Best companies for leaders: in CE's third annual ranking, GE again eclipses P & G for top honors ... but only just.

Peter Drucker was quoted as saying that "the army trains and develops more leaders than do all other institutions together--and with a lower casualty rate." Not to be outdone, some corporations have developed good leadership programs that are the equal of those in the services because they retain an essential principle: in order to win, one needs leaders to perform and inspire at all levels--not just at the top. Strategy, though important, is meaningless without motivated and qualified people carrying it out. Technology and money are fungible; performance capability is not. Leadership development has always been important. Today it has become a competitive differentiator. Those that do it well will win more often than not. Those that do it poorly or not at all will lose. Bank on it. Also, the impending shortage of leaders as a result of the pending retirement of baby boomers now underway, and combined with the continued growth in emerging markets, begs the question of how does one develop the right kind of leaders?

The Hay Group, in partnership with Chief Executive, has conducted its third annual study that attempts to shed light on this urgent need. A total of 790 public companies were considered. More than 47 percent are headquartered in Europe, 31 percent in North America, 15 percent in Asia/Pacific, and the remainder in the Middle East/Africa and South America. The full spectrum of industries is represented, with the most coming from financial services (12.5 percent), manufacturing (10.4 percent), consumer products (5.8 percent), and pharmaceuticals (5.2 percent). Data for the rankings were collected from three main sources: survey self-scores, in which companies rated extent and effectiveness of leadership development on a variety of measures; survey peer scores, in which companies were asked to name three organizations from which they would like to hire; and academics and experts who were queried on the best companies for leadership development.

For the year 2007, General Electric and Procter & Gamble again rank atop the best companies--and by a comfortable margin--ahead of the remaining 18 on the list of 20. (P & G edged GE for the top spot in 2005; then GE moved ahead in 2006.) This year's ranking also sees Johnson & Johnson, Coca-Cola, Hewlett-Packard and GlaxoSmithKline climb in the standings and makes room for several newcomers to the list, such as Unilever, Toyota, McDonald's and Vodafone. Citigroup has had the most precipitous relative decline since 2005. Royal Dutch Shell is conspicuous by its absence.

Why GE and P & G consistently outpace others as leadership academies has less to do with money spent than with what Rick Lash, Hay Group's North American talent practice leader, reckons is their ability to create "action learning"--the concept of developing leadership skills in the context of the work situation to solve mission-critical business problems--something that GE pioneered. The differences among the remaining 18 rankings are not huge and are best explained by peer group perception, feedback from academic experts, and improved data from the companies themselves. In play also is the fact that for talented younger people some industries are more (and less) attractive than others. For the latter, oil and gas and retail come to mind. It doesn't help that companies in these industries don't manage the perception very well.

How do the best companies keep their leadership pipelines filled with ready-to-go executives to succeed their current teams? In the course of the study, a number of HR leaders of CE's "20 Best Companies for Leaders" were asked what they thought their companies did right to make the list. In addition, CE spoke with a number of CEOs whose companies are represented, including GE's Jeff Immelt and P & G's A.G. Lafley. At the core of most companies' approach is an assiduous involvement of the boss, screening and identifying of high-potential employees, and a rigorous feedback and assessment process that's done early and often.

Secrets of 'Session C'

"One of the secrets to this story," says Immelt, "is that there are no secrets. We educate people in the right curriculum. We keep the curriculum fresh. We ensure that other people in the company, including those who report to me, also spend time grooming leaders."

Susan Peters, GE's chief learning officer and head of executive development, attributes the Fairfield, Conn., conglomerate's success in this field to a powerful internal review process known as "Session C." The company's top leadership spends half of every April working full-time on this. Under it, everyone in the company is reviewed by his or her boss. Reviews cascade up the chain and ultimately to Immelt himself. "Our Session C employee engagement process is highly detailed and takes a lot of personal time," says Immelt. "We're always forcing the system to see if we are looking broadly enough two to four levels down, to touch these people to make certain we know who they are and to identify their potential."

Immelt adds that in addition to reviews, the company uses thought leadership--courses such as business in India, organic growth and ecoimagination at its Crotonville facility--to attract and enrich able minds from within.

Dick Antoine, global HR officer for Procter & Gamble, says the global consumer products company measures every employee against nine factors, such as technical competency and the ability to embrace change. "We do 360 [reviews] and use the same nine factors for everyone," he says. HR owns the system, but line leaders are in charge of the discussion. "Leading from the line is key," Antoine adds.

A.G. Lafley counts leadership development as not just a priority but one of P & G's core competencies. "We focus on individual leadership development. How can you personally become the best leader that you can be? In our assessment of effectiveness we talk about situational and inspirational leadership because we want courageous and inspiring leaders. The days of command and control are over," he says.

In addition to three inspirational leader sessions a year, each of the approximately 140 general managers who run countries and business categories throughout the Cincinnati, Ohio-based multinational attends a week-long college twice a year that Lafley opens on a Sunday night and closes on a Friday afternoon. Each year, the company offers a formal executive leadership program for those tapped to become executive officers of the company. Also, every month Lafley has private half-hour sessions with every one of P & G's 22 line presidents and functional leaders.

"It's their agenda," says Lafley. "It's a time for me to work with them one-on-one on how they can become more effective leaders. It's a great way for me to coach their development." Similarly, Immelt also personally teaches a leadership course, "Things that Leaders Do," that covers the fundamentals of organic growth. Like Lafley, he conducts a class with 35 people who are in the queue to become officers on the importance of leadership style. "I take each one individually in order to understand the elements--not to have a common style--but how to be true to your own style," Immelt says.

Screening and Assessment

Screening and identifying high potentials is central to the organizations in the top 20. McDonald's uses round-table discussions to help identify top candidates. After an individual is identified as a high potential, he or she goes to a third-party assessment center for a two-day session. Candidates then undergo an accelerated program designed to build strengths and competencies.

At Unilever, candidates are reviewed annually with high potentials working with coaches, facing closer scrutiny for special attention. After five years in the program, those who don't make it to the next level are dropped. At Britain's Vodafone, the telecom giant uses assessment centers vigorously at an early stage. After high potentials are identified, they attend a series of meetings with peer groups and managers. Their names begin to appear on succession plans, which trigger advanced training and development.

The study found that the best companies are more likely to use rotational job assignments. Some have formal programs that require candidates to work in, for example, two business units, across two functions in at least two countries before reaching the C-suite. At Unilever, according to global talent director Chris Macrae, 10 percent of management are expatriates. "Everyone is rotated to different roles--maybe in their home countries, maybe not," he says. "It's always been a part of the way we do business."

Hans Oberschulte, head of global HR at BASF, estimates that 70 percent of the company's 700 executives have worked outside their home countries for three or more years. He adds that about half of its expats are working cross-functionally or divisionally, broadening their exposure to different parts of the business.

The Gretzky Principle

While companies focus on managing their pipelines, they also have to worry about future demand. Wayne Gretzky's famous dictum about skating not to where the puck is but to where the puck will be applies. Factors such as outsourcing, changes to operating models, and the demands of emerging markets compel companies to anticipate what kind of leaders they will need in the future. To this point, less than half of the respondents (46 percent) report that talent management at their organizations is led by in-depth analyses of roles that they will need to fill in the future. Such uncertainty risks pipeline mismatches.