Analytical and Problem-Solving Skills are Important but Recruiters’ Focus on Leadership-Skills for Recruiting First-Level Executives

Asish K Bhattacharyya

Reading time: 10 minutes

Although Peter Drucker, who is considered to be the first Management Guru and who is still the widely read author in management, argued in 1954 that that management subsumes leadership. In 1970s, a debate on whether management skills are different from leadership skills surfaced in management literature.  The debate  has lost relevance. Now recruiters are looking for leadership skills while recruiting first-level executives. 

Peter Drucker in his book, The Practice of Management (published in 1954), describes the jobs of the management. According to him, management has three jobs – managing a business, managing managers and managing workers and work. Although those three jobs can be discussed separately, they are integrated, and managers cannot separate them in discharging their responsibilities on daily basis. According to Drucker, managing business means ‘managing by objectives’, because managers’ performance is measured against objectives they set for themselves or set by others. Management is a practice – it is a blend of science and art. Manager has to act and perform by applying  her knowledge and skills to achieve the desired results. ‘Manage managers’ implies making human and material resources productive to achieve the objectives. ‘Managing worker and work’ implies that manager has to ensure that workers perform at their full potential and make material resources productive. The term worker covers a whole range of employees - unskilled  to CEO. To quote Drucker, “It implies consideration of the human being  as a resource – that is, as something having peculiar psychological properties, abilities and limitations that require the same amount of engineering attention as the properties of any other resource, e.g., copper. It implies also consideration of the human resource as human beings having, unlike any other resource, personality, citizenship, and thus requiring motivation, participation, satisfaction, incentives and rewards, leadership, status and function.” 

Drucker says that the management must consider both present and the long-term future. He says, “management – almost alone-has to live always in both present and future”. He further says, “management must keep the enterprise successful and profitable in the present – or else there will be no enterprise left to enjoy the future. It must simultaneously make the enterprise capable of growing and prospering, or at least surviving in the future – otherwise it has fallen down on its responsibility of keeping resources productive and unimpaired, has destroyed capital”.

Managers allocate the total time and attention span  available to them  to the three separate but integrated jobs depending on their job profile and position that they occupy in the organisation hierarchy. 

John B Kotter in an article entitled, “What leaders really do’ published in Harvard Business Review (first published in 1990 and reprinted in HBR December 2001) explains the difference between leadership and management. According to Kotter, the following are the differences:

·      Management is about coping with complexity. It brings a degree of order and consistency in key dimensions of a large business. Leadership is about coping with change. In a dynamic business environment business firms survive and grow by managing changes in the internal and  external contexts and not merely by managing complexity. 

·      Both managing complexity and managing change requires three activities -  deciding actions required, creating networks of people and relationships in order to accomplish the agenda and ensuring that those people actually effectively and efficiently perform tasks assigned to them. However, leadership require accomplishing  those three activities differently from the way management accomplishes them.

·      Managing complexity requires planning and control, including allocation of resources, for a short period, say for one year. Managing change requires developing a vision for distant future and formulating strategy for achieving the same. 

·      Implementing the plan requires creating  the right organisation structure, designing job profiles, assigning jobs to right individuals, communicating plans to those individuals, delegating powers to them and monitoring their performance. Planning and control also require monitoring overall implementation of the plan and taking corrective actions based on feedback. Achieving vision requires aligning people, that is, creating coalition of individuals who understand the vision and committed to achieving the same. 

HBR reprinted the article in 2001, because even at that time most companies in U.S.A. lacked focus on the leadership component of management. They focused too much on planning (including long-term planning, also called corporate planning, say for five years), analysis and solving problems, and control. They recruited candidates at executive positions who demonstrated analytical and problem-solving skills. However, companies were finding that those two skills were inadequate to cope with rapid changes in the external contexts.  When searched for managers for leadership skills for  senior management positions, they found it difficult  to find right individuals, as most companies rewarded managers with analytical and problem-solving skills. Organisation culture was such that they produced leaders with high IQ, but low leadership skills. 

Managers at every level should have leadership skills and an organisation culture should be created to encourage executive to acquire those leadership skills (rather, discover those skills within) and reward executives having leadership skills.

Things have changed since then. Even in India companies are recruiting individuals with high leadership skills in entry-level executive positions and giving higher responsibilities to only those who demonstrate application of those skills.

CORPORATE GOVERNANCE - CEO DUALITY

The Security and Exchange Board of India (SEBI) has deferred the  date by which the top 500 listed companies are required to comply with regulation to separate the roles of the chairperson and the CEO from April 1, 2020 to April 1, 2022. The SEBI regulation requires that the non-executive chairperson and the CEO should not be related to each other as per the definition of relative in the Companies Act 2013. It is explained that SEBI has taken the decision to defer the applicability of the regulation in view of the demand from companies and to keep the compliance burden low in the wake of current economic scenario. 

When we see through the lens of agency theory, which assumes that the manager ignores the interest of the company  and enriches itself unless monitored, separation of the two roles -  chairperson and CEO makes sense, albeit theoretically.  Independent chairperson improves the oversight function of the board. The chairperson has clear authority to speak on behalf of the company and to manage the board meetings. Separation  mitigates the conflict of interest in the areas of performance evaluation, executive compensation, succession planning, and appointment of new directors. It  allows the CEO to focus on strategy implementation and organisational issues, as the responsibilities related to management oversight, board leadership and governance-related matters lie with the chairperson. Crafting strategy is the joint responsibility of the board and the CEO. 

When we see through the lens of the stewardship theory, which assumes that the manager is motivated to work in the interest of the company, separation of the two positions does not make sense. A manger, who is self-motivated to work in the interest of the company, does not required monitoring. On the other hand,  separation of the two roles results in losing the benefits of ‘unity of command’.

The U.K. Code of Corporate governance, which is a soft law (comply or explain) mandates that the same individual should not occupy both the positions. In U.S.A. there is no mandate to separate the roles of the chairperson and the CEO. However, more and more companies in U.S.A. are now separating the two roles. In 2005, in 30 per cent of the S&P 500 companies the role of chairperson and the CEO were split. In 2013, the percentage increased to 40 per cent and now it is 53 per cent. OECD Corporate Governance Fact Bok 2019 reports that out of 37 jurisdictions covered in the report, 30 per cent require separation, 30 percent do not require separation, 35 per cent recommend separation and 5 percent have incentive mechanism to induce separation. 

Research fails to provide conclusive evidence that the separation of the two roles improves performance. Research evidence suggests  that benefits and drawback of separation of the two roles are situation dependent and depend on array of factors. Two professors of Stanford University examined the leadership structure and the circumstances under  which they changed over a twenty-year period (1996-2015). Their sample consisted of 100 largest and 100 smallest of Fortune 1,000 companies (2016). They reported that most separations (78 per cent) occur during orderly succession when the former founder, CEO or other officer continuing to serve as chairperson temporarily or permanently. Research evidence suggest that the temporary separation provides stability.  The vast majority of cases of combining the two positions (91 per cent) involve an orderly succession at the top. In a nutshell, changes in the leadership involved orderly succession. In some cases, companies separated the two positions to address corporate governance failures under shareholders’ pressure. 

Indian family businesses dominate the corporate sector and will continue to drive the growth of the economy. Stewardship theory better explains the behaviour of the controlling shareholder (the family). Mandating family businesses to separate the chairperson and CEO positions is like forcing someone to take medicine without an ailment, ignoring the ill effect of the same. One complaint against family businesses is that the family expropriates the wealth of non-controlling shareholders through abusive related party transactions (RPT) etc. This has already been addressed under the current dispensation by making the audit committee responsible to approve RPTs.  Appointment of a lead independent director might be a better option than mandating separation of the positions of the chairperson and CEO.  If, companies are forced to separate the two positions, they will prefer to appoint the nominee of the controlling shareholder as the non-executive chairperson and an outsider as CEO, who will be subservient to the chairperson in the interest of the company and in his/her self-interest.