CEOs and CHROs by Korn Ferry

CEOs and CHROs Crucial allies and potential successors.

www.kornferryinstitute.com

Introduction A new CEO received a number of congratulatory comments from peers and subordinates. They were impressed by his past success and excited about future opportunities. But three former CEOs and colleagues, after lavishing praise, also quietly warned, “Be careful what you wish for. Your new role is daunting, demanding, and lonely.” CEOs today face unheralded pressures as their organizations are met with enormous changes in general business conditions and more demanding stakeholder expectations. Fifty years after the inception of the Fortune 500, only 65 companies (13%) remain independent enterprises. The half-life of technological innovation continues to get shorter. Economic and cultural changes are compounded by widespread access to information and inevitable globalization. Investors, customers, regulators, and outside communities all place enormous demands on company performance. Talented employees are more mobile and have more choices about where to work and how hard to work. CEOs who don’t personally adapt and create adaptive organizations fail. CEOs traditionally responded to these pressures by mastering product and service skills through knowing and meeting customer demands, by building disciplined operational skills through understanding systems, and by ensuring financial rigor through implementing financial controls. The pathway to CEO often originated in sales/marketing, operations, or finance. For today’s CEO, marketing, operations, and financial acumen are only the table stakes for success. The increased business pressures require CEOs to possess an additional set of skills that will allow them to build robust and resilient organizations. Creating the right organization is less about structure—roles, responsibilities, and rules—and more about capabilities—that is, talent, leadership, and culture. Drafting an organizational chart that lays out who reports to whom is less important than creating a corporate identity that communicates the expectations of the firm’s brand to customers and the expectations of the firm’s culture to employees.

“Succession to a CEO role requires a balance of technical and people skills,” says Peter Goerke, group director of human resources and member of the group executive committee at Prudential PLC. “For all C-suite roles (and often at least one level down), there has been a gradual shift in requirements towards business acumen and ‘softer’ leadership skills. Technical skills are merely a starting point.” Korn Ferry research confirms his observation. Best-in-class executives (those in the top 10% of pay for their function) tend to have leadership styles that motivate employees, develop future leaders, and create appropriate cultures. Executives more frequently are being evaluated on how they treat people, nurture future leaders, and create the right work environment. And rightly so: well-managed talent, leadership, and culture are what enable sustainable customer, operational, and financial results.

CEOS AND CHROS

What best-in-class leadership looks like. Irrespective of functional background, the best-in-class senior executives tend to be more similar than different in the way that they lead the workforce and shape the workplace. These leaders are, of course, technically competent, but they also tend to present an approachable, informal, and inclusive leadership style. They ensure employees leave meetings feeling better about themselves, which results in a greater commitment to doing the right work. As credible activists, these executives instill a growth mindset that enables others to make acceptable customer, product, operational, and financial choices. And they create a work environment in which employees feel they have the opportunity to grow personally and professionally by contributing value to their company. Successful leaders recognize and appreciate the complexity of modern business. At the same time, they are able to find patterns in this complexity. They see around corners, envisioning future product innovations, customer expectations, technological imperatives, or financial requirements. But they aren’t bogged down by hypothetical options; they recognize the importance of winnowing choices and making essential selections that position their organization to win. An analysis of executive profiles and assessments collected by Korn Ferry has found that, across functions, best-in-class leaders have higher levels of emotional awareness and competence in six key areas. Tolerance of ambiguity. They don’t need to have all the answers and can work in conditions of uncertainty and change. They are comfortable surrounding themselves with people who are different from them in order to better see the many sides of a problem or opportunity. As such, they are change champions who can readily initiate and institutionalize change. Empathy. They know their personal strengths and weaknesses and are adept at connecting with others. They are able to “read the room,” assess the general culture of their team, and quickly size up other people’s strengths and weaknesses. This allows them to place people in positions that use their skills to fortify others. They are excellent talent scouts and culture architects who recognize potential to get the most out of their people while creating a productive work environment.

Successful leaders see around corners, envisioning future product innovations, customer expectations, technological imperatives, or financial requirements.

Confidence. They have confidence to face and make bold decisions. They recognize that leaders have to take smart risks and are willing to act before all the data is in. That said, they know how to access constantly updated data and often surround themselves with others who enable them to make informed decisions. In today’s changing business context, speed and adaptability are crucial to winning. Being a change champion means taking risks, sharing credit, facing failure, learning rapidly, and looking forward not backward. Composure. They are emotionally steady when pressure is high. As leaders they need to remain calm and not get easily frustrated, which can rub off on their own teams. Energy. Beyond just physical stamina, today’s leaders need mental vigor and the ability to sustain analytical thinking despite long and arduous days. The energy gives leaders tenacity in the face of difficult situations, and they leverage that intensity to keep others motivated as well. Adaptability. Best-in-class leaders are able to adapt to different situations by listening to and accommodating others’ methods. In the global business world, it is about being able to bring together and accept a diversity of views and styles. Needless to say, the warning counsel of former CEOs to future CEOs is not a surprise. With changing business conditions come changing requirements for success. The CEO’s job is hugely demanding and continues to become even more so with the shifting regulatory landscape, global expansion, and constant communication required. And it is lonely.

CEOS AND CHROS

The CHRO: a key ally for CEOs. CEOs need social and emotional support—allies who don’t just tell them what they already know (e.g., customer, operational, or financial expertise), but who tell them what they need to know: Are they having the impact they intend as leaders? Do they have the right executive talent in place? Is the culture productive and energizing, or toxic and demoralizing? Without leveraging deep insights on talent, leadership, and culture, CEOs may have exceptional technical solutions that are not implemented, or implemented out of sync with the rapid change in global markets. It is the chief human resources officer (CHRO) who can help. This person understands deeply “the importance of leadership, integration, and personal skills,” says Kenneth J. Carrig, who led HR in many global organizations (SunTrust Bank, Comcast, Sysco, Continental Airlines). While all senior leaders need this knowledge, such expertise is currently concentrated in HR. CEOs increasingly seek insights from their CHROs to help them succeed. The role of HR in organizations has evolved dramatically over the last two decades. HR was once the administrative function that defined terms and conditions of work and dealt with the union landscape. It then focused on developing functional expertise through people and organizational processes such as staffing, training, performance management, compensation, communication, and organizational design. In more recent years, these HR practices have been used to help implement strategy. A growth plan centered on product innovation, for example, requires different talent, leadership, and culture from a customer intimacy approach. HR leaders design practices to implement these differences. In recent years, HR has shifted from an inside to outside focus. Rather than “the employer of choice,” HR now focuses on being “the employer of choice” of the employees our customers would choose. Training programs are co-created, co-delivered, and co-attended by people outside the company (e.g., suppliers, customers, regulators). Organizational designs are less about role clarity and more about governing to build customer value. External communications to customers deliberately match internal employee messaging. The brands that organizations seek to build outside become the cultural expectations inside.

HR has evolved dramatically, from an administrative function to one that is integral to implementing strategy.

This evolution from administrative to functional, strategic, and now outside-in thinking has expanded the mental map of CHROs dramatically, putting them in a unique position to support CEOs. With their business acumen, effective CHROs can accurately converse about customers, products, operations, and financials. Further, they can help CEOs actually transform the organization by building a high performing executive leadership team, working with the board on issues such as compensation and succession, and monitoring the culture. Jean-Christophe Deslarzes, who is executive vice president for HR and on the group executive committee at ABB, describes the business leader role for top CHROs: “Strong CHROs are business leaders. Business because they understand market dynamics, know the business’ key success drivers, are financially literate, and have integrated what makes the company’s customers happy. Leaders because they need to convince and influence with empathy and energy in order to have the desired impact,” he says. “Indeed, the more informal authority [CHROs] have across the organization presents them with a greater leadership challenge than the formal hierarchical position a general manager has. [The CHRO role], thus, is an invaluable leadership experience.” Over 25 years of research at the University of Michigan’s Ross School of Business and the RBL group, it has been determined that highperforming HR professionals master six competency domains that are also essential to CEO success: Strategic positioner. HR professionals go beyond knowing the business to helping CEOs focus strategic direction and align choices that create value for investors and customers and respond to changing external conditions. Credible activist. HR professionals build relationships of trust with key stakeholders outside (customers, investors, communities, regulators) and inside (board, top team, employees) and take bold positions that drive future performance. Capability builder. HR professionals recognize the power of their organization’s culture, align the internal culture with external expectations, and transform the culture as required.

CEOS AND CHROS

Change champion. HR professionals are able to both initiate and sustain change so that the organization anticipates and responds to external pressures for change. HR innovator and integrator. HR professionals wisely innovate and integrate HR practices around people, performance, information, and work to improve talent, leadership, and culture. Technology (information) proponent. HR professionals know how to source structured and unstructured information from the cloud, workforce analytics, and scorecards to make more informed decisions. Given the pressures coming to bear today on both CEOs and CHROs, it should be noted that their effectiveness stems from essentially the same set of skills. Diane Gherson, senior vice president of human resources at IBM, states that â&#x20AC;&#x153;all our successful leaders were selected (and developed) for talent, leadership, and cultural skills since these skills are indeed required of any general manager or leader of a major business unit.â&#x20AC;?

CEOs and CHROs: cut from the same cloth. Over several decades, through proprietary psychometric assessment tools, Korn Ferry has profiled leadership styles of thousands of senior executives, including CEOs, chief operating officers, and functional leaders (CHROs, chief financial officers, chief marketing officers, chief information officers). The assessments gauge how much emphasis (or importance) an individual places on 14 attributes that have been sorted into three categories: leadership style, thinking style, and emotional competencies. High or low scores are not good or bad per se; emphasis on one style or another might be beneficial depending on the role. Best-in-class profilesâ&#x20AC;&#x201D;which are updated routinely to reflect changing demands and business conditionsâ&#x20AC;&#x201D;are an aggregate profile of the top-paid 10% of individuals in each senior executive role.

Figure 1

Demographics by leadership role.

Position

Education

Mean annual base compensation (USD)

Women

CEO

1.75

$747,000

13%

COO

1.70

$673,000

12%

CHRO

1.75

$510,000

42%

CFO

1.64

$555,000

10%

CMO

1.75

$450,000

17%

CIO

1.64

$429,000

12%

The data in Figure 1 reports the best-in-class (top 10%) demographics and shows that the education of the six groups is about the same, that women make up a much higher percentage of CHROs than they do the other roles, and that the top CHROs earn less than CFOs, but more than their counterparts in IT and marketing. The higher pay for CHROs may be driven by a short supply of these top-flight, strategic-thinking executives who have the unique insights that CEOs demand.

CEOS AND CHROS

Figure 2

Leadership styles by executive role. These illustrate the extent to which each type of executive is oriented toward task-directive communication, social interaction, logical or fact-based communication, and collaboration/ participation. These styles are public facing, reflecting a leaderâ&#x20AC;&#x2122;s priorities and what behaviors he or she finds effective in leading and influencing others.

Importance

CHRO

5.03

5 4.04

4.44

2.19 Task-oriented

Social

4 3.70 3

Intellectual Participative

Importance

Intellectual Participative

4.79 3.90

4.22

2 Social

Task-oriented

Intellectual Participative

CMO

CIO 4.97

5 4.16

3.49

3 2.18 Task-oriented

Social

2.45

2.29

Importance

3.83

4.20

Social

Intellectual Participative

Importance

Task-oriented

4.94

2.00

CFO

COO 5

5.23

4.39

Importance

CEO 5

Social

Intellectual Participative

5.09 4.21

4.26

2.19 Task-oriented

Social

Intellectual Participative

Figure 3

Thinking styles by executive role. These profiles illustrate how different types of executives approach decision making or private consultations, and the relative emphasis on taking action, being flexible, embracing complexity, and creativity.

4.18 3.77

2.54 2.14 Actionoriented

Flexible

Complex

Creative

3.37

2.82

Flexible

Complex

2.50 2.34 Actionoriented

Flexible

Complex

3.60

2.70 2.12 Actionoriented

Flexible

Complex

2.19 2

Actionoriented

4.21

Importance

3.01 2.53

2.38 Flexible

Complex

Creative

CMO

4.38 4.20

Creative

CFO

Creative

CIO

4.13

4.23

2.15 Actionoriented

3.96

5 3.95

CHRO

COO

Importance

CEO

Importance

2.32 Actionoriented

Flexible

Complex

Creative

CEOS AND CHROS

Figure 4

Emotional competencies by executive role. These charts illustrate the degree to which an executive exhibits certain personal traits that influence leadership, including tolerance of ambiguity, composure, empathy, energy, humility, and confidence.

CEO

Importance

4.00

Ambiguity Composure Empathy Tolerance

Energy

Humility

COO

4.72

4.16

4.13

4 3.90

Ambiguity Composure Empathy Tolerance

Humility

CIO

4.88

4.35

Ambiguity Composure Empathy Tolerance

Energy

4.17

Ambiguity Composure Empathy Tolerance

Energy

Humility

Confidence

CFO 4.64

4.59 4.41

4.03

4.12

Ambiguity Composure Empathy Tolerance

CMO

Energy

Humility

Confidence

4.85

4.63

4.15

4.04

4.83

3.97

4.44

Confidence

4.68

4.61

Energy

5.01

5.06

4.45

Confidence

CHRO

5.11

4.56

Importance

4.34

4.31

Importance

4.81

4.77

5.15

Importance

4.58 4.32

4.11 3.79

Ambiguity Composure Empathy Tolerance

Energy

Humility

Confidence

Although most best-in-class executives reveal a similar silhouette, it is clear that CHROs are cut from the same cloth as CEOs and COOs. It is not a surprise that COOs and CEOs have similar profiles, given that they play similar roles. What is fascinating is that best-in-class CHROs are so much more similar to CEOs than are CFOs, CIOs, or CMOs. Even examining nuanced distinctions, we find that the CHROâ&#x20AC;&#x2122;s profile is statistically closer to that of the CEO and COO than are the other key functional leaders (see Figure 5).

Figure 5

Score differences on assessments by executive role. This table reports the Euclidean Distance from the profile of the best-inclass CEO, in which a lower number indicates more similarity. Overall, bestin-class CHROs (distance .735) are closer to CEOs across 14 traits than are CFOs (.82), CMOs (1.039), and CIOs (1.031).

Leadership

Thinking

Emotional

Total

CEO

COO

0.313748

0.541929

0.349363

0.717064

CHRO

0.43553

0.282624

0.52137

0.735792

CFO

0.409967

0.235592

0.672062

0.82

CMO

0.225341

0.776315

0.653219

1.039297

CIO

0.598964

0.743354

0.388151

1.030531

CEOS AND CHROS

CHRO role 1: coach and architect. As we described earlier in this article, CEOs in today’s dynamic and complex markets succeed not only with technical insights about customers, products, operations, and financial performance, but through managing talent, leadership, and culture. Because CHROs have profiles that match CEO emotional and thinking profiles, and because CHROs have unique insights about talent, leadership, and culture, CEOs may turn to CHROs as leadership coaches and talent architects. As coach, a CHRO may help a CEO recognize unintended consequences of his or her behaviors. Most people judge themselves by their intent, but others judge them by their behavior. CHROs may help CEOs recognize whether their personal behavior is actually achieving their desired outcomes. For instance, if a CEO proposes driving for increasing market share by creating deeper connections with targeted customers, a CHRO may then monitor the chief executive’s time and behavior to test for leadership hypocrisy. Is he or she personally spending time with key customers? Asking about customer results? Holding others accountable for customer performance? Building a customer-focused culture throughout the organization? In addition, the CHRO may help the CEO identify and make choices about creating the right organization to deliver on stated goals. This might include addressing questions such as: Talent: To what extent do our employees have the knowledge and skills required to deliver on our expectations for customers, investors, and communities?

To what extent do we have an employee value proposition that increases their commitment and engagement to the right goals? ©

To what extent do our employees find meaning and purpose from their work so that they are self-motivated?

CHROs may help CEOs recognize whether their personal behavior is actually achieving their desired outcomes.

Leadership: To what extent do we recognize the importance of collective leadership in reaching our goals, and if so, how?

To what extent do we create a leadership brand that defines how leaders inside our company can best serve external stakeholders?

To what extent do we regularly assess our leadership capability to discover areas of strength and weakness?

To what extent do we seriously invest in developing future leaders who will be prepared to meet upcoming business requirements?

Culture: To what extent have we defined our culture from the outside in, so that our external firm brand becomes the basis for our internal ways of thinking and acting?

To what extent have we created a disciplined process of evaluating and transforming our culture?

When CHROs raise and offer choices about these organizational questions, they help their CEOs respond to the challenges they face. Thomas Ebeling, CEO of ProSiebenSat.1 Media AG (and previously CEO of Novartis Pharma), acknowledges how crucial it is to have an excellent CHRO on hand. “It is almost impossible to achieve sustainable success without an outstanding CHRO, who should be a key sparring partner for a CEO on topics such as talent development, team composition, managing culture, and personal feedback to the CEO,” he notes. Jill Smart, former CHRO at Accenture, says that the “best CEO/ CHRO relationships evolve over time, beginning long before the CEO is promoted and creating a dynamic in which the CEO knows he or she can trust the CHRO fully. At the same time, however, the CHRO’s value depends on being completely candid—and even playing devil’s advocate when necessary. Simply telling the CEO what he or she wants to hear negates the value of the CHRO’s advice.”

CEOS AND CHROS

CHRO role 2: successor candidates. Now we come to a more bold prediction. In the future, CEO successor candidates may come from HR, in addition to finance, marketing, operations, and IT. Most failures of succession occur when an organization focuses on people more than the requirements of the position. In general, two or three leading candidates are identified and monitored, maybe even coached. The evolving demands placed on CEOs, however, aren’t rigorously discussed or defined. If future CEOs must manage organizational challenges as much as customers, products, and financial difficulties, then CHROs may uniquely have the skills to move into this role. As Figures 2-5 make visible, today’s CHRO already resembles the CEO on leadership traits as much or more than does any other functional executive. If the ability of an organization to change and adapt becomes the key differentiator, then CHROs who have mastered these skills may become excellent candidates for CEO succession. Of course, CHROs cannot expect to be on the succession slate without experience and grounding in business operations. As Ebeling states, “I do not believe that a CHRO can become CEO without being tested as an operational business leader.” If CHROs master those table stakes skills, however, they may be viable candidates for CEO roles. As Goerke observes, “The skills that help an executive climb the corporate ladder will not be sufficient once they get near the top. Once people reach the C-suite or close to it, technical and functional expertise matters less than leadership skills and a strong grasp of business fundamentals.” If promoted to CEO, such former CHROs would bring some specific attributes to the role.

If the ability of an organization to change and adapt becomes the key differentiator, then CHROs who have mastered these skills may become excellent candidates for CEO succession.

Good CHROs tend to be highly self-aware. They know their strengths, weaknesses, and predispositions. They know where to focus their personal attention and when to surround themselves with others who have complementary skills. They generally have the interpersonal savvy to connect with others and to engage them around a common agenda. They also recognize which leadership style should work in specific situations. Top CHROs excel at managing others. They deal constantly with complex people-based situations, both in their own teams and as an advisor to peers and other executives. Sometimes, a CEOâ&#x20AC;&#x2122;s ego is the thing that gets in the way of creating an organization that is stronger than its individuals. CHROs, whose efforts so often require working with others, are well prepared to create teams in which success is viewed as a collective, not individual, result. CHROs who appreciate the science and art of working with others may ensure more employees realize their potential. They may help employees clarify their personal values and how those values align with the organizationâ&#x20AC;&#x2122;s goals. CHROs may also be able to put aside ego, which can create political gridlock, and positively engage others in accomplishing organizational objectives. Successful CHROs tend to have deep insights about organizations. They understand, for instance, the power of integrated systems. They recognize that processes surrounding customer insights, product innovation, operational excellence, and financial controls are best integrated so that the overall organization has a common identity. They also understand how to foster collaboration across geographic, functional, or business group boundaries. They are constantly checking the cultural barometer of the entire organization, especially the interactions of the executive leadership. Top CHROs know how to serve external stakeholders through internal actions. They help build customer share by using HR practices to encourage customer centric behavior. They enhance investor intangibles by helping shareholders gain confidence in future leaders. They help foster alliance partners or joint ventures and make sure that the complexities of alliances work. They bolster community reputation by creating a positive work environment inside the organization. They are advocates and ambassadors, always conscious of the image projected to external audiences. Additionally, increased regulation in some parts of the world have given the CHRO greater interaction with regulators on issues such as CEO succession and appropriate corporate governance around compensation.

CEOS AND CHROS

The future of the connection between CEOs and CHROs. In short, good CHROs frequently possess a blend of unique skills that CEOs of the future are likely to require. This is not to suggest that leaders from other functions are lesser CEO material, but rather that boards should take another look at the CHRO when working on succession. Obviously, CHROs who are not CEO candidates should still provide insights during board discussions on succession. Debra Perry, who serves on multiple boards, recognizes how valuable such contributions are: “CHROs can help boards identify the critical elements of leadership necessary to deliver on the organization’s strategy. Further, the CHRO could provide insight into how those leadership elements can be woven into the leadership’s team objectives. The CHRO can also provide candid feedback on the gap between leadership potential and reality in fulfilling these objectives.” To date, few individuals with an HR functional background have succeeded into the CEO role, but some with significant stints in HR are starting to emerge, including Mary Barra at General Motors, Samuel R. Allen at John Deere, Steven Newman at Transocean, and James C. Smith at Thomson Reuters. CEOs who spent time as a CHRO as part of their corporate career development frequently comment that it made a huge impact on their growth personally and professionally. If HR leaders are to develop into future CEO candidates, they need to acquire the foundational finance and operations skills first. That requires not only formal education or training, but also primarily job experience. Such career breadth often tops the list of desires when CEOs and chairmen begin recruiting a CHRO, and shortlist candidates with such experience are viewed more favorably. Armed with that knowledge, CHROs should send HR’s high potential talent to work elsewhere. This is not only a long-term investment in the development of individual leaders, but also in the leadership talent of the whole organization. For that new CEO who was warned about the difficulties of the job, this research also offers hope. In the CHRO, there is an available partner who understands how the CEO works, thinks, and leads—and how talent, leadership, and culture can be used to win in the market. The CEO’s job will always be daunting, but it need not be lonely.

If managing talent and culture drive CEO success, should more organizations put CHROs in the succession candidate pool?

About the authors.

Dave Ulrich Dave is the Rensis Likert Professor at the University of Michigan’s Ross School of Business and a partner at consulting firm RBL Group. He has published more than 25 books, including The Why of Work, Leadership Sustainability, and The HR Value Proposition. dou@umich.edu

Ellie Filler Ellie is a managing partner with Korn Ferry and leads the firm’s Human Resources Center of Expertise for Europe, the Middle East, and Africa. Before entering the executive search profession, she spent more than 12 years in HR with some of Australia’s largest organizations. ellie.filler@kornferry.com

About Korn Ferry At Korn Ferry, we design, build, attract, and ignite talent. Since our inception, clients have trusted us to help recruit world-class leadership. Today, we are a single source for leadership and talent consulting services to empower businesses and leaders to reach their goals. Our solutions range from executive recruitment and leadership development programs, to enterprise learning, succession planning and recruitment process outsourcing (RPO).

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