Six dimensions separate exceptional CEOs from the rest of the pack. This article provides guidance on how current and future leaders can join that elite group
This is an edited transcript from a McKinsey podcast – 18 May 2020.
Sean Brown: Hi, I’m Sean Brown. Welcome to Inside the Strategy Room. In this episode we are talking to two partners who work day in and day out counseling chief executives. They and their colleagues recently published an article on the mindsets and practices of the best CEOs which summarizes their research and lengthy experience.
What exactly did you study, and why?
Scott Keller: By way of context, Carolyn and I, given our backgrounds, have the opportunity to attend various leadership retreats that provide people who are a few years out from becoming a chief executive with opportunities to learn about global trends and to hear from former or current CEOs. One time, we attended a retreat where, on the first night, the CEO was very clear and crisp, saying there are three things CEOs do that really a make a difference: set the vision, drive execution, and manage stakeholders. The next morning, another CEO, a very successful one, shared his view on what it takes to be a great CEO. “Look, three things you need to do as a CEO: You have to tell the story, shape the culture, and put the right talent in place.” That night, yet another CEO offered her three rules. “I have to decide what businesses we are in, allocate resources, and create a high-performing team. That, to me, is the essence of being a great CEO.” And I remember on the final day, Carolyn and I said to each other that each CEO was very compelling, but it was hard to distill something universal or non-subjective from all of them. That led us to also explore the academic world. We found one body of research that looked at traits of great CEOs—things like being a great relationship builder, resilience, decisiveness. But in our experience counseling CEOs, many of those traits are the reasons why they became CEOs; the traits are not as instructive in guiding what they should do to be excellent in the role. Another body of research examined how CEOs spend their time. One of the more influential of these was by Harvard Business School’s Nitin Nohria and Michael E. Porter, which found, among other things, that 72 percent of CEOs’ time is spent in meetings and 75 percent of their time is scheduled in advance. Other research explored how all-encompassing the CEO role is: you will do some work during 80 percent of your weekend days and 70 percent of your paid vacation days. That is all helpful information, but it doesn’t speak to the the quality or effectiveness of the time spent. It also did not differentiate between how mediocre CEOs spend their time versus great CEOs.
We wanted to add to the body of research out there. How do the truly excellent CEOs think and what do they do as they go about the role?
Sean Brown: How did you approach these questions? Did you conduct empirical analysis?
Carolyn Dewar: We thought it was important to not just be anecdotal, so we assembled a database of information on 7,800 CEOs, correlating their performance and other attributes of their tenure with decisions they made. We track some companies over a 25-year period, through multiple CEOs. The database is also global in nature, covering more than 70 countries, and spans 24 industries, because we wanted the insights to be broadly applicable.
We have been exploring several segments of a CEO’s tenure: those who are a couple years out and are preparing for the role, the first year or two in the CEO position, mid-tenure CEOs who have hit their stride and want to maintain their momentum, and those at the end of their tenure planning to pass the reins. What we have found in the research is that excellent CEOs play six roles at once (exhibit). Part of the art and science is understanding what the CEO needs to do on each of those dimensions to be great.
Sean Brown: The CEO role actually encompasses six different roles? Why don’t you take us through.
Caroline Dewar: Corporate strategy, that’s the one folks tend to start with because it’s backed by management science. There are templates. There are ways of thinking about strategy challenges. For a capable but average CEO, that means using performance metrics for the organization such as being the best in the industry and winning customer share. If we are number three in the market and want to move to number one, what do we do?
Those who are truly distinctive, or excellent as measured by their performance and tenure in role, play the corporate strategy somewhat differently. Their mindset is to beat the odds. Beating the odds is a theme throughout our strategy thinking and it centers on being bold in the areas that matter most. There are three practices, or habits, of excellent CEOs that we see on this dimension. The first one is reframing what winning means. There is one CEO we worked with who led an industrials company. The company had always framed itself as wanting to be the best in aerospace; they saw that as their piece of the industrials pie. When this CEO came in, he reframed the ambition to say, “We need to think bigger. We’re going to be the best among all industrials.” That really lifted the waterline of the peer set, and it was amazing to see the organization rise to that new vision.
The second piece is around bold moves. If you have elevated the vision sufficiently, what strategic moves will you will make to realize it? It turns out there is a discrete set of bold moves that matter most. There are organizational pieces as well such as, how will you fundamentally shift the DNA of the organization? There is a Fortune 20 CEO who felt he had missed the boat in a huge wave of change coming through the industry. He said, “Look, I knew that big wave was coming but I didn’t make a move in my first year as CEO because I felt I had to get the organization on board with my leadership first.” The reality is, you set the tone and metabolic rate for your tenure in that first year. By the time this CEO, in years two and three, tried to take the organization in a new direction, the organization wasn’t willing to follow.
The last piece is quite tactical, relating to the boldness with which you allocate resources. Research shows that most organizations, even if they set a bold vision, only tweak the budgets, plus or minus what they had last year. Excellent CEOs take more of a clean-sheet approach. They say, “If I were to reallocate 10 percent of my budget each year to what we say matters most to our future, what would that look like?”
Sean Brown: That’s great. Your second CEO dimension is organizational alignment. What do you mean by that?
Scott Keller: CEOs trying to take their companies in new directions know that they have to change the organization. On talent, for one, you have to act on your lower performers and elevate your strong ones. You know, half of senior leaders say their biggest regret is not moving on low performers fast enough. But there is another level at which to think about talent. What we see excellent CEOs do is to think about roles. What roles in the organization create or protect the most value? In the first conversation with a CEO client, we ask them to list their 20 most talented people and the 20 roles that create the most value. Then we ask, “How many of those roles are filled with that top talent?” What really separates the excellent from the good is this mindset that says, “I will put equal rigor and discipline in this realm of the organization as I put on corporate strategy or any more quantitative operational area.” When the CEOs we work with do that, they realize their list missed about half the critical roles. And the reason is that typically only about 20 percent of the most value-creating roles report to the CEO, about 60 percent are two levels down, and about 10 percent are even lower. And when a new strategy is involved, 10 percent typically don’t yet exist! So, these leaders end up creating a talent management engine for the critical few most important roles to ensure a robust pipeline.
Sean Brown: How does culture fit into this process of aligning talent with the organizational priorities?
Scott Keller: A lot of CEOs put in place an employee satisfaction or engagement survey, largely because they have heard employee engagement is correlated to business performance. That’s absolutely true. Unfortunately, that is the equivalent of someone saying, “If you weigh yourself every day, and you are within this range for your height, you are healthy.” There is a correlation between weight and health, but that scale won’t tell you if you have high blood pressure or diabetes or early signs of cancer. Excellent CEOs go beyond engagement. They look at things like how the company innovates, role clarity, how externally oriented people are—things engagement surveys do not pick up. It’s what we broadly call “organizational health”: all the soft dimensions that correlate with business performance. The great CEOs measure that; they manage that. And when you manage the full set of elements that shape a culture, research shows you have more than twice the likelihood that your strategy will be executed. Over time, you also will have three times the total returns to shareholders that other companies have.
Sean Brown: That makes sense. In terms of organizational design, is there something excellent CEOs do that others don’t?
Scott Keller: Great CEOs know that being clear on the organizational structure needed to take the company forward is critical. It might be a few signature processes, it could be a set of shared values they are driving, but they are very clear on what the organization holds stable. It’s a part of our DNA, who we are. And they are equally specific about where they want to drive speed and agility. It’s incredible how often that isn’t made clear from the top, and therefore people make up their own versions and end up at war with each other deeper in the organization.
Sean Brown: Another of the six dimensions of CEO excellence is team and processes. How do those differ from your points about roles and culture and organizational design?
Scott Keller: We all know teamwork makes the dream work. High-performing teams are 1.9 times as successful, from a financial performance standpoint, as others. But it’s hard. More than 50 percent of top team members feel their team is ineffective while fewer than a third of CEOs feel they lead an ineffective team, so there can be a real mismatch there. The CEOs who break through that have the mindset of putting dynamics ahead of mechanics. The mechanical view of teamwork would say, “Hey, I need a good operating rhythm and a set of team norms.” The dynamic view would say instead, “I am regularly going to check the composition of my team, and I will separately show resolve in how close I get to my team members.” This is an interesting differentiator. CEOs need to maintain enough distance from their team members to be objective, yet enough closeness to gain their trust and loyalty. And that’s not an easy thing to do.
Sean Brown: One of the key responsibilities incoming CEOs may have little experience in is dealing with the board. How do the best approach this?
Carolyn Dewar: When good CEOs think about the board, they focus on making sure the meetings go well and have the right agendas, and that they are able to continue with their vision without too much interference from directors. With excellent CEOs, the mindset is quite different: how do you help the individual board members, and the collective, help the company and help you as CEO? There are a number of elements in that. One is, boards are being asked by the markets and the public to play increasingly active roles so they are in a transition period grappling with that. As CEO, you can help to shape your board’s thinking. You can help focus the board on the most forward-looking items on which you would benefit from their input. Then there are the capabilities of the board itself. One aspect is the board’s composition, meaning the types of skills and experiences you need among your directors to further your vision or strategic priorities. Do you have the global reach you need? Do you have people who have scaled a business at the inflection point that yours is at? Is this the board for the go-forward company or for the company it was in the past? And even if you keep the same directors, how do you bring them along? How do you build those capabilities?
Sean Brown: CEOs also spend a lot of time dealing with external stakeholders, which is increasingly critical these days. What kind of issues do they need to tackle?
Carolyn Dewar: There has been a huge shift in the past couple of years around social purpose. It used to be that corporate social responsibility was something you could park on the side. That no longer works. Excellent CEOs are integrating the company’s social purpose inextricably with the core business competencies. They don’t just write a big check and hand it over at a ceremony but are articulate about why their organization exists in the world and how it can advance the social good. In terms of the broader set of stakeholders—investors, the media, regulators—you need to have a clear view on which of those you must spend time on. As CEO, what role do you play versus relying on your team, and with which ones?
Sean Brown: We’re finally at the sixth dimension, which is the most personal but possibly most vital to all the others: how CEOs organize their time and energy.
Scott Keller: About ten years ago, Steve Tappin wrote a book called The Secrets of CEOs and some of the headlines that came out of it were that 50 percent of CEOs feel incredibly lonely and there is such a huge amount of frustration, disappointment, irritation, and exhaustion that being a CEO should come with a health warning. Developing personal working norms helps ensure that you can handle the stress and move beyond the exhaustion. Good CEOs, our research found, stay organized and efficient. For great ones, it’s more about focusing their time on what only they can do. That means having a staff that doesn’t just help manage their time but also manages their energy. Everyone has a unique set of things that energizes them or depletes their energy. Excellent CEOs are aware what those are for them and have their office build their days and weeks in ways that help them. For example, they avoid those cascading sets of meetings that can be so exhausting and instead break them up with a lunch with a frontline employee or a meeting with a customer.
Sean Brown: Do you have any advice for people who support CEOs on how they can best assist?
Carolyn Dewar: The key is to think about the unique role that only the CEO can play. How do you help remove the clutter that gets in the way, so the CEO’s time is really focused? On strategy, there is typically an owner. Organization—that’s about elevating the chief HR officer into a truly strategic role and making sure you have the right person in that position. Scott and I have even seen CEOs create stakeholder relations roles—people who convene investor relations, government relations, corporate social responsibility, someone from HR, a person from marketing. That group then coordinates amongst itself and bubbles up what the CEO needs to pay attention to across stakeholder groups. The same goes for team and process: Who will look across strategic planning, budgeting, the IT queue, workforce strategy, all of these big management processes and make sure they are interlocked? That is another role I have seen created.
Sean Brown: What ultimately makes someone a great leader versus a good leader for an organization?
Scott Keller: “Good” is being the leader the organization needs you to be. “Great” leaders tend to move beyond that. They find a way to be authentically themselves while still delivering what the organization needs. Understanding the legacy you want to leave and what you stand for matters here. It not only has the effect of allowing you to be your full self at work, which can give you more energy and resilience, but also helps people understand the why of what you do. Choosing authenticity in your leadership model is part of ensuring that.
Sean Brown: CEO positions entail a lot of power, which can breed big egos and even hubris. Any advice on how to stay grounded?
Scott Keller: There is fascinating research out there that the more senior your get, the more you lose the ability to understand when people are giving you a fake laugh—you know, like when you tell a joke. It’s very easy to start to feel a bit invincible. You tune out the critics. What we have seen excellent CEOs do is develop ways to stay hungry but stay humble by getting out with the rank and file. They also have inner circles that help keep their feet on the ground and remind them the CEO role isn’t forever. They will still be a human being afterward, with many more years when they are not CEOs.