development path for its leaders, sacrificing longterm growth opportunities. Demand a framework for training and development—not just the budget number, but how the budget is spent, and what is the projected return.

Just as strategy is, the attributes of leadership can be company-specific. Turner of WSFS says, “Certain qualities of a leader cut across all organizations. But depending on the culture and style of the organization, to be a good leader at WSFS might look tremendously different from being a good leader at Citibank.” So his company developed a program about how to be a successful leader at WSFS. Managers learn not only general leadership skills but also how the company differs from its peers.

To prepare for tomorrow, good boards keep abreast of talent trends in their industry. For instance, the auto industry is shifting its priorities from mechanical engineering talent to software and electrical engineering talent. As a result, GM’s board spent a session with the head of product development and talked about how to hire talent that fit the changing nature of the business. The key to such sessions? Turn them into discussions, not presentations. CEO Mary Barra will prep the board ahead of time by sending them information about industry trends. And she makes sure that top people in the organization have a chance to interact with the board.

The changing of the guard in the employee base is also affecting the talent proposition. Board members should consider not only the strategic disruption arising from technology but also the upheaval in demographics as companies deal with a multigenerational employee base. As baby boomers begin to retire, companies need to bring in new talent with different skills and mindsets. So besides overseeing longterm strategy, boards must also focus on how to build the talent pool to execute it.

Such changes have driven the talent discussion to the forefront for board members. It’s no longer enough for the board to talk once a year about the management development program. The directors need to discuss where they want the company to be five years from now. What does that strategy look like? What talent base will you need? In many cases, the need is for different skills, different energy, and a different culture.

The board should insist that management assess its talent development program and communicate its findings to the board—identifying the people who advance to positions where they made a difference. Former Vanguard CEO Jack Brennan experienced that oversight first-hand. When he was running the company, his technology chief died suddenly, and he told the board that he was going to go outside the company for a new head. A director suggested that he consider the person who ran Vanguard’s internet unit. Brennan demurred because the candidate was only thirty-one. The director said, “When you were thirty-one years old, you were running the whole company.”

Today Brennan says, “I didn’t have the brains or the courage to put a thirty-one-year-old in charge of a third of the company.” The board can help managers make difficult decisions on talent when they can’t quite pull the trigger. An epilogue to this story: that young IT leader was Tim Buckley, who would succeed Bill McNabb as Vanguard CEO almost two decades later.

One technique we like for bringing talent along is rotating key managers through different roles, which will broaden their experience, improve their learning skills, and help them apply their expertise in new circumstances. Properly managed, these talent pools will be the source of new team leaders. But each rotation must involve more than a couple of years of ticket punching. They have to last long enough—three or four years—so that the staff member can demonstrate real accomplishment and a broadening of their ability to manage on a larger scale, at a higher degree of complexity, or with a greater level of responsibility.

Some companies offer the prospect of job rotation as a hiring tool and use their young employees to sell the idea. For recruitment drives at colleges, GM will often use staffers who have graduated within the past five years. Newcomers can participate in a two- or three-year program that will move them through different areas of the company. The automaker has learned that young staffers appreciate the chance to experience a variety of roles as they enter a company as big as GM.

Board members will need to keep track of promising newcomers as they develop. To get to know the talent in an organization, venture beyond the sort of meet-and-greet events orchestrated by management. For example, companies often have analyst days, when they roll out the next generation of leaders or key executives in the management structure. And while such sessions are sometimes helpful, they can involve a lot of artifice. Most of these presentations are very polished and well scripted, and don’t give you a real view of what’s going on in an organization.

Instead, board members should spend time with key employees on their own and in informal settings. Bob Weismann, former director of Pitney Bowes, instituted a policy whereby directors would have breakfast with two employees before every board meeting. He finds the arrangement better than a formal dinner with board members and management sitting at a long table, which is good for presentations but leads to scattershot conversations. (For that reason, former Verizon CEO Ivan Seidenberg always insisted on round tables.)

Field visits are especially useful in letting board members see several layers down and get to know the people most likely to be the leaders of the future. Many boards use employee engagement surveys to probe what the lower levels of the company feel about how leaders are managing their responsibilities. Smart directors will leave the office instead and get out into the organization without management looking over their shoulders. Then they can get a better sense of what’s actually going on.

Use such opportunities not only to ask questions but also to let employees ask questions of you. UnitedHealth Group board member Michele Hooper has followed this model when running town halls for employees on her own. “They will come out and ask you the darnedest things,” she says. “I’ve been put on the spot about individuals or company strategy. Always leave enough time at the end to say, ‘Is there anything else you want to ask me, or tell me, or talk about?’ That always elicits something that’s not on the agenda but gives me an insight into what they’re thinking and how they’re feeling about their organization and their leadership.”

Informal settings can also help board members get a better reading from the CEO about talent. The aim should be to encourage a free flow of ideas about how to create a leadership team from scratch. Such a meeting wouldn’t involve any shuffling of documents—it would just be conversation, and preferably over dinner instead of in the boardroom, because the moment the talk becomes formal, the CEO will start to protect the team.

To assess talent at Tyco International, former CEO Ed Breen, now executive chair of DuPont, would arrange a dinner with division heads and ask them to bring along some staffers responsible for the day-today work. He would then assign three or four directors to visit a site on their own for a whole day with the unit’s management team and local employees. The night before, board members would have dinner with 150 people from the local site, letting directors see how much the workforce was engaged with the objectives of the company.

Intelligence from outsiders can also give you insight into your management team and a sense of how they will perform in the future. Talk to investors at your customer events. You’ll get a better sense of what the outside world thinks of your talent, and who will excel in different circumstances. The people who perform well when the company is in a steady state may not be the ones best suited for leading in a transformational era.

Whether the top talent is homegrown or imported, smart boards stay ahead of trouble on their leadership team, keeping them on track for the long term. Use board meetings to assess performance of important players below the level of the CEO and be ready to step in and offer coaching. In one successful intervention, the board of a $9 billion industrial company in the southwestern United States followed a standard board meeting with an hour-long executive session. In the session, it discussed the contributions of some of the key managers. Among the observations:

—The head of manufacturing is spread too thin and not up to par. He is focused on operations and cannot plan five years out.

—The head of a major business unit is not seeing the potential for exponential growth. We need someone with a broader view of what could be a $10 billion business.

—The people identifying acquisitions missed the services area.

As a result, presentations to the board in the next six months became clearer, crisper, and more to the point, showing greater cooperation among the team.

Retaining the Right Talent: Compensation, Diversity, and Sustainability

As part of its oversight, the board must ensure that the compensation system is fairly conceived and implemented, and that it is calibrated to retain essential staff.

In managing the CEO’s compensation, it’s the responsibility of the board to ensure that CEO pay is not out of line. The greater the complexity of the package, the harder it is to strike the right balance. Warren Buffett says,

I was on the board of one very prominent company where the CEO’s options were excessive. They were fifteen years and tilted every possible way. And the directors never specifically approved them. The CEO never lived big, but he thought he was the best CEO in the country, and he felt that if he wasn’t paid accordingly, he just wasn’t being given proper recognition—a very human failing. I think that picking the right CEO is ten times more important than the compensation. But somebody has to be there to represent the shareholders in terms of overreaching by even very competent executives.

Consultants can help you set compensation levels based on the competitive landscape, but they can only take you so far. You need directors who are business-savvy and owner-oriented, with a particular interest in the corporation. Only then will somebody on the comp committee speak up when CEO pay is out of line.

Forward-thinking companies will link compensation to initiatives that build the future. It is the board’s role to insist that management always considers the long term in recruitment and retention. If an executive is crucial to the future development of a key line of business, the board must ask management if it is paying her well enough because she is someone the company will want to stay for ten years. Are you, the management, doing enough for her?

Larger corporations may need to vary compensation level by sector. In 2015, when GM acquired Cruise, a developer of self-driving cars, the unit had forty employees. It now has about eleven hundred. The company has a different compensation structure for that division. Given its work and its research, Cruise competes not as much with Toyota and Volkswagen as with Google, Facebook, and Amazon. And that’s right out of Silicon Valley. Investments in the unit by SoftBank and Honda let GM directly compensate employees by issuing stock, which gave the company a way to put a value on Cruise’s growth.

Be ready to adapt your compensation structure to take account of new preferences. GM has found that for millennials, benefits are equally important as pay, along with where and how they work. So the company regularly benchmarks its compensation programs and assesses whether they are attuned to the newest cohort of employees.

Make sure your talent does not grow stale and remains engaged. Turner of WSFS recommends that all companies send executives on an extended tour every three to five years as part of talent refreshment, as he did himself shortly before he retired (see chapter 2). He advises starting with the CEO and then switching to other senior managers to give each a chance to recharge their batteries. We all approach the world from different perspectives, so the CEO’s insights from the tour will differ from the head of human capital’s and the chief technology officer’s.

Most board members know that companies should do more to ensure diversity in their talent pool. One executive asked the management of a large corporation to analyze staff by gender and race deep down in the organization. The results were disappointing, and to the detriment of the company as well as the employee base. The executive asks, “If 1.5 percent of your VPs are Black, are you finding the best people?”

For that reason and more, companies must recalibrate their whole policy of recruitment around diversity. At Vanguard, one of us (McNabb) was looking to hire a general counsel because our longtime incumbent retired. We felt that we needed to go outside to find someone with even greater breadth, especially in light of the evolving globalization of our business. We went to Spencer Stuart, the search firm, which proposed some solid candidates, but essentially all of them were white men. The investment management business is not a very diverse one.

We finally went back and said, “We won’t make a hire until you show us legitimate candidates of diversity. And unless you do, we will keep the position open.” Spencer Stuart eventually brought us some good candidates, including one incredible woman who happened to be Black. We were able to lure her to Philadelphia from New York. It took us four months longer than we’d planned, but she has made us so much better than we would have been if we hadn’t taken those steps. Make no mistake: She wasn’t hired because she was Black. In my mind, she blew away all the candidates with her experience and potential. The lesson is that we would never have found her had we not insisted on a diverse pool.

Talent exists in every sector of society. We don’t have to prove diversity as a value creator. Diversity has to be at the center of recruitment. To create diversity, companies must transform a fundamental premise of recruitment: rather than simply seeking the best candidate when a position opens, the people in charge of hiring must change the selection process to identify talented people early in their careers. Instead of the usual process of waiting to find a general counsel until the position opens, companies must shift to one where they dig through layers to find raw talent long before they have to make an appointment.

Boards must change their mindset to make sure the company stays ahead of such needs instead of reacting to whatever the CEO serves on their plate. View talent through a wide-angle lens. Boards need to ensure not just diversity of gender, ethnicity, and age—all legal imperatives—but also diversity of thought, geography, and experience. Use nontraditional talent pools. Beware of unconscious bias, or bias built into algorithms.

Diversity should be real, not simulated—that is, the hiring of people to let you tick off boxes. Mary Erdoes of J.P. Morgan says, “Diversity for diversity’s sake doesn’t get you anywhere. Diversity of thought, which comes from diversity of age, experience, industry—that’s the most valuable, hands down.” Those are the outsider perspectives that let people ask the so-called dumb question, “which is never dumb,” says Erdoes.

Increasingly, companies are recognizing that women already on their staff are in undervalued positions and could be playing a wider role across the corporation. Senior women in many US companies are concentrated in HR departments, often at the highest level. In 2019, the chief human resources officer (CHRO) at fifty-eight of the Fortune 100 companies was a woman. Increasingly the CHRO is deeply involved in planning the company’s future. Yet the HR function is generally still thought of as a softer role than other senior positions and less transferrable to elsewhere in the C-suite.

Smart companies are helping senior women expand their ambit by forming a G3, or group of three—a partnership of the CEO, the CFO, and the CHRO. They jointly set priorities and review the company’s operations every quarter and communicate frequently in between. The tight working relationship links the allocation of human and financial resources across the organization and vastly improves strategy and execution.

The same idea can apply at lower levels in the organization. HR leaders can cultivate broader skills by working closely with leaders of business units, helping improve placement, recruiting, and learning and development of senior women. All these initiatives can also help to identify HR leaders who have the potential to serve on public boards (see chapter 4).

At GM, every board meeting has a diversity element, featuring a deep dive into one aspect of the issue—focusing on women at one meeting, on nonwhite talent at another, on talent outside the United States at the next. Whenever managers travel to a plant in another country and board members are along for the trip, the agenda will always allow time for the directors to meet with local leaders so they can see up-and-coming talent.

The emerging goals of sustainability and social responsibility are important for talent as well. While some companies promote sustainability as part of philanthropy, others, like Unilever, have said that sustainability will define who they are. Many companies lie in between. But, says Shelly Lazarus, chair emeritus and former CEO of Ogilvy & Mather, the shift is toward the Unilever side of the house: “The more millennial your communities and your audiences and your workforce are, the more it matters.” To millennials, this issue is truly important, and you ignore it at your peril. They have strong opinions about which companies are good and which ones are bad. And they use these judgments when deciding whether to join a company or to stay where they are.

Unilever has reaped the rewards of its policy. Its sustainable living plan has been great for attracting millennials to work there. Talent is scarce, and millennials favor Unilever as the second-best place in the world to work, after Patagonia.

Yet not all see the bottom line as the be-all and end-all of sustainability measures. Former Xerox CEO and current Johnson & Johnson board member Anne Mulcahy says, “Sustainability and social responsibility are not inconsistent with shareholder value, but I don’t think we should discuss corporate citizenship in the context of financial returns. It’s hugely important to the employee value proposition, but it’s largely becoming a broader employee expectation, which I think is really quite positive.” (For more on sustainability, see chapter 2.)

Tracking Culture

Culture is an essential part of the talent equation. Culture is the ethos of your business. It informs behavior. It shapes talent. But culture is not static. It is also informed by the people you bring into the fold.

The implications of cultural problems resound throughout the corporation. Many of the big corporate failures of recent years—Wells Fargo, Enron, Volkswagen, and Boeing, and the #MeToo issues that have affected many organizations—are not simply failures of risk oversight but are borne of cultures where values are misaligned, the wrong things are rewarded, or people are fearful or reluctant to report wrongdoing. Tim Richmond, CHRO of biopharmaceutical company AbbVie, says, “Culture is at the heart of everything, whether it’s people’s choices to take property or damage the company’s reputation or not care about it. Culture is not a program. It’s a reflection of what you do every day. How you engage. How you react.”

To make sure the culture is healthy, board members of every company should conduct a culture audit, and to do it well, directors must get out in the field. They will learn a lot more about culture on a site visit than they will ever learn in the boardroom. It’s governance by walking around. And it’s a critically important element in the search for excellent management. On top of that, staff are apt to tell a director anything. They know they’re not going to get fired for revealing a problem to a director. Indeed, directors are looking for frankness.

Look for signs of problems with your culture. Beware of rapid cycling in your top team. The velocity of your turnover has implications for culture and can be a warning sign as well. Many companies permit hiring of top managers from outside and have a revolving door of people every two or three years. They are not building a culture that encourages people to stay and see the results of their efforts.

If change is frequent, the board must probe whether turnover among the top team is the result of a problem with the CEO or is a characteristic of the wider organization. Is the CEO’s behavior at issue, or is the CEO a poor judge of people? Are people leaving for big promotions elsewhere? Or is the company making mistakes in firing people? To keep track, the board should ask for a monthly report of staffers who have left for other employers.

Especially in large companies, culture may not be uniform across the organization. Trian’s Ed Garden, who also sits on GE’s board, has found that the culture of the company varies from one line of business to another. He says, “The culture at Aviation is very different from the culture at Power. It’s not homogenous. You have to go out there and touch and feel the operation.”

Issues with day-to-day operations can also indicate that the culture needs to change. Culture affects operations in several critical areas, in particular the cultures of decision making, change execution, and promotions and employee development. All are mediated by the culture of interpersonal behavior. Do people engage in destructive competition? Do they hide information? Do they use abusive language? Do critical players fail to collaborate effectively? The board must ask these questions continually.

Of these elements, the culture of decision making is an over arching operational concern. What is the behavior at the nodes where big decisions are made? For example, pricing may involve several departments, with many intersections between them. To evaluate culture, probe who controls the transaction. What information and what rules are they using? What issues are they failing to confront? Is one person dominating the process? Are decisions fact-based or intuitive or a mixture of the two? If the group makes a mistake, how does it recoup? Do the people respond constructively or do they play the blame game? The board can demand an analysis of the decision-making process and bring in external companies for an evaluation.

The board can apply the same analytical framework to the culture of promotion and advancement. The attributes of the people who win promotions—their qualities and characteristics—can reveal much about the culture. Is the process objective or not? It is not the role of the board to manage the process in any of these realms. Instead, ask for information and serve as a sounding board.

A crisis can be an opportunity to review culture. One large company that was forced to recall a product realized it had a cultural problem because different units withheld information from each other that would have let the company make better decisions. The company did not try to defend the culture. Instead, the company brought in outsiders to do an investigation and external assessment. The company followed up with a meeting to which it invited hundreds of its top leaders from around the world and asked a simple question: If they could change one thing about the company’s culture, what would it be? The responses, distilled, are now part of the company’s foundation.

Culture is a reflection of your talent. So to put the story of your company out into the world, tell your investors about your people. If you nurture your talent well, you will have a good story to share with your owners. Show them how your talent has a direct relationship with the creation of long-term value. The good stories shouldn’t be left just to the fashion companies, whose designers are tracked by their investors, or to the pharmaceutical companies, whose investors track the R&D chief and the regulatory liaison with the Food and Drug Administration. These stories are common to all organizations. Every company should be able to tell investors how their people create value.

In the end, though, a company’s culture is set at the top, often through example rather than codification. As GM’s Mary Barra says, “I can’t come into the office and change the culture today. But I can work on how I behave today, how I act in a meeting, how I take or don’t take an action.” GM has meetings with senior leaders twice a year and then quarterly calls, and most are about culture and behavior. And the board raises the topic several times a year.

The success or failure of a company will be a function of the people—their quality, their expertise, their work ethic, their culture—and how as a board you can influence them.

CHECKLIST FOR MANAGING TALENT

• Discuss talent at every board meeting.
• Determine the qualities that the CEO and the leadership team will need in the future based on strategy and marketplace trends.
• Plan ahead by identifying CEO candidates two or three layers down in the corporation.
• Use simulations to benchmark CEO candidates and put finalists through their paces in different parts of the company.
• Canvass senior colleagues and customers about all internal CEO candidates.
• Go out in the field to get to know tomorrow’s likely leaders.
• Link compensation to initiatives that build future value.
• To ensure diversity in the leadership ranks, identify and nurture talent before you need it.
• To attract younger employees, adopt meaningful sustainability initiatives.
• Be on the lookout for signs of cultural problems, such as rapid turnover of top managers.