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Best Companies for Leaders

GE eclipses P & G for the Top spot in 2006.

Growth requires more than a good strategy these days. Everyone has a decent strategy, but how many have leaders at all levels of the organization who have the understanding, drive and skills to execute it in ways others cannot? When Peter Drucker presciently introduced the idea of identifying leaders of “the future that has already happened,” he underscored the hallmark of any effective organization: The best institutionalize leadership development.

The Hay Group, in partnership with Chief Executive, has conducted a second yearlong study that attempts to shed light on this urgent need. By identifying the top companies that develop leaders systematically in ways that others acknowledge as productive of top talent, one can understand what works, what doesn’t and what should be avoided.

The study, which considered 1,279 companies with at least $8 billion in annual revenues from around the world, focused on what top performers did differently with high potential future leaders, since that is the group that will, in Drucker’s phrase, shape the future, a future that has already happened. Of these, 564 provided sufficient data for comparisons.

This year GE narrowly edged out Procter & Gamble, last year’s top ranked company. (See rankings for 2006 and 2005 .)

Top 20 Companies for Leaders

 2006

2005 

1. General Electric1. Procter & Gamble
2. Procter & Gamble2. PepsiCo 
3. PepsiCo 3. IBM 
4. Citigroup4. General Electric
5. Johnson & Johnson5. Johnson & Johnson
6. HSBC Holdings 6. Dell
7. BASF 7. Microsoft 
8. Home Depot8. Home Depot
9. IBM9. JPMorgan
10. Coca-Cola 10. Motorola 
11. Dell11.Pfizer 
12. Microsoft12. FedEx
13. Novartis13. BASF
14. Verizon14. Verizon
15. Nestle15.BAE Systems
16. Lockheed Martin16. Johnson Controls
17. GlaxoSmithKline17. Siemens
18. Amgen18. BP
19. Hewlett-Packard19. L’Oreal
20. BAE Systems20. Colgate-Palmolive

Data for the rankings was collected from three sources: surveys in which leaders in HR and line positions rated effectiveness in leadership development in their own organizations; survey peer scores where respondents rated companies in their industry peer group who make $8 billion or more in annual revenue on quality of management and employee talent; and surveys of experts from academia and executive search firms. Many from this third group were also interviewed and asked a variety of questions regarding the best companies for leadership development.

GE was cited by 12 academics, while P&G was cited five times. GE received high marks for both the number of qualified executives it has grown internally and also for those it has nurtured and “graduated” to other firms.

The Fairfield, Conn.-based conglomerate spends over $1 billion annually in corporate training and management leadership, which it uses to drive key initiatives throughout the organization. CEO Jeff Immelt has said that the company sees itself as a true learning organization with a core development curriculum managed at the corporate level, plus with just-in-time programs designed to address specific needs. “I’m one of the top recruiters,” he told the Financial Times. “I don’t think our investors want us to lose our top leaders.”

The company’s renowned Crotonville, N.Y., facility and its European counterpart in Brussels are perhaps the best-known corporate universities. They offer intensive management training through special leadership programs designed to accelerate learning for high performing employees, using a variety of methods from e-learning to action learning, from boot camps to leadership summits.

Many companies offer similar programs and claim that their leaders closely monitor developments. But to be an effective leader today requires more than an understanding of pricing in global markets or knowledge of one’s competitors. An understanding and empathy for the cultural values of others and their impact on one’s perceptions are also important.

Leadership today demands that people be agile in responding to complex environments. For example, GE’s approach in focusing not only on results but how results are achieved earns high marks from peers and professional educators alike. The complete leader is not merely a technocrat with deep skills in operations, finance or sales and marketing. How leaders work through teams and develop a culture of trust with others is key.

  Best Practices

 2006 Best Practices

 2005 Best Practices

 1. Having leaders at all levels who
focus on creating a work climate
that motivates employees to perform
at their best.
 1. Having leaders at all levels who
focus on creating a work climate
that motivates employees to perform
at their best.
 2. Ensuring that the company and
its senior management make
leadership development a top
priority.
 2. Ensuring that the company and
its senior management make
leadership development a top
priority.
 3. Providing training and coaching
to help intact leadership teams,
as well as the individual leaders,
work together more effectively.
 3. Providing training and coaching
to help intact leadership teams,
as well as the individual leaders,
work together more effectively.
 4. Rotational job assignments for
high potentials.
 4. Providing job-shadowing
opportunities for managers in
mid-career.
 5. External leadership development
programs for mid-level
managers.
 5. Ensuring that high potentials
receive objective 360-degree
assessments and feedback on
their leadership ability early on.
 6. Web-based, self-study leadership
modules for mid-level
managers
 6. Ensuring that mid-level managers
get enough time to take
part in leadership development
activities early in their careers.
 7. Executive MBA programs for
mid-level managers.
 

Although it dropped to second among the 20, P&G is widely viewed as one of the best pipelines for future leaders, with many respondents citing the quality and time the company invests in its executives’ careers. The fact that the company demonstrates tremendous stability in retaining talent speaks volumes for the development culture it fosters.

P&G CEO A.G. Lafley is widely regarded as a leader who intuitively understands the connection between people and results. “I care about touching people in ways that make their lives better,” he said, emphasizing the company’s “build from within” philosophy. Though described as caring and thoughtful, Lafley was nonetheless capable of cutting 9,600 employees to reduce costs, showing that empathy and toughness are not mutually exclusive.

Other companies that ranked in the top 10 include PepsiCo, which gets strong reviews from its peer group and is seen as similar to P&G in its continuity of management and promotion from within. Home Depot was also featured last year for its focus on high-potential leaders, particularly during a period of staggering growth. Also noteworthy is the solid working relationship between CEO Bob Nardelli and Dennis Donovan, the company’s executive vice president of HR. The two executives worked closely together when Nardelli ran GE Power Systems.

Differences in internal managerial emphasis in developing leaders and nurturing them appear partly to account for IBM’s shift in ranking from third to ninth place, still a respectable showing. Compared with last year the company received fewer mentions from academics, recruiters and others. Dell’s senior vice president of HR, Paul McKinnon, once served as a consultant to PepsiCo and saw how effective it was at developing leaders. He is said to have embraced many of the company’s ideas and to have brought a new perspective to Dell.

Practices That Waste Resources and Don’t Get Results

Based on the 2006 data, the practices that are least likely to create more of the right kind of leaders are as follows:

 1. Outdoor activity-based programs at all levels of management
 2. Paper-based self-study leadership modules at all levels of management
 3. Job-shadowing for senior managers
 4. Web-based self-study for senior managers and high potentials
 5. Executive MBAs for senior managers

Novartis’s CEO Daniel Vasella pays particular attention to planned international career assignments. His global company is one of a growing number that believe executives need to move around before they move up. Similarly, Peter Brabeck-Letmathe, CEO of Nestle, remarks that the Swiss firm encourages local operations to be run as autonomously as possible (thus requiring strong local leaders) while not sacrificing corporate priorities.

The 2006 survey found that the top 20 companies for leadership manage high potential employees with a greater sense of urgency and priority. They are more likely to have a formal process for identifying high potentials and a separate career track with specific programs to accelerate their development. In addition, the top 20 are more likely than other firms to include marketing as a function to which they attract high potentials. This might be due to the fact that the top 20 have a high number of market- focused businesses with leaders who value that background. Also, the top 20 are more likely to promote from within-not just for mid-level and senior managers-but for the CEO as well.

Equally important are practices that waste resources and don’t get results (see table). There are five activities that are negatively correlated or demonstrate a weak relationship with results. These familiar practices, such as outdoor programs and paper-based self-study modules, come under the heading of easy-to do or faddist practices that are harmless but of little long-term value. Companies based in Asia tend to rely on such methods far more than firms in the U.S. or Europe.

       How Leaders Differ

 Practices

 Top 20 Companies

Peer Companies 

Actively manage the careers of high potentials 78 % 52 %
Have a formal process for identifying individuals who are likely to assume leadership roles in the future
 90 % 74 %
Have career tracks for high-potential professionals or individual contributors that are separate from
those for high-potential leaders
 73 % 42 %
Have formal programs that are designed to accelerate the leadership development of high potentials 75 % 49 %
Include marketing as an organizational function from which they get their high potentials 70 % 46 %
Fill mid-level manager positions from within   80 % 64 %
Fill senior-level manager positions from within 75 % 60 % 
CEOs are promoted from within 88 % 73 %

The study showed that there is no silver bullet for leadership development. However, three of the six best practices identified last year are also the top three practices this year. Job shadowing for mid-level managers and 360-degree assessments for high potentials also declined in significance.

What is the payoff for leadership development? It varies. There is anywhere from a five-to-one to a 20-toone return on investment. For the five years from 2000 to 2004 the study found annualized earnings per share price improvement in the top 20 of at least 5 percent compared to the S&P 500. Many other factors may be involved, but respondents say that developing talent gives them an edge.

Considering the impending shortage of talent brought on by retiring baby boomers over the next five to 10 years, the question of how we develop enough of the right kind of leaders is becoming increasingly urgent.


All charts Source: Hay Group

About JP Donlon

JP Donlon
JP Donlon is the Editor-in-Chief of Chief Executive magazine.