September 17, 2013

Keys to High Performing Organizations

We believe that most of the differences between mediocre companies and high-performance companies relate to the how well their business strategy is connected to their people strategy. Although most business leaders recognize the importance of the people factor, only a few have been successful in effectively using HR to inspire success and achieve a high-performance business strategy. Rapid change is occurring in all sectors of corporate life and the ability to adapt to this change has become strategically important. Clarity on what needs to be done on the human resources side of the organization is vital. In a high-performance company people behave in an inspired, responsible and decent manner. Such a company has a way of doing business where ‘heart and mind’ come together.

Some recent developments

Before considering how an inspired performance can be achieved, we should take a step back and look at some recent developments. In 2005 the former CEO of WorldCom was sentenced to 25 years in prison after he was found guilty of an $11 billion fraud. Other scandals at companies such as Andersen, Enron, Ahold and others damaged public trust in the corporate world.

Credit Suisse reported recently that family-owned companies generate superior returns and higher profitability than listed companies with a more diversified shareholder base. It found that European stocks with a significant family interest performed better than their respective sectoral peers. Since 1996 those stocks have outperformed their peers by 8% a year, and similar results were observed in the US market. There are three main reasons for this superior performance, according to Credit Suisse:

• Most families intend to pass on their holdings to their children, promoting a long-term strategic focus rather than an obsession with the next quarterly results.

• Families tend to avoid costly acquisitions, extensive use of leverage and trendy short-term strategies.

• There is a better alignment between management and shareholder interests as families usually have a limited number of companies (often just one) under their control.

The conclusion may well be that listed companies are suboptimal in their performance and that the drive for maximization of shareholder value through the stock markets has not led to better companies and better financial results. This may also explain the growth of private equity, which accounted for more than 33% of EU merger and acquisition activity in 2006. Where listed companies often fail to do so, private equity firms buy (parts of) companies and provide business focus, work on the basis of longer-term plans (four to seven years) and stay close to the management team.

Many financial institutions and politicians fear the growing influence of private equity and are arguing for greater controls over private equity deals, but there seems to be little reason for their concern. Private equity poses only a small risk to financial stability and Europe’s banking industry, according to a European Central Bank report published recently.

Corporations now seem to be starting to copy private equity. ABN AMRO, a Dutch bank, is racing against time to finalize a merger with Barclays and thwart a rival joint bid from three big European banks – Royal Bank of Scotland, Santander and Fortis. This trio is proposing to break up the Dutch bank with each partner picking off the bits that best complement its activities.

So what is high performance and how can it be achieved?

High-performance business

One of the criteria in the annual Fortune World’s Most Admired Companies survey is financial soundness, and some of the top companies listed can be called high-performance businesses. The survey, conducted by Hay Group, assesses 16,000 senior executives and directors, along with financial analysts, and identifies the companies that enjoy the strongest reputations within their industries and across industries.

The nine attributes used to evaluate companies and determine the industry rankings and the overall rankings are:

1. quality of products or services
2. wise use of corporate assets
3. financial soundness
4. long-term investment value
5. ability to attract and retain talented people
6. quality of management
7. social responsibility to the community and environment
8. effectiveness in doing business globally
9. innovativeness.

The first four attributes focus on what a business successfully delivers in terms of quality of products and services and financial results. This is predominantly about business performance and results. It is remarkable to see that five out of the nine Fortune attributes (points 5–9 above) concern the people side of the business. These make up a substantial part of the factors that determine the world’s most admired companies and indeed high-performance businesses.

Attracting and retaining talented people

When it comes to HR best practice, part of the success of the most admired companies stems from the fact that they do not delegate the responsibility for developing people strictly to the HR function. They spread the responsibility across all lines of business and share it with line managers. The amount of time managers report spending on the management and development of people is much higher than at other companies, suggesting that an operations-oriented, manager-driven approach to talent management works best.

Indeed, talent management is one of the core leadership functions that cannot be delegated. For line managers, it means getting in touch with, and showing an interest in, developing key people.

Companies with a high-performance business strategy recognize the need for managers who are close to talent and able to spot opportunities and non-traditional career paths for the people they manage. Being hands-on is critical. For example, when Jack Welch retired in 2001 from General Electric, after having served as CEO and chairman since 1981, he was succeeded by Jeffrey Immelt. In 1994 Immelt’s name was already on a list of some 24 candidates to replace Welch on his retirement. The list was reduced to eight by 1997 and to three by June 2000. Immelt was the youngest of the three internal candidates. His selection was announced at the end of 2000. Welch retired and Immelt took over in September 2001.

Some critical skill sets today are different from what they will be ten years from now. Not many companies find themselves with three extraordinary people ready to fill the top job. Typically, high-performance businesses have more confidence in their executive teams and high-potential managers than other companies. Along with this confidence, they have also developed the strength to lead their company into the future. By contrast, it is a known and measured fact that the out-of-pocket, cultural and psychological cost of having to go outside to replace senior managers is high, with disruption across the board.

Even with the move towards ‘flattened’ organizations, hiring the right people for the right jobs, and then making sure you do the right things to keep them and move them forward in their careers, is critical. Flattened organizational structures mean smart talent management is even more important than it was a decade ago, since role requirements have changed and ‘managing horizontally’ is becoming the norm.

The global economy is moving fast. Some critical skill sets today are different from what they will be ten years from now, just as they are different from what they were 10–20 years ago. Notwithstanding the importance of technical skills, people can be taught what they are lacking. However, to be successful, companies still need capable humans who are thoughtful, understand how to work with others and have maturity and emotional intelligence; qualities that are more difficult to develop.

Energizing leadership to mobilize people

On top of existing leadership competencies, the building of deeper levels of engagement and commitment than experienced so far is a new leadership task and a key challenge for the future. Energizing leadership is not just about leadership as displayed by the CEO and a few other senior executives; it is about the leadership displayed at various levels within the organization. ‘Leadership starts at the top’ is a phrase often used. This is true, but it is important to understand that although leadership starts at the top, it must be followed by a structured approach to establish proper leadership at various levels in the organization.

In the last decade of the 20th century many leaders gave a high priority to performance management and the application of various performance management tools. The aim was to get greater clarity regarding mutual expectations for the job and to create higher levels of output. Employees seem to have understood this, perhaps influenced by the ‘new economy’ of the late 1990s and the numerous dotcom business initiatives. Although the majority of these businesses may no longer exist, the entrepreneurial spirit that accompanied them still does. So does the feeling of freedom associated with working in small start-up businesses, as well as the realization that each individual needs to perform well from the start.

Some leaders understand the new challenges better than others and adapt their leadership style accordingly. They understand that the organization will benefit from the higher levels of engagement of the people around them. It is amazing to see how organizations can improve their performance by raising engagement levels. The business they are in does not change fundamentally and the workforce stays largely the same – the only difference is a change of leadership, with the new leader behaving differently from the previous one.

Connected leaders

Higher engagement levels work, but they need to be sustainable in order to create real commitment. In his book The Connected Leader (2006, Kogan Page), Emmanuel Gobillot says that real leaders are connected leaders. Old leaders are formal leaders: they are diplomatic, tactful, managerial, efficient, knowledgeable, experts and credible. Real leaders, by contrast, are innovative, risk takers, approachable, warm, communicators, listeners and flexible. They have a different language and offer a different mental map.

Real leaders are innovative, risk takers, approachable, warm, communicators, listeners and flexible, and their impact is magnetic. The impact of real leaders is magnetic, says Gobillot, and this new kind of leadership is necessary to get people to follow the leader. To achieve this, real leaders do three things:

• They connect through trust – they are aware that they have to build credit on their trust account before they can spend any.

• They align through meaning – they talk with individuals about their purpose and how this purpose can be combined with the purpose of the organization. In this way they align the real organization with the formal organization.

• They sustain through dialogue – they tell stories instead of being evangelists.

Peter Drucker asked whether organizations are using the talent available to them sufficiently and offering ways of working that stimulate people to give the best of their abilities. The answer to this question is often negative. Therefore one of the most important leadership challenges for the coming years is to find new ways of unlocking the human potential which is still hidden in many organizations.

There is a growing tendency in the corporate world to respond to rapid change, globalisation, new technologies and the complexities that arise from them by turning to conventional leadership and management methods. Many leaders try to manage this increasing complexity through ‘clear’ and ‘strong’ leadership from the top and simplified top-down approaches. By doing this they expect to reestablish stability and predictability. In today’s world many of them will fail. The risks of this leadership approach increasing pressures and complexity are clear. Managers and employees will, in the end, only perceive the parts of the reality that fit with the frameworks and guidelines given to them. Other parts of the changing reality in consumer behavior, customer expectations, external developments and so on may easily be overlooked. This may have dire consequences in the longer term.

Rather than creating detailed rules and procedures to manage complexity, it will be important in international, matrix-based organizations to learn to deal with complexity at various levels, as well as across borders. Clear processes may encourage fast decision making. Rather than creating detailed job descriptions to manage the complexities of modern organizations, it will be important to have a good understanding of key roles and responsibilities and how they fit with the overall operating framework.

Apart from the philosophical aspect raised by Peter Drucker – that human potential in many organizations is greatly underutilized – the engagement levels in day-today-work will suffer, new business opportunities may be overlooked and innovation capabilities will be reduced. Eventually it will become difficult to retain talent in such an environment.

We should strive to create and nurture organizations that are passionate to achieve the opposite: human capital and talent are given the space and room to manoeuvre quickly when action is required to grasp new business opportunities, and people are empowered to respond to challenges (since they know best what is required for successfully managing them in their day-to-day work and how to do this most efficiently).

A key leadership task is to ensure that everyone understands what the strategic direction of the organization is and the key activities that underpin it. In other words, the task is to ensure engagement through a shared vision. In a modern organization this is coupled with the leadership capability to engage a person’s mind and heart. It is this combination that will bring renewed energy and value to organizations and will create sustainable competitive advantage.

 

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