With opportunities everywhere in China, and organizations both foreign and local scrambling to exploit them, the shortage of leadership talent in the country is increasingly becoming an impediment to growth.
According to management consultants Hewitt Associates, nearly 60% of companies surveyed in the ?2003 Best Employers in China? study reported shortages in leadership skills. In a second Hewitt study of leadership practices in the region, 45% of participating China-based companies reported these shortages.
In a rapidly growing economy, but one in which the operating environment can be difficult, where competition can be brutal, and where shareholder expectations of returns are getting higher, it is no wonder that of the top five factors China-based executives nominate as critical to success in the market, four relate to people: leadership quality; acquisition and retention of talent; employee engagement; and leadership and management development (the fifth is competition).
While ?The Best Employers in China? study included only information from foreign invested companies, there are strong reasons to suggest that a talent crisis exists in local Chinese enterprises as well, particularly those in the State sector.
Recent policy pronouncements, aimed at speeding up the process of reform in this sector, have put business leadership to the fore.
Reform of State Enterprises (SOEs) is fundamental to China's continued growth and development. Without it, there is little hope of progress on the three other big issues that act as a brake on progress: unemployment and social stability, a bankrupt pension system coupled with a rapidly aging population; and, linked to both, development of a fully functional capital market.
On January 1, a comprehensive set of performance standards came into play aiming to ensure executives in China's 189 central SOEs focus fully on the financial health of their organizations. They must now sign contracts with the State-owned Assets Supervision and Administration Commission (SASAC) guaranteeing financial performance.
Those performing to standard will receive bonuses up to three times their basic salary, and be eligible for longer term incentives. Those who fail will face pay cuts or even dismissal.
At the same time, the Boards of these organizations will be given more power. How this is to work is not clear. Even in developed economies, where there is something of a crisis in corporate governance, the roles and responsibilities of boards are not widely understood, and public confidence in companies and the people who run them are at an all time low.
What is clear for now, however, is that SOE leaders will not necessarily be accountable to their Boards in terms of the evaluation of their performance. They will be accountable to SASAC.
All this represents huge change. Not only has the sacred cow of State ownership been slain – these initiatives, after all, are all about more rapidly priming SOE's for sale to private investors, including to foreigners. Also gone, or going, is the notion that leadership of key Chinese organizations depends principally upon political ideology and connections. And gone, too, is the iron rice bowl for these leaders.
Based on Hewitt's conversations with senior leaders in many State Enterprises – usually in the context of consulting projects with them; projects often related to clarifying roles and responsibilities through the organization and designing systems that more clearly tie rewards to performance – we would suggest that this group will generally support these changes.
Less clear is how effectively the cultural transformations they imply – indeed require – will trickle down through their organizations, where individual departments and branches can be bastions of politics and conservatism.
Effective business leadership – a quality that focuses employees on business goals and simultaneously builds a high degree of trust and confidence – will be essential.
As if in recognition of this, SASAC has recently conducted an experiment in which six SOEs have been allowed to recruit externally for senior executive positions, targeting applicants on both the Mainland and overseas. "We want to attract the best talent in the world to state-owned enterprises," said Li Rongrong, minister in charge of SASAC.
Yet even in foreign invested companies in China, it's clear that there are few, if any, companies capable of driving this kind of leadership performance. Indeed, Hewitt's Top Companies for Leaders research, a global study administered separately in the US, Europe, and Asia Pacific, suggests that only a handful of companies worldwide know how to produce leaders of this caliber.
Of the 46 China-based companies – again foreign invested – that participated in this study, none made the list of Top Companies for Leaders in Asia Pacific. Furthermore, our analysis of the data provided by these companies indicates that their leadership programs fall short of 'best practice.'
– While the CEO is actively involved in developing leadership in all Top 10 Companies for leaders in Asia Pacific, in China this is true only in 72% of cases;
– In addition to their involvement, nine of the top companies, report that CEOs provide the necessary resources to create and sustain strong leadership practices. In China, this occurs in only 59% of companies;
– All Top 10 companies have a specific strategy for developing leaders. In China only 55% of companies do;
– Eight of the Top 10 companies use succession planning to select leaders. In China this occurs in just19% of cases; and
– Every Top 10 company links compensation to leaders' performance. In China only 83% do this.
What's getting in the way of more effective leadership development practices? Again citing Hewitt's study, the top three factors are an overemphasis on short-term operations, lack of talent internally, and lack of know-how and experience in developing leaders.
If this is true for foreign-invested companies in China, it would clearly be so in SOEs. To really ensure the cultural transformation they seek, SASAC might well consider holding SOE leaders accountable for putting in place processes for developing other leaders as well as for financial performance.