This book is based on a current snapshot of requirements and expectations for candidates for senior executive positions. It is also a snapshot of positions filled mostly by people between ages 35 and 55, meaning, in this case, people born between 1940 and 1960. So it is fair to ask whether, as time passes, these requirements will be the same.
The top five requirements are essentially timeless skills and transcend specific technologies or industries. The principal requirements for executive success will remain the same over time. These are skills that allow people to deal with increasing change, and with increasing diversity in the workforce, among their customers and among the constituents with whom they interact. It's hard to imagine how any of these will become less important.
I believe that interpersonal and communication skills will be even more important in the future, and the requirement that people have a record of results in the same industry or something nearby will decrease. The moves of executives like Lou Gerstner from RJR to IBM, and Randy Tobias from AT&T to Lilly, all say that in today's world it's the skills of the individual and the ability to master change, create vision, and provide leadership that are more important than the technology/experience base.
Relevant experience will be defined less by industry and more by the kind of issues the company is expected to face. The principal specification will increasingly include having dealt with the kind of change a company must face and less that it includes "comparable" industry experience. Clients will increasingly say they want executives from the kind of culture that they want to become.
The principal requirements for executive success will not either change all that much or go out of style. What will change is the kind of preliminary experiences and prequalifying backgrounds that rising managers will have.
The New Qualifying Standards
We talked a little bit about this in Chapter 11, "The Early Years." Unlike the executives who won the competitions included in our sample, if we were to do this book again in 15 or 20 years, I suspect we would find that every successful candidate was also:
- Computer literate, both in the sense of knowing how to use computers as a communication and research tool for herself, as well as understanding how they become a distribution device for products and services.
- Appreciative of how to deal with generations that have moved to a visual and symbolic form of information processing, and away from a logic, narrative and alphabetized form; this generation will process images directly, whereas today's executives turn phonetic symbols first into words and then back into pictures and images.
- Comfortable in dealing with the reality of non-sequential careers for themselves and most of the people within their organizations.
The other element of the personal portfolio every future manager will need is a comfort with the international mind-set that one must bring to products, competition and opportunities. In practice this means three things:
- You view your home country as nothing more than one region in a global marketplace. You perceive no barriers or protection to products or capital flows either trying to get in or trying to get out.
- You understand how cultural differences are a key element in all business plans and organizations. You view cultures as neither good nor evil, only different.
- You recognize that historical or regional advantages are anomalies. You understand that there is no divine right or guarantee of opportunities or protections for your "natural" market. You organize and manage with this dynamic. You discard the mind-set of trying to extend or perpetuate what were abnormal blips in the long history of commerce.
In addition to the global mind-set, future executives must have a working understanding of the six technologies that will produce much of the growth and most of the value in the twenty-first century. Traditional manufacturing and service businesses will increasingly be made commodities by global competition. The availability of labor and capital pools that were walled off just a few years ago behind trade barriers or totalitarian politics has created a surplus of supply for the production of mature products and services. The industries of the future are those that will allow companies to break out of the trap of commodity prices for goods and instant competition from low-cost, global labor. These are the industries that will apply intelligence to create an advantage over low cost and low price. The managers of the future must understand the following industries:
- Digital Communications. This is the "mother" of all technologies. It is the rapid advance in the cost performance curves of communication technologies that will allow the breakthroughs in other sectors. Managers must understand the fundamental notion of how the substitution of information for engineering technology or time and place limits will transform the nature of competitive advantage. They should also understand the fundamental issues of how bandwidth translates into the ability to effectively move high volumes of information and the likely developments in the cost performance curves of the underlying technology. For at least their own industry, they should understand the bandwidth requirements of the key applications and how that compares with distribution technologies already in place.
- Robotics. Robotics is the "working" end of putting digital technologies into the production process. The only way that the industrialized world can compete with the newly liberated labor forces of China and the formerly totalitarian economies of Eastern Europe and Latin America will be to offset the huge discrepancies in unit labor cost with the application of technologies. Robotics will permit some companies to use advanced intelligence as a way to compete with more expensive labor and still maintain an overall cost, quality and consistency advantage.
- New Materials and Ceramics. Both deal with the fundamental problem of breaking out of conventional design trade-offs. Speeds, temperatures and pressures are becoming higher and higher in modern applications of all kinds. New forms of ceramics, plastics and nonferrous materials will be the solution to provide the necessary higher tolerances that will accompany these new high-performing products. Similarly, as the environmental and supply trade-offs of traditional materials become clearer and clearer, materials that are environmentally friendly on the disposition side or are totally renewable in terms of resources will become an increasingly important part of a satisfactory and environmentally friendly industrial base.
- Computers and Software. Computers and software are the tools of this age. More and more they will be the basic tools of managers at all levels. Increasingly user-friendly software will allow managers to leverage their intelligence in the analytical and decision-making professions. Being computer literate will be mandatory. As the computer becomes an everyday appliance attached to broad base networks, the rethinking of the service, retail and distribution businesses will be inevitable.
- Civilian Transportation. Civilian transportation will hold a key position among the six new important industries. This will occur as more of the world's population grows richer. The ability to move people to and from work and to places of service delivery, entertainment and tourism becomes an increasingly important ingredient. As information technology removes the constraints on matching consumers with products, the ability to deliver people and goods anywhere in the world grows more significant. This sector includes everything from environmentally friendly automobiles, mass transit, light and intercity rail, to new forms of high-speed, intercontinental transportation.
- Biotech and Bio-agriculture/Forestry. The last major growth industry that managers need to understand will be the biotech animal husbandry and agriculture/forestry sectors. In both cases this will be a movement from chemically-based technologies to more "natural" biologically-based ones. Our current agricultural industry is heavily petroleum-based in terms of the energy needed for cultivation, hydration and pesticides. The cost and environmental consequences of this kind of economy are no longer acceptable. Companies that can provide biologically-based alternatives, lower in energy consumption and toxicity, create major advantages for an economy where farming must be done in smaller and smaller areas closer to watersheds and cities. Similarly, a biotech industry that requires less dependence on pharmaceuticals and surgical procedures and expensive diagnostics will create exceptional value to a society hard pressed to pay for rising health care costs.
Invest for Retirement Every Day
Successful executives of the future will know that no single company will provide for their financial security. They will understand that they must also provide their own emotional security and provide and prepare for the possibility of several retirements at a variety of stages. There will no longer be a standard retirement age. We will evolve to where some people will retire in their 40s or go to working half-time, or drop back and then "un-retire" later on. Others will continue to work well beyond normal ages. The people with the healthiest attitudes will see retirement, semiretirement or partial retirement as just more challenges and adventures rather than as forms of exile from which there is no return.
What does it take for a person to feel comfortable stepping out of a structured job even for an interim period? Or making a variety of corporate transitions and viewing retirement as positive? The people who successfully master this kind of transition several times in a career will be those who have a variety of other things going on in their life. Like networking, they will have started to do them long before it was necessary.
These "successful" retirees-to-be will have:
- Hobbies. They will have things that they feel a passion for, and where they can exert mastery. For them, the enjoyment is the process and the improving, rather than in reaching a specific goal. It is this phenomenon that explains much of the attraction both of golf and gardening.
- Service. People eventually discover that living only for yourself makes everything else feel hollow. People involved in meaningful service find satisfaction in the giving.
- Nonworking relationships. Successful would-be retirees maintain ties with family and friends outside of the workplace and to people with common interests. They make sure that a meaningful percentage of their relationships are not colored by their corporate status.
- Curiosity. It can be the 100 things that you want to do before you die. It can be travel. It can be sciences, or reading, drama or art. Healthy preretirees have things that they will always want to learn more about and feel a sense of exploration and adventure as they pursue.
- Continued skill building. Healthy preretirees are those who view themselves as a work in progress. They understand the joy of improving their own skills, whether in sports, music, performance art, and writing, speaking, counseling or writing diaries. One of my successful executive friends said that it is hard to feel bad about getting older if there are some things at which you are getting better.
Much has been written lately about the escalation in executive compensation. One can approach this issue from the point of view of societal values and signals. But the debate ought to be informed by an understanding of the economics. If current levels of executive compensation "make sense" in terms of adding value to shareholders, then that colors the issue in a different way than if, in fact, no rational economic case can be made. It is hard to ignore the fact that superior leadership can generate a return far in excess of its costs.
Let's take a company with $800 million in sales, a market value of $500 million and a book equity of $300 million, earning 5 percent on sales or about 13 percent on equity and 8 percent on market capitalization. This is a respectable-sized company, but not one that would make even the antechamber of the Fortune 500. Then let's further presume that we replace the CEO with someone who can drive the margin on sales from 5 percent to 8 percent, increasing the net income from $40 million to $64 million a year. The new CEO has added $24 million a year after tax to the firm's income stream and added several hundred million dollars to its market capitalization. Would you pay $1 million or $2 million more to get this superior CEO? Of course you would. And it would be economically rational to do so.
The furor, of course, should not be over whether the exceptional CEO is worth the compensation. It is worth debating whether we are moving toward a system where even the average or below-average person receives high-performer compensation. That is the more significant and worrisome factor. The reality is that a general manager who can be 25 percent or 30 percent better than the average will always be worth substantially more than he or she is paid.
This is the supply side of the question. Rational buyers would clearly bid up that small number of superior CEOs until their cost equals the marginal benefit that they can bring to a company's earnings. But it is clear that in companies of almost every size, we are a long way from this. So the fact that the compensation levels are lower than what the market would ultimately pay must have to do with the fact that there is plenty of supply. There are two factors at work. The first is that there are many personal benefits from a managerial career-prestige, control, higher degrees of security, challenge, personal skill development. All of these encourage people to pursue these careers.
And, certainly in the early stages, it takes less money to attract people to these jobs. Because it is so hard to tell whether the manager you are considering is one of the superior ones or just average, the excess supply allows the market to say, in effect, "Show me." For the relatively few where the evidence is clear that they are capable of generating high value added, the dynamics turn from a buyers' to a sellers' market. The exceptional compensation of the handful of movie stars who are in short supply draws an endless parade of would-be stars into the lower ranks of the career chain. There will always be managers and executives striving for the opportunity to prove themselves and become one of those stars.
It seems clear that the market for executives is still stacked in favor of the buyers, compared with other markets for talent with high economic value. In a typical Fortune 1000 company, the executive management group might have a total cost to the company of less than 2 percent of the firm's income and an effective share of the incremental income that they earn above a normal rate of return of less than 6 percent or 7 percent There are many industries where this kind of percentage looks meager. In professional sports, the athletes' share of the total revenue stream might be 60 percent and five to eight times the level of the owner's profit. Book authors get 12 percent to 15 percent of the gross revenue which is often 50 percent to 150 percent of the profit. Commissioned salespeople in many fields are compensated at 10 percent to more than 20 percent of total volume, regardless of whether the shareholders make money. Total compensation for the sales force often exceeds the total profit for the enterprise. There are also many fields where the compensation to the principals is both higher in total and as a fraction of income than that of business leaders. Any banker will tell you that the people who get rich are not the corporate executives, but the entrepreneurs who start their own firms and whose compensation includes the growth in the total value of the enterprise over time.
Similarly, the people who manage money-venture capitalists, investment bankers or hedge fund operators-generate compensation in a whole other league from that of corporate executives. Look at the list of the top 100 wealthiest people. You will see few, if any, corporate executives; rather, company founders like Bill Gates of Microsoft, and investors like Warren Buffet, the partners of Solomon Brothers and Goldman, Sachs; buy-out artists like Ron Pearlman, and hedge fund operators like George Soros. Perhaps the reason that there are fewer hue and cries over the compensation of these individuals is that the link between their efforts, whether they be entertainers, sports figures, entrepreneurs or money managers, seems more direct. With corporate officers the connection seems vaguer. It may be easier to assume that either anyone can do it, or that the results happen on their own. So in addition to answering the question, does it make sense to pay high-performing executives well, it also is important to answer the question, do high-performing companies, in fact, result from exceptional executive leadership?
The Last Equation
Society needs good leadership and good leadership will always be in short supply. Much of this book has been focused on how tough the competition is for executive jobs. How, except for a fortunate few, the market favors the buyers of managerial talent. We've discussed the low odds of success in managerial careers and the many things that have to be done right to move up the corporate ladder.
But none of this changes the even more important fact that no society can be any better than the quality of its leadership. Almost every aspect of a society's quality of life depends on how good its leaders are. That is never more true than today. We have global competition and no trade or tariff barriers to hide behind. We have no transportation barriers, and the explosion of technology allows new products to overtake the old in a matter of months. So a firm's ability to prosper will increasingly be a function of its leadership. For our society, the quality of life, standard of living and the opportunities for freedom and personal development depend ultimately on the supply of leadership available.
The good news for us is that there will be a lot more variety in the kind of leadership profiles available. Many talented people who, in times past, might have been excluded from contributing their talents to this common pool will now find that only performance matters.
We increasingly see age stereotypes broken. People who previously might be thought to be too young are taking positions of responsibility. An entrepreneurial market lets the reaction to products rather than someone's tenure or seniority dictate their impact. Similarly, advances in health care and life sciences and the increased focus on preventative fitness means that older people will also be viewed as being able to make contributions as long as they are mentally fit and willing to do so. The executive suite is also open to people with more variety of backgrounds. Social class and educational pedigree are less important in today's meritocracy. And some, but certainly not all, of the barriers that people of color, women and those of diverse ethnic backgrounds have faced are receding.
But the fundamental issues will still be the same, even though we will have a more diverse labor pool to draw from. The competition will push the standard up for everyone. The leaders will be those who have developed their skills, who have taken the long view and focused on getting results, created value for their shareholders and constituencies; who have worked hard, who have worked smart and who have worked patiently.
But, most important, leaders will come from that group of people who bring real enthusiasm to leading people. They will be those who enjoy this often messy, often frustrating, often painful process. They will be the ones who will realize it is a privilege to lead people. It is a test of your own humanity to interact with people in all of their human dimensions. For those who have the passion and have the skill, there is a joy to it that no other profession can match. And that, perhaps, is the most important secret of all from the search firm files
