Winning strategy The World s Most Admired lead the way in board governance and human capital management 4 2007 The 2007 study into the World s Most Admired Companies highlights the board s role in effective human capital management >>
Contents Spotlight on corporate governance 1 Investing in your assets 2 Human capital rising up the agenda 3 CEO evaluation accountability for human capital 6 is a key differentiator
00 Most Admired Companies Benchmark Research 2007 The phrase our people are our greatest asset may sound like a platitude, but the evidence is that this is true 2007 Hay Group. All rights reserved
1 Spotlight on corporate governance Hay Group partners with Fortune Magazine annually to identify the World s Most Admired Companies, taking as our sample the Fortune 1000 and Global 500 companies. In the course of this research we conduct our own investigation of best practice within these organizations to determine how the Most Admired Companies are distinct from their peers. We have looked at such issues as the attraction and retention of talent, leadership development, performance management and strategy implementation. This year the spotlight was on corporate governance in relation to human capital. There was a time when matters relating to human capital were dismissed as soft and relegated to any other business on the boardroom agenda. Hay Group s research in this, the tenth year of our partnership with Fortune, reveals that it now comes close to top of the priority list.
00 2 Most Admired Companies Benchmark Research 2007 Investing in your assets The phrase our people are our greatest asset may sound like a platitude, but the evidence is that this is true. A company s workforce, particularly its high potential employees and their motivation and development, is increasingly regarded by stakeholders as an intangible asset. Globally, the value of intangible assets employees, patents, and brands has ballooned in recent years. More than ever before, it s not just about the balance sheet. Strategies, business models, products and services can be easily appropriated by competitors. It is much harder for competitors to duplicate a wellfunctioning organization characterized by a talented group of people well led and aligned around clear and compelling objectives. Hay Group set out to determine the role successful boards play in overseeing a company s management of its human capital. Are boards more actively engaged with human capital strategies in the Most Admired Companies? Do they take a more proactive approach when it comes to CEO and executive succession and leadership development? Throughout our experience researching the Most Admired Companies, we have observed that the best companies are clearly differentiated from their peers. Putting people first and achieving success through them has been one driver of their success. Our findings this year on board governance provide resounding confirmation of this and illustrate that in the most successful companies, human capital issues truly command attention at the very top level of the organization. 2007 Hay Group. All rights reserved
3 Selection of the CEO is arguably the board s single most important decision Human capital rising up the agenda Respondents from the Most Admired Companies are more likely to report that their boards have become more involved in the oversight and management of human capital in recent years. A high percentage of both Most Admired and other companies all stated that their boards have become increasingly involved in the oversight of human capital. However a distinction between the two groups is apparent when it comes to human capital strategy. Some 82 per cent of the World s Most Admired companies agree that they have a human capital strategy in place that has been reviewed and approved by the board. This was only true for 62 per cent of the peer group. What s more, the boards of the best companies are more likely, at over 80 per cent, to regularly review human capital information and metrics such as turnover, employee survey results, detail on recruitment activities and job offer acceptance rates. Only 69 per cent of their peers can make the same claim.
00 4 Most Admired Companies Benchmark Research 2007 CEO succession boards are rolling up their sleeves and preparing for even the unexpected Selection of the CEO is arguably the board s single most important decision a decision in which boards of the World s Most Admired Companies are taking a much more hands on approach. A decade ago, CEOs were incumbent for longer periods, 10 years was not uncommon. High profile cases of boards firing CEOs abound in today s corporate environment and increasing turnover has reduced the average period of CEO tenure to five years. This indicates both that boards have to apply themselves to CEO succession more frequently but also that their efforts are not always entirely successful. The boards of Most Admired Companies are not only demanding a more significant role in the CEO succession planning process, they are devoting much more time and effort to it than other boards, says Beverly Behan, managing director of Hay Group s board effectiveness practice. What s more, the ability of the board to respond quickly to the unexpected loss of the CEO or other top executives is vital. Nowhere is this more vividly illustrated than in the case of McDonald s. In 2003, when McDonald s CEO, Jim Cantalupo suffered a fatal heart attack, the company was able to name an appropriate successor within hours. Quick action by the McDonald s board in naming an eminently appropriate successor reassured all stakeholders, including the markets. When, tragically, seven months later, that new leader at just 44 years of age was diagnosed with terminal cancer, McDonalds was again able to move quickly to appoint Jim Skinner its current CEO. Our research indicates that the best boards are similarly primed with 91 per cent of the Most Admired Companies agreeing with the statement we have a well-defined plan to cover the emergency loss of the CEO that is discussed at least annually. Their preparedness distinguishes them from their peers, only 65 per cent of whom agreed. What s more, over 80 per cent also have a plan to cover the emergency loss of other top officers such as the chief financial officer. Such dramatic circumstances are rare, but it would seem that the best organizations employ a more structured and considered approach to succession in general. 2007 Hay Group. All rights reserved
5 Death of the cult of the corporate savior the boards of Most Admired Companies prefer internal CEO candidates 70 per cent of the Most Admired Companies agreed that they had taken time to develop a tailored profile for their future CEO. Again we can contrast current board practices with those of ten years ago when boards would almost as a matter of course routinely go outside the company in their search for a new CEO a corporate savior. The sea change is attributed by some to General Electric s efforts in the Welch succession where the board implemented a comprehensive succession and development plan for internal GE executives after asking the question who are we going to find better than our own people? Almost 80 per cent of the Most Admired Companies stated that, in terms of a CEO successor, their preference is for an internal candidate. Only 60 per cent of their peer group made the same claim. The best boards recognize that they have a duty to their shareholders to ensure that there are strong internal candidates that have been groomed to assume corporate leadership so that going outside becomes a matter of choice, not one of necessity. They recognize that there are risks in hiring a CEO from the outside, such as cultural fit. As such, today s best boards are looking for effective processes to develop and assess their internal executive talent so that they feel confident in making well-informed decisions about corporate leadership, says Bev Behan. Selection of the CEO is the board s most important responsibility and, increasingly, boards are applying the same kind of rigor to this critical decision as they have long been demanding in addressing decisions about M&A, corporate strategy and risk. The hands-on nature of board involvement in executive development was borne out by the research which showed that over 85 per cent of the best boards received regular updates on the development of internal candidates for top leadership positions. However when it comes to developing a comprehensive profile for the future CEO which reflects the company s strategy and business model, the scores were lower. This suggests that many boards are still using off-the-shelf types of CEO profiles instead of tailoring their requirements more pointedly to their company s specific operating model and context. Only 70 per cent of the Most Admired Companies agreed that they had taken time to develop a tailored profile for their future CEO versus less than 60 per cent of the peer group.
00 6 Most Admired Companies Benchmark Research 2007 CEO evaluation accountability for human capital is a key differentiator We have seen that the most successful boards distinguish themselves by their oversight of human capital and monitoring of key human capital metrics. It is no coincidence then that these organizations are also the ones that show commitment to talent management and succession planning. Their leaders will take a hands on approach to this activity, devoting as much as 30 per cent of their time to identifying and developing future leaders. Yet this year s research noted one specific area in which the contrast is most stark between the best and the rest the evaluation of CEO performance. Over 90 per cent of both Most Admired Companies and their peers saw financial success as a key indicator of CEO success. Similarly, over 90 per cent of organizations in both groups viewed success in strategy implementation as an important criterion. However, a distinction between the Most Admired companies and their peers immediately developed in response to the question in evaluating CEO performance, our board focuses on success in developing human capital. Over 80 per cent of the Most Admired Companies agreed with this statement, as opposed to only 66 per cent of the peer group. This finding mirrors our experience of over 60 years working with successful organizations around the world. Companies that place the development of human capital at the core of what they do and measure CEO performance against it, not only stand apart from the rest, they are also more likely to be successful.
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