Identifying individuals with the potential to lead your business in future is one of the most critical challenges facing HR professionals and Boards, and one that can go badly wrong if not underpinned by reliable advice and robust data.
As discussed in our previous blog, each year close to $1 trillion of market value in the S&P 1500 is wiped out by badly managed CEO and C-suite transitions, so it’s essential to get it right.
A common mistake is to overlook potential in favour of past experience, appointing externals based on their previous success elsewhere. The trouble is, a leader that has succeeded in one context won’t necessarily succeed in another. In fact, the data shows that for CEOs who led S&P 500 companies more than once, 70% performed better the first time. Few are able to repeat this in a different organisation. While nearly every CEO (97%) outperformed the market in their first role, only a minority of CEOs (38%) managed to repeat this in subsequent roles. Instead of over-relying on past experience, leadership succession planning should place more emphasis on potential.
What is leadership potential?
Generally speaking, potential is latent capability; the potential to become even better than you currently are. At Kiddy we define leadership potential as ‘The opportunity for significant and rapid acceleration in an individual’s ability to deliver greater value in future.’ The emphasis on significant and rapid acceleration is key because whilst we believe that everyone has potential to develop their current capability to some degree, few have the potential to be your next CEO, and even fewer have the potential to be your next CEO within, say, two years’ time.
Whilst current leadership capability plays a role, it is only a jumping off point. Some current high performers may have reached their ceiling. Others may be effective now, in the current climate, but not adapt well to the inevitably changing leadership demands of the future. So, don’t appoint successors in your current leaders’ shadows; your future leaders are likely to need different capabilities. In fact, research suggests that only 30% of high performers are also high potentials. In other words, only a minority of your current high performers will be your strongest performers in future. This makes assessment of leadership potential critical to succession planning.
At the heart of potential is ability to develop and learn from experience; to continually adapt and evolve one’s leadership capabilities – an increasingly valuable quality in today’s unpredictable and rapidly changing business context.
How do I identify leadership potential?
Potential is a complex construct, and so whilst simplistic models may be intuitively appealing, they will result in unreliable assessments which won’t provide the confidence you need. Kiddy’s model of Leadership Potential, illustrates the key components, based on an in-depth review of the academic research literature regarding the factors that predict future leadership success and interviews with experienced business psychologists operating within a leadership assessment context.
Due to its complexity, potential can’t be reliably identified by informal observations or manager opinions, which naturally tend to be based on past performance and are likely to be subject to bias. To reduce bias, increase objectivity, and provide greater confidence, formal assessment of potential should be undertaken. The design of this assessment should be informed by the critical questions ‘potential for what’ and ‘potential for when’, but will typically involving a combination of psychometrics, future-focussed leadership simulation and in-depth psychological interview.
Then what? Create a strong organisational learning context
As outlined in my previous blog, The Four Biggest Myths About Leadership Potential, it’s a common mistake to assume that individuals identified as high potential future successors will automatically fulfil their potential. But once identified, potential will not be fulfilled automatically. In fact, some studies claim that 40% of high-potential promotions end in failure. So, having identified candidates with the individual characteristics associated with potential, a leader’s potential will only be fulfilled if the right organisational conditions are created.
Help to accelerate the fulfilment of potential by creating a strong organisational learning context; where individuals are given opportunities to stretch themselves, where people are given regular, rich feedback, and are encouraged to reflect on and extract learning from their leadership experiences and are then supported to adapt their approach to apply this in practice.
Leadership potential is not only about identifying those with the potential to go furthest and fastest, but also about creating an organisational context that enables and accelerates its fulfilment.