Unexpected Companies Produce Some of the Best CEOs

 

About 10% of S&P 500 companies change CEOs annually. Behind these appointments are often years of intricate preparation grooming successors. We regularly get approached by CEOs and boards who find it challenging to groom the right candidates and look for effective approaches to develop the next CEO.

Venerable behemoths like GE, IBM, P&G, and McKinsey have historically been viewed as CEO factories; indeed, 20.5% of all CEOs appointed at the S&P 1500 firms from 1992 to 2010 came from 36 CEO factories such as these, with GE being the largest. The sheer brand power of these companies often helped their executives rise to the top of search lists. But today GE is run by an outsider, IBM’s performance has been mixed, and P&G had a painful do-over” on their CEO succession. Now we must look beyond the brand names to uncover repeatable practices that boards, CEOs, and HR teams can use to strengthen their leadership pipelines.

It is tempting to assume that the largest academy companies have an edge when it comes to developing talent. As part of ghSMART’s CEO Genome research, we discovered that some surprising companies produce remarkable numbers of CEOs. Moreover, the CEOs these companies produce tend to perform well, thanks in part to the leadership development practices the companies embrace. We estimate there are over a dozen stealth CEO factories” across a range of industries and geographies; these include Medtronic, Rohm and Haas, and Danaher Corporation. We’ll explore the latter two in greater detail.

Until Danaher alum Larry Culp took charge at GE, Danaher was virtually unknown to the general public despite its stellar performance in scientific innovation. Rohm and Haas (which merged with Dow Chemical in 2009) was highly respected within the chemicals industry but far from a household name. And yet both companies produced scores of successful CEOs. More important, companies led by CEOs who came out of Rohm and Haas or Danaher performed 67% better than those same companies did when other CEOs were in charge. (Our research partners at the University of Chicago, N Vera Chau and Professor Steve Kaplan, compared stock returns for companies while they were led by 35 CEOs who came out of Rohm and Haas or Danaher and compared those returns to stock market returns of the same companies during time periods when they were led by CEOs who were not Rohm and Haas or Danaher alums and adjusted for variations in industry returns.)

Three practices stand out as especially important in the success of these stealth CEO factories — and these are distinctive from the prevailing approaches we see in many large companies today. These practices are instructive for boards, CEOs, and CHROs as they groom successors. The practices also offer helpful guidance for individuals who are looking to grow.

1. Give leaders broad authority. In contrast to the complex matrix management structure prevalent among large corporations today, stealth CEO factories vest their general managers with broad roles and substantial decision authority. As Raj Gupta, former chairman, CEO, and president of Rohm and Haas reflects: Very early on in their careers, we had GMs responsible for manufacturing, selling, R&D, supply chain and asset management. These were real CEO-like jobs running a full P&L and balance sheet, making big decisions with minimal guidance by corporate.” CEOs coming out of Rohm and Haas and Danaher spent on average nearly half of their careers in P&L leadership roles prior to their first CEO jobs, arming them with valuable experience running a business. Andy Silvernail, who joined IDEX Corporation from Danaher and created over $9 billion shareholder value as CEO, says, At Danaher, I got my first P&L six months out of business school. It was a highly decentralized environment with a lot of opportunities to really run a business in your early thirties. The buck really stopped with you. You had to make real decisions from an early age.” The broader authority to make decisions is an important factor in grooming future CEOs. Our CEO Genome research showed that highly decisive CEOs were 12 times more likely to succeed.

2. Encourage them to think like CEOs. Stealth CEO factories push their leaders from very early days to think like CEOs — laser focused on metrics and stakeholders directly connected to value creation. Managers at Danaher are trained to prioritize cash, returns on working capital, and strong competitive positions in markets with growth outlook. As a result, CEOs coming out of Danaher are astute at selecting high quality businesses to run and to acquire. For example, Scott Clawson is a serially successful CEO who quadrupled the value of the first company he ran (GSI, a $800 million agricultural equipment business) and delivered more than twice the returns on the second (Culligan, a $500 million water treatment company). Scott told us that he leaned on Danaher training to complete over 35 acquisitions, helping strengthen companies’ competitive position and adding hundreds of millions of shareholder value.

Rohm and Haas ingrains in its leaders a sense of responsibility to five key stakeholders (five voices” in the company vernacular): customers, employees, investors, community, and process. In most companies this broad view doesn’t factor into daily decision making until the C-suite. At Rohm and Haas, you were taught very early to evaluate every decision from the perspective of the five voices,” says Pierre Brondeau, a Rohm and Haas alum who is now CEO of FMC Corporation. That prepares you for the CEO role – thinking about the full set of stakeholders you are accountable to. It’s not about pleasing your boss – it’s about doing the right thing by your stakeholders.” Pierre successfully applied those principles to grow value of FMC five-fold during his tenure as CEO. In our CEO Genome research leaders who effectively engage stakeholders to produce results were two times more likely to succeed as CEOs.

3. Challenge strong performers early with big opportunities. Stealth CEO factories send young managers into uncharted waters with minimal support. We made bets on people and moved them early on,” says Raj. As one Rohm and Haas executive noted, Raj was very comfortable looking beyond the obvious candidates for big jobs, often reaching or more levels down.” For example, in the late 90’s Raj bet on relatively inexperienced young manager named Carol Eicher to lead the launch of a $1 billion joint venture in Saudi Arabia, which was the first of its kind for Rohm and Haas. He didn’t hesitate to send Carol to negotiate this important and complex deal, which was larger than any of ROH existing business units at the time, because he believed she had acumen to succeed. Carol successfully launched the JV and went on to become a successful CEO of Innocor delivering fourfold returns for investors.

Our research showed that these types of bold bets (career catapults”) help accelerate leaders to the top. And CEOs coming out of stealth CEO factories have these types of career experiences more often than a typical CEO. Compared to only a third of all the CEOs we analyzed, virtually all the CEOs who emerged from stealth factories had at least one career catapult, 79% of them had two, and 37% had three or more (compared to only 6% all CEOs in our analysis).

CEO Commitment Is Critical

To benefit from these approaches, the CEO must be committed to development of the leadership pipeline as her top priority. Raj Gupta says his commitment to these practices helped him groom 16 successful CEOs during his tenure at the helm of ROH, including Ilham Kadri, who is now in her second CEO role running Solvay – an $11 billion chemical company headquartered in Brussels. Kadri says, As a young manager with just a few months at ROH under my belt I was put in charge of closing a major acquisition in Russia in the midst of 2008 financial crisis. Later on, I was appointed first ever female General Manager in the Middle East and Africa, leading the transfer of ROH technologies in UAE and executing large investments in the Kingdom of Saudi Arabia. Those opportunities challenged me very early in my career to operate with a lot of unknowns and make decisions on a wide range of issues, which was great training for becoming a CEO.”

These three practices for developing strong leaders don’t require huge scale or large training budgets. They require leadership values and corporate structures that allow for real empowerment and risk taking. Above all, they require the leader at the top to be personally invested and genuinely eager to grow other strong decisive leaders rather than obedient corporate foot soldiers.