One critical category of risks that has long been underappreciated is risks related to top executive talent. Boards, CEOs and top management teams seeking to understand and mitigate these risks should consider the following:

Every day the CEOs and top management teams of publicly traded companies and those in the portfolios of private equity firms around the world focus on managing risks – market and competitive risks, product and process risks, asset-specific risks and compliance risks, to name a few.

One critical category of risks that has long been underappreciated is risks related to top executive talent. Boards, CEOs and top management teams seeking to understand and mitigate these risks should consider the following:

1. Do we have a common agreement about what great leadership looks like? Ask 10 people to define great leadership and you are likely to get 11 different answers. Many corporate CEOs and private equity firms approach this topic with an intuitive view. Having recruited, managed and developed hundreds or thousands of leaders, they have a very good feel for who does – and does not – have strong leadership capability and potential.
   
   However, there is a real risk when the board, CEO and top management team members lack a standard view on what great leadership looks like in the context of the company’s business, strategy, culture and future opportunities and challenges. While the rise of competency modeling has given many companies a standard way to think about the behaviors and style it expects of its leaders, insufficient attention is often paid to the business situation in which the executive will be asked to lead. And if not customized to key roles and adapted to reflect the company’s future needs, competency models become too generic to be meaningful.
   
   Successfully managing this risk may require the board and CEO to clarify what the company’s strategic vision is for the next three to five years, and what is possible given its available capital and other resources. In the absence of alignment between the strategic intent and what the company can achieve, is it impossible to know what ‘great’ leadership looks like?



2. How effectively do we deal with underperformance among executives? While the popular myth of ‘the boss’ is often uncaring and indifferent to firing others, the reality is often very different. In my experience, assessing and giving feedback to hundreds of top managers in blue-chip companies around the world, the single most common struggle that senior executives have is taking timely and appropriate action when one of their team members is not performing.
   
   Boards, CEOs and private equity firms are sometimes surprised about the positive reaction they receive after they remove an underperforming leader. They should not be. The issue is rarely whether the senior team recognizes when one of their members or a direct report to one of the members is not meeting expectations – that is often abundantly clear. The issue is whether the board and CEO have created a management culture that accepts anything less than stellar performance from executives.



3. Do we have a meaningful succession plan which reflects the realities of our business and an accurate and current view of the capabilities of our managers? As many as 40 percent of companies have no succession plan. The boards and CEOs of these companies are incurring only slightly more risk than their counterparts in companies which essentially just move the same names for the same positions forward from year to year.
   
   Leaders change - some progress more quickly than expected, others fall back. All the while the requirements for great leadership in the company may be shifting as business conditions change. To manage this risk, boards and CEOs need to challenge their traditional thinking about who belongs in the succession plan for each key management role. If 90 to 100 percent of the candidates are the same from year to year, chances are that the company is thinking too narrowly about who has the potential to fill key management roles.



4. Have we effectively communicated with our high potential leaders? This risk is straightforward - if you do not tell your leaders how great they are and what is possible for them in future, another company will. Too many companies keep their succession plans a secret or communicate it only in subtle ways, for example by selecting certain leaders to manage or participate in key initiatives.
   
   When companies think about retention plans, too often the only factor is money. Yet when top leaders talk about their aspirations and the likelihood that they will remain with a company, most often the issue is about where they fit in the company’s future plans and how transparent they feel the company has been about their potential. Giving more compensation or special bonuses to executives can certainly help to keep them in the short-term. But a more sustainable – and less costly – way to deal with high potential leaders is to also very actively help them manage their careers, starting with a clear discussion about how they are viewed by the board and CEO and what is possible for them within the company.



5. Have we confused retaining talent with retaining the RIGHT talent? Some companies view all retention as positive. In reviewing retention rates, the logical conclusion is that more is better. But this assumption is fraught with risk.
   
   Certainly a high degree of retention is needed to ensure continuity of relationships with key customers and safeguard institutional knowledge. All of these benefits are fully realized, though, only if the company has very carefully selected and developed the best available talent. The best managed companies make it very desirable for top-performing, high potential leaders to stay, and somewhat unattractive for less motivated or talented leaders to stay. Having lower performers leave not only creates the opportunity to bring in better talent, it guards against the risk that top talent will avoid a company because they do not see a commitment to being the best. Retention is good, as long as it is targeted.



6. Has the company prepared senior leaders to effectively manage upward? Post corporate executive development programs focus on teaching leaders how to better manage their team. But how many teach leaders how to better manage upward?
   
   Too often, managing upward is confused with being political, avoiding tough conversations or simply telling ‘the boss’ what you think they want to hear. Yet, when discussing the members of their management team, no CEO has ever told us “I truly respect and value how that manger avoids speaking candidly with me!” Managing upward is a skill – maybe even an art – and the more clear CEOs are about how they expect their managers to do it, the better it will be done. The risk is that in the absence of clear direction, based on fear or faulty assumptions, too many managers will be overly deferential to the CEO and not maximize the impact they could and need to have as leaders.



7. Is our senior team a collection of business unit and functional leaders or a high performing team that together manages the enterprise? CEOs cannot and should not be expected to be the only leaders with an ‘enterprise’ view of leadership. Each of their direct reports has to share the CEO’s sense of ownership for the overall well-being of the company and actively participate in key strategic decisions. While this may sound like a statement out of an introductory level MBA course, a study led by Heidrick & Struggles and the Marshall School of Business at the University of Southern California, made clear that few top management teams have the necessary commitment to their enterprise management roles. Factors such as narrowly defined incentive plans and traditional, narrow perceptions of top management roles often drive top management team members to see themselves solely as the owner or representative of their business unit or function.

Top management teams need to be guided to understand their responsibility to the enterprise. CEOs who cultivate the right mindset and make relatively simple fixes like clarifying decision rights (who has authority for which decisions) and clearly articulating the teaming behaviors expected of top team members can create the right mindset and a shared sense of ownership for running the entire company.