The Automotive Industry's Accelerating Leadership Gap

The Automotive Industry’s Accelerating Leadership Gap Key Takeaways

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The North American automotive industry confronts a looming leadership gap, with a significant percentage of executives likely to retire in the next five to 10 years.

Where is the next generation of leadership coming from in the automotive industry, and how prepared will it be for the challenging business environment that awaits?

By Bradford B. Marion and Bill Westwood

Given the financial pressures on the automotive industry, both the quantity and preparedness of the bench strength that exists in many companies is expected to fall short of the succession needs that will exist.

The North American automotive industry is driving toward a large leadership pothole. Many companies expect 20 to 30 percent of their highest ranking executives to retire within the next five years and 40 to 50 percent of their executives to retire within the next decade. This turnover is likely to be exacerbated by early retirement packages, which are on the rise as many companies attempt to reduce their North American cost structure.

Turnover in the executive ranks across all industries in North America will result in a broadbased talent gap between supply and demand of qualified next-generation leaders, which in turn will make retention in the automotive industry even more difficult.

The volume and preparedness of “next-generation” leadership in many companies are expected to fall short of the succession needs that will soon exist. Additionally, most companies anticipate increased turnover of rising executives, given the industry’s significant financial challenges and recent move away from historically lucrative pensions and retirement benefits. The limited bench strength that exists in most companies, coupled with accelerated turnover, exacerbates this looming leadership gap.

Past performance is often over-emphasized as a basis for promotion, without realizing how behavior must change for future success. As a result, the next generation of leaders that some companies are counting on will fall short.

Automotive is not the only industry confronting leadership management challenges, yet its challenges are unique and may intensify sooner than they do in other sectors. “Companies have not been grooming and training enough employees for promotions and now have a mismatch of talent for open positions,” reports Wall Street Journal columnist Carol Hymowitz. “In the past, top managers would plan far ahead to fill a position. Today, every vacancy seems to be treated as unique – and even as a surprise….”1

Evaluating “learning agility,” prioritizing behavior in addition to performance and strengthening leadership assessment, development and on-boarding capabilities will help close a potentially dangerous talent gap.

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This marks a troubling business trend, particularly in the North American automotive industry, where retention, recruitment, hiring and, to some extent, on-boarding practices face growing pressure from challenging economic conditions. The financial pressures bearing down on Detroit Three automakers and their suppliers have caused most of these companies to reduce headcounts, including executive bench strength, and to at least cap spending in some areas. These cost constraints potentially affect training and development programs, executive coaching and mentoring activities and even expatriate assignments, which often serve as a valuable leadership development opportunity.

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The industry’s current struggles are already hampering recruiting efforts.

“With the frequent negative publicity about the industry’s financial condition and the economic conditions in southeastern Michigan, it has become increasingly difficult to recruit talent from outside the industry,” says Neil Marchuk, executive vice president of human resources for TRW.

Leadership Implications of Financial Constraints Constrained leadership development budgets represent just one of the impacts that the North American automotive industry’s competitive pressures have inflicted on manufacturers and suppliers.

Several other issues challenge organizations’ abilities to identify, recruit and develop future leaders, including the following:

Issue

Challenge

n A widespread perceived decline in

n More rising executives seek growth n Increase use of special assignments,

commitment between companies and employees n Severe competitive pressures

confronting the North American automotive industry n Recent elimination of historic

and developmental opportunities outside their companies n Greater difficulty in attracting

functional leaders (finance, IT, HR, purchasing) typically hired from outside the industry

defined benefit plans, which n Increasing likelihood of turnover provided golden handcuffs to many among ranks of rising executives executives short of retirement (ages 40-48) eligibility n Decrease in expatriate n Budgetary constraints and assignments, which represent a increasing number of two-career valuable leadership development families experience

Potential Solution mentors and access to top management (used by TRW, GM, and Ford) n Given the turnover in the

industry, external hires may be positioned for bigger jobs and more responsibility than if they had stayed with their original companies n Increase the use of long-term

incentives (TRW and Johnson Controls Automotive) n Emphasize flex time, virtual offices,

part-time arrangements

The industry executives who participated in interviews for this paper reported that the average age of their company’s senior executives ranges from 48 to 52 (see Methodology on page 12). In most of these companies, an estimated 20 to 30 percent of current senior executives will be eligible for retirement in the next five years. In the next 10 years, this number is expected to increase to 40 to 50 percent. As many companies work to lower their cost structures in North America, early retirements may well increase these numbers. A notable exception to this trend is Johnson Controls Inc., where the average age within the management ranks is 42, according to Group Vice President of Human Resources – Automotive Experience Christer Bergstroem.

Given the hard work that lies ahead for the industry in North America, many senior executives will at least consider early retirement packages 2

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when the option is offered. Furthermore, most realize that if they are going to make a change, they need to do it while they are young enough to be marketable to other companies and industries.

Retention Rears its Head Economic conditions and new perceptions about loyalty have already nudged more executives to seek career development opportunities outside their employer. Retention has emerged as a concern and could grow more challenging as the demand for next-generation leaders exceeds the supply. Finally, companies that excel in preparing their next generation of leadership will likely confront retention pressure from companies that have not sufficiently groomed rising leaders.

Retention issues already are emerging in functional areas such as finance, information technology (IT), human resources and procurement, where industry experience is not considered essential. One top supplier is currently experiencing four times its normal turnover rate in the finance, IT and purchasing leadership ranks – largely because those skills are highly transferable to other industries with brighter growth prospects or healthier balance sheets.

Greg Lau, executive director of global compensation and corporate governance at General Motors, suggests that the challenge of retaining key executives will increase due to two factors. First, as companies rely more and more upon expatriate assignments for professional development, the need for effective repatriation, which can be difficult, becomes increasingly critical. Second, the average age of managers who are most susceptible to leave a company is between 40 and 45 years.

These rising leaders often find their ascension to the top executive level blocked by more senior executives still years away from retirement.

There are outstanding executives working at original equipment manufacturers and major suppliers who are 20 years into their career, yet have another 15 to 20 years of work ahead of them. A growing number of them are pondering whether now is the time for them to consider stepping outside the automotive industry. Many companies have eliminated their defined benefit plans, which historically served as the “golden handcuffs” that restricted this type of career shift. As a result, more future leaders in their 40s perceive that there is less economic risk in making a move outside the industry.

Another factor may contribute to retention problems. “There generally is less commitment on the part of an employee towards an employer in today’s world,” notes Gary Phillips, former vice president of human resources for Cooper Standard Automotive. “And the perception among 3

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many employees is that their companies are less committed to them.

As a result, executives often feel as though they need to exert their own initiative toward career growth, even if that takes them outside their own company. That presents a challenge in terms of retention of that next generation of leadership.”

Leading Responses Few companies are idling in the face of these issues, yet certain organizations, including General Motors, Ford, Johnson Controls, Cooper Standard Automotive and others, have taken a much more proactive approach to retaining and developing rising executives.

Phillips advocates the use of greater creativity in structuring employment arrangements and developmental activities for senior executives. For example, the use of flex time, part-time arrangements, virtual offices and retiree mentorship programs can help retain access to leadership knowledge and experience, while developing and preparing the next generation of leaders to take the helm.

Creativity is in demand, given the fact that the economic pressures contributing to the pending leadership gap also constrict the budgets of programs designed to help cultivate the next generation of leadership (see “Leadership Implications of Financial Constraints” side bar on page 2).

Most of the HR executives who participated in interviews report that their organizations have capped training and development programs. In addition, some companies are considering constraints on “bench-strength” hiring and expatriate programs due to cost reductions. To help address these challenges, leading companies use the following approaches: Start at the top: The evident time and commitment of chief executives to the development of their next-generation leaders sends a clear and unmistakable message. At GM, Rick Wagoner takes personal responsibility for reviewing the top 50 executives in the company and is personally involved in the promotion and succession potential for the top 360 executives. Wagoner also serves as a GM University professor for selected curriculum. TRW Chief Executive Officer John Plant dedicates time to mentor and develop the top 10 to 20 percent of its leadership team.

Many companies have replaced higher-cost training and development programs with less expensive alternatives, such as special project assignments, mentors and executive coaches, but this is an evolution that is quite consistent with the research on what creates high-impact developmental results for emerging executives. GM is similarly reducing its use of external executive education programs while beefing up the already rigorous curriculum at GMU. 4

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New and clearly defined incentives: As defined benefit pension plans have been replaced by defined contribution plans, leading companies in the industry are reworking retirement plans as well as their compensation structures to help strengthen recruiting and retention. TRW has placed greater emphasis on the long-term incentives within its compensation plans to help attract and retain top executive talent. Johnson Controls Automotive has developed a well-defined incentive structure that boasts a highly attractive value proposition for top performers. The company blends together short- and long-term incentives that leverage upon the company’s strong performance record and long-term growth. For more information on this topic, see Korn/Ferry’s recent whitepaper “Executive Compensation: The New Long-Term Incentive Portfolio.”

Strong overseas commitments: While many companies have reduced expatriate populations due to declining participation and/or cost reduction efforts, a small but notable group of organizations have strengthened their commitment to overseas assignments. Wagoner has mandated that GM’s entire rising generation of leadership will have a global resume. In 2000, roughly 47 percent of GM’s top 50 executives had expatriate experience.

Today, that figure has jumped to 57 percent. Since 2003, the company’s expatriate population has grown by 50 percent. Johnson Controls also maintains a robust expatriate population of roughly 200 professionals.

The company has shifted more expatriates into emerging countries and uses the assignments to develop the capabilities of the rising executive as well as identify and cultivate local succession talent. By contrast, TRW’s expatriate population decreased by 15 percent from 2006 to 2007, as the company strives to bring in more local national talent into its international leadership roles.

All companies interviewed for this paper agreed that the challenges associated with expatriate career moves have increased dramatically. Twocareer families have become the norm, more often than the exception. For some younger professionals, their Baby Boomer parents are nearing an age where parental care becomes a concern. The cost of expatriate assignments remains an ongoing issue, as is the challenge of effective repatriation. For those executives based in the Detroit area, the dramatic softness in the housing market poses a significant obstacle (for both the executive and the company) when considering extended expatriate assignments.

A more holistic approach: Johnson Controls and GM both favor a formal, multi-dimensional approach to grooming their next generation of leaders. In addition to executive training and development programs and expatriate assignments, GM has developed a formal talent management and succession planning system that constantly monitors the succession pipeline feeding key leadership positions. The quality of talent within the 5

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pipeline is now measured on more than just performance, as GM has enhanced its assessments with behavioral evaluations. Johnson Controls conducts quarterly reviews of strategic talents for succession management with the Automotive Experience President and the leadership, and runs several talent development programs for high-potentials. It also incorporates behavioral assessments into its evaluations of leadership talent, focusing on the competencies that are best aligned with its strategy and achieving its business objectives.

Completing the Leadership Assessment and Development Picture By introducing behavioral considerations into their assessment of rising executives, Johnson Controls, GM and other companies in the industry are sidestepping one of the most common flaws in selecting future leaders: overvaluing past performance while undervaluing the importance of leadership competencies (see “Learning Agility Equals Leadership” side bar on page 8).

Research on leadership assessment conducted by Korn/Ferry and Lominger International, a Korn/Ferry company, has yielded several important insights, including the following: n

Current performance and future potential are only somewhat related.

Research cited by Lominger clearly indicates that while 93 percent of high-potential managers are also high performers, only 29 percent of high performers are also high-potential managers.2 n “Learning agility,” or the ability to learn how to deal with first-time situations or changing conditions, is a better predictor of potential than intelligence.3 n Most managers overrate the performance and potential of their direct reports.4 n The behavioral requirements for success as an early-stage manager are dramatically different than they are for a C-suite executive (see Leadership Styles by Management Level chart below).5 Leadership Role Styles by Management Level

Leadership Styles by Management Level (Most Successful 20%) ( Most Successful 20%)

Decisive (Task-Focused)

Hierarchic (Intellectual) Integrative (Participative) Flexible (Social)

Supervisor (n=1,258)

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Manager (n=7,358)

Director (n=6,061)

Vice President (n=4,622)

Sr. Executive (n=4,486)

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Leadership Development Gets Younger at Ford

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he pending retirement of large percentages of current leaders in the automotive industry poses an appealing opportunity for many future leaders. The turnover within existing leadership ranks will provide talented younger leaders with the opportunity to step into bigger jobs than would have been available to them in the past. For companies, the challenge becomes how to prepare those young executives on an accelerated timeline and how to minimize the risk of failure.

Some rising executives in their 40s are beginning to receive intense doses of leadership development opportunities to accelerate their readiness to succeed retiring executives. Just ask Joseph Hinrichs, who at 41, now serves as Group Vice President, Global Manufacturing at Ford Motor Company.

Ford has experienced significant turnover in its leadership ranks in recent years due to the financial performance of the company.

The turnover of these executives, many of whom were expected to remain with the company for another five to 10 years, widened the gap between the highest and second-highest levels of leadership.

Hinrichs’ experience in the past several years reflects the way in which companies can fill these gaps with new approaches.

Hinrichs joined the company as a plant manager a mere eight years ago. After he was identified as a high-potential leadership candidate a few years later, his career path received a jolt – one packed with stretch assignments, diverse positions and a 2005 expatriate stint in Canada. There, he served as CEO of Ford Motor Company of Canada, Limited, where he led the national headquarters, six regional sales offices, five

vehicle assembly and engine manufacturing plants, two parts distribution centers and affiliates including Ford Credit, Jaguar, Volvo, Land Rover and Hertz. His responsibilities gave him commercial, operations, financial and regulatory responsibilities, while functioning away from corporate headquarters.

Since assuming his current position at the beginning of 2008, Hinrichs is responsible for the operations of 105 assembly, stamping and powertrain plants worldwide. He also has global responsibility for the company’s manufacturing engineering organization, material planning and logistics, Ford production system, and manufacturing business office organizations. Hinrichs reports to President and CEO Alan Mulally in his global role, but also maintains his North American responsibilities, in which he reports to Mark Fields, executive vice president and president of the Americas.

This type of intense, cross-cultural development has become central to developing future leaders at the company, notes Ford Group Vice President of Human Resources and Corporate Services Felicia Fields. Fields notes that the company looks for roles where they can test future required leadership competencies, while doing so on a smaller scale. She says the company also uses committees and special assignments as a means to give a developing executive cross-functional experience and perspective, as well as exposure outside the company.

Increasingly, the company intends to create new roles and combine selected functions, sometimes in unconventional ways, where it makes sense for the company and selected leadership development needs.

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By overrating performance, hiring managers are more likely to select high performers for leadership-track positions; however, slightly fewer than three in 10 of those high performers will succeed.6 Given the automotive industry’s existing competitive and demographic conditions, failures in leadership assessment and selection can cause more severe problems than they previously inflicted. With fewer training and development dollars to spend, investing those precious resources in the wrong leadership candidate represents a greater loss.

Leadership assessment missteps also regularly occur when evaluating external leadership candidates. Companies hiring external talent commonly underestimate the importance of behavioral and motivational characteristics, which Korn/Ferry research has shown to be the capability set most closely aligned with a successful cultural match between new executives and the jobs and companies they enter.

Learning Agility Equals Leadership Research indicates that a manager’s current or past performance and a manager’s potential to become a successful leader are only somewhat related. Learning agility – the ability to learn how to deal with first-time situations or changing conditions – offers a far more accurate predictor of leadership success. The following breakdown highlights the difference between high-potential managers and high performers:

High Potential

High Performer

n Agile learners

n Technical or managerial experts

n Strong candidates for promotion

n Superior performers year after year

outside their areas

n Candidates for senior general

management positions

n Easily learn new functions n Like to try different approaches n Highly curious n Deal well with ambiguity and

complexity

n Impatient, do not accept the status quo n Push the envelope, but willing to take

the heat

Source: Lominger International, a Korn/Ferry Company

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n Depth of organizational knowledge n Excellent at developing people n Trusted resources within the

organization

n Difficult to replace in kind n Widely recognized outside the

company

n Love what they do, may not aspire to

broader management

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Effective internal and external leadership-assessment processes require slightly different approaches: Internal Leadership Candidate Assessment

External Leadership Candidate Assessment

1. Assess leadership potential early and regularly while focusing on “learning agility” characteristics.

1. Use a structured process to understand and identify the behavioral and motivational characteristics of the culture – and of the specific position within the organization – as reflected in the same characteristics of the company’s (and area’s) most successful executives.

2. Tailor developmental opportunities – job rotations, expatriate assignments, special projects, mentoring, executive coaching and formal leadership training programs – to address gaps in leadership candidates’ skills and behavioral characteristics and to “stretch” them on these characteristics.

3. Provide feedback to leadership candidates regularly and directly, and focus on how they are doing (behavior) in addition to what (results) they are getting. Describe for them the shifting behavioral characteristics, in particular, that predict greater success for them at higher levels within the organization.

The purpose of the ongoing evaluation is to improve the candidate’s capacity to succeed in the face of changing conditions.

2. Assess the degree to which the candidate’s behavioral and motivational characteristics align with the culture and position. For example, the motivational profile of a research & development leadership position differs from the motivation profile for a manufacturing leadership position.

3. Avoid placing too much emphasis on a candidate’s interpersonal skills and likeability. Instead, strive to probe deeper to learn how the candidate actually makes decisions or solves problems. People naturally tend to like and select people they perceive as similar to themselves; that tendency can be problematic at a time when the industry is hungry for fresh ideas and outside perspectives. The near future will entail significant change for the North American automotive industry.

Change adept leaders will be critical, yet this difference may also create a degree of discomfort.

4. Offer a highly structured on-boarding program that contains at least one month’s worth of structured interactions for the newly hired executive beginning on day one. These activities include technical training, lunches and breakfasts with key leaders in different parts of the organization, and similar interactions that help the newly hired executive feel a little more “a part of” the organization each day.

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Conclusion: Closing the Gap Companies across the automotive industry need to be making a candid assessment of the amount of turnover that they will experience within their leadership ranks in the next five to 10 years. While retirement-related turnover may be easier to predict, the potential loss of future leaders to external recruitment should not be overlooked.

Now is the time that the leadership assessment and development process must begin for the next generation of leadership. This will require a financial investment, as well as a commitment of time and energy on the part of the company, its board and the chief executive.

Companies must recognize that past performance is a marginal indicator of future success, and the ability of organizations to assess learning agility, behavior (as well as results) and leadership competencies will determine whether they are investing in future leaders who will succeed. During this time, the gap between the demand for and supply of qualified next-generation leaders will be increasing. Retention measures will be critical, as the opportunities both inside and outside the automotive industry will provide nextgeneration leaders with attractive alternatives.

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Endnotes 1 Hymowitz, Carol. “In the Lead: They Ponder Layoffs, But Executives Still Face Gaps in Talent,” The Wall Street Journal, Jan. 28, 2008.

2 High-Potential Management Survey, Corporate Leadership Council, 2005.

3 Eichinger, Robert W. and Lombardo, Michael M. “Learning Agility as a Prime Indicator of Potential,” Human Resource Planning, Dec. 2004.

4 Ibid.

5 Brousseau, Kenneth R., Driver, Michael J., Hourihan, Gary & Larsson, Rikard. “The Seasoned Executive’s Decision Making Style,” Harvard Business Review, Feb. 2006.

6 Ibid.

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Bradford B. Marion is the Head of Korn/Ferry’s Global Automotive Sector and is based in Chicago.

Bill Westwood is a Senior Client Partner in Korn/Ferry’s Leadership Development Solutions group and is based in Chicago.

Methodology In early 2008, senior human resources (HR) executives from Ford, General Motors, TRW, Johnson Controls, Delphi, Cooper Standard Automotive and Continental AG were interviewed to contribute insight to this paper. The intent of the interviews, and this paper, is to highlight important leadership challenges facing the automotive industry in the near future while identifying select best practices and considerations that will help address these leadership challenges.

About the Korn/Ferry Institute The Korn/Ferry Institute was founded to serve as a premier global voice on a range of talent management and leadership issues. The Institute commissions, originates and publishes groundbreaking research utilizing Korn/Ferry’s unparalleled expertise in executive recruitment and talent development combined with its preeminent behavioral research library. The Institute is dedicated to improving the state of global human capital for businesses of all sizes around the world.

About Korn/Ferry International Korn/Ferry International, with more than 80 offices in 39 countries, is a premier global provider of talent management solutions. Based in Los Angeles, the firm delivers an array of solutions that help clients to identify, deploy, develop, retain and reward their talent.

For more information on the Korn/Ferry International family of companies, visit www.kornferry.com.

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