Human capital drives economic prosperity. People can account for half of the operating costs of a business and significantly influence results. Yet whilst companies analyse and mitigate against enterprise risk, they overlook human capital risk. The role of the board includes responsibility for governance; therefore leadership risk management should receive the full attention of the board. In many companies, efforts are underdeveloped, miscommunicated or ignored.

We believe that market analysts and shareholders should reward directors who take a best practice approach to leadership risk that encompasses the senior management team as a collective, the make-up of that team, and their ability to execute strategy and deliver results. Effective leadership risk management improves business continuity, minimises disruption, and makes a business more agile and resilient.

Common practice

We find that organisations typically assess the top 100 roles internally. Driven by the HR Director and Group Head of Talent, the Board is often not involved in the process. A nine-box competency matrix maps internal talent (a narrow bandwidth in determining future stars). In some cases, high performers are actively moved group-wide to build experience and some organisations also use a static market mapping exercise to identify the names of leaders in their competitors. The process remains a static, annual review in the majority of businesses.

Striving for best practice

1. Build a future understanding

Few companies have modelled their labour supply and demand for job families against current and future imbalances. Fewer still have developed strategies to address shortfalls. Ensure the focus is not on replacing the current incumbent; very rarely will future challenges require the same skills as those that worked in the past. Tesco’s past two CEOs (Sir Terry Leahy and Philip Clarke) have very different experience to current CEO, Dave Lewis. Investing in a credible forecast about the future makes it possible to understand the skills and capabilities the leadership team will need.

2. Strip out the process

Few companies have defined what makes their existing leaders good. Define the competencies and build them into the overall leadership development programme.

Strip out the process by removing duplicates from the ‘names in boxes’. Most companies have high performers in several succession boxes and removing the duplicates reduces coverage to 25% to 35% at the senior level.

Make sure the process takes a group view of future leaders. HR Directors believe there needs to be a mentality shift to break down talent silos, particularly where high growth or emerging markets are considered.

3. Be proactive

Proactively engage with talent on an ongoing basis when there is NO role. Don’t wait for an unexpected change in leadership to review internal successors. Break the cycle of collaborating with your search firm as a reaction to an event.

4. Getting to know you

Companies think about best-practice transition as on-boarding. This presumption is flawed as people experience on-boarding differently. Engaging with future leaders before a need arises ensures internal and external candidates begin to develop relationships with board members. Active engagement with the leadership team ensures everyone is heading towards the same goal.

To mitigate leadership risk, companies should balance internal and external successors in their planning scenarios. They should monitor the external leadership competitive landscape on an ongoing basis. A proactive, intentionally open, and forward thinking approach to leadership is governance at its best.

This article originally appeared in HR Grapevine on 2nd February 2015 and can be viewed here.

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