FORTUNE

How top companies breed stars

The world's best companies realize that no matter what business they're in, their real business is building leaders. Here's how the champs do it.

By Geoff Colvin, Fortune senior editor-at-large

(Fortune Magazine) -- You couldn't be blamed for rolling your eyes when American Express chief Ken Chenault says, "People are our greatest asset." CEOs always say that. They almost never mean it. Most companies maintain their office copiers better than they build the capabilities of their people, especially the ones who are supposed to be future leaders, and for decades they've gotten away with it. But now their world is changing profoundly - and at long last we're going to find out which self-proclaimed people-cherishers actually mean it.

A fast-growing number of CEOs - including Chenault - are demonstrating their sincerity. With Amex (Charts, Fortune 500) at No. 19 on our North American list, he has built an exceptionally rigorous leadership-development program packed with metrics, incentives, goals, values, and calendars (for more about the program and Chenault, see "No Holds Barred").

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John Dineen: He runs GE Transportation, a key developmental slot.
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Douglas Baillie: Hindustan Unilever's chief runs India's top "academy company."
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Richard Floersch: The McDonald's chief human resources officer helps track the company's top 200 leaders.
Fortune: Top Companies for Leaders 2007
ï Gallery: Global Top 10
ï Rankings: Global and regional
ï Video: Inside GE's success video
Resource Room
As more companies try to develop leaders, they could learn from non-business organizations that do it notably well. Three diverse examples:
Military special forces
Army Rangers, Navy SEALs, and other elite fighters are famed for achieving top-level performance when stakes are high. The most important part of their development is that they always train in teams. Some of the best companies have been moving toward team development, but it's been central to the special forces from the beginning. They assume they can achieve goals only as a team, and their creeds include a promise of loyalty to the team. For example, the Rangers say, "Never shall I fail my comrades." Devotion to teammates, not a boss, institution, or share price, is the strongest motivator.
National outdoor leadership school
For 42 years NOLS has believed the wilderness can teach leadership lessons as no other experience can. It is the ultimate no-excuses environment. You can't persuade a mountain to get a little lower just for you or explain to an approaching blizzard that you're already quite cold. Four Seasons, Gates Capital Management, and other firms have sent groups to NOLS; Wharton, Northwestern University's Kellogg Business School, and other schools sign up groups regularly. NASA space shuttle crews have gone on NOLS expeditions since 1999.
Eton
Every elite institution has famous alumni, but that doesn't mean it helped develop their leadership skills. Britain's most storied independent school is different. Far more important than course content is immersion in a deep-rooted culture that can be far from welcoming. Students - 19 have become British Prime Ministers, and many others have held top leadership jobs in business - learn to achieve goals in an environment at least as tough as anything that might follow. Etonian Alan Clark, a former British Defense Minister, called the school "an early introduction to human cruelty, treachery, and extreme physical hardship." What better preparation for corporate life?
Video
Inside GE's success
Since Jack Welch's days, GE has steadily produced stellar leaders sending it to the top of Fortune's list of Top Companies for Leaders.

More broadly, companies that were never especially serious about leadership development are getting serious. Companies that were always good at it are getting better - and finding that the world wants desperately to learn what they know. General Electric (Charts, Fortune 500), No. 1 on our new ranking of the world's Top Companies for Leaders, reports getting five to ten requests each week from companies wanting to benchmark its practices.

So who's world-class great? Fortune has teamed with Hewitt, the world's largest human resources outsourcing and consulting firm, and RBL Group, a consulting firm specializing in leadership development, to conduct new research into the ways companies around the world are developing leaders and which are doing it best.

The result is a ranking of firms that others envy, the world's top "academy companies." The term originated some 20 years ago with professor Jeffrey Sonnenfeld, now of the Yale School of Management. He notes that these companies "offer more internal training to their executives, and their alumni often populate the leadership of other firms."

For example, alumni of Procter & Gamble (Charts, Fortune 500) (No. 2 on our list) include Microsoft CEO Steve Ballmer, eBay CEO Meg Whitman, Intuit founder Scott Cook, AOL founder Steve Case, and even GE chief Jeff Immelt. Hindustan Unilever (No. 4) has supplied nearly 200 CEOs to other companies worldwide over the years. GE alumni run scores of companies, including, besides GE itself, four of the 30 in the Dow Jones industrial average: Boeing (James McNerney), Home Depot (Frank Blake), Honeywell (David Cote). McNerney may hold a record, having worked for three companies in our top ten - GE, P&G, and McKinsey (No. 7).

Of the many powerful forces driving companies to develop leaders more effectively, the most important is the world economy's long-term shift from dependence on financial capital toward human capital.

Even given the credit crunch, money for investment is more abundant than ever. It isn't the scarce resource in business anymore; human ability is. Hewitt global-practice leader Robert Gandossy, who oversaw the Top Companies for Leaders study, says, "Organizations need talented people a lot more than talented people need organizations."

Even if that weren't true, companies would still be beefing up leadership development for a more immediate reason: The best young employees are hungry for it. It seems young people understood the new nature of today's economy before a lot of CEOs did, and they insist on jobs that will keep making them better.

Judy Pahren, senior VP for development and diversity at credit card bank Capital One Financial (Charts, Fortune 500) (No. 5), says that new employees cite "job flexibility, development, and community involvement" as the top three factors in keeping them at the company. GE's Immelt says his company is responding by, among other things, sending high-potential employees to the company's famed Crotonville, N.Y., leadership-development center much earlier in their careers; in attracting top prospects, "that's a strong selling point."

Companies are finding that the advantages of building a reputation for developing talent are greater than they may have thought - "a first-pick advantage," as the RBL Group calls it, an edge in attracting the cream of college and business-school students.

Says Hewitt's Gandossy: "Companies that provide people with opportunities to learn and grow become talent magnets, drawing scarce talent in droves." By continually attracting the most promising graduates and then developing them, these firms become higher-performing organizations, enhancing their ability to attract the best - a self-reinforcing cycle that makes the company more dominant every year.

A close look at the companies on our list reveals a set of best practices that seem to work in any environment. (Some companies well known for producing leaders, such as PepsiCo and Goldman Sachs, did not participate in the study; see accompanying methodology box.) These companies operate in every kind of industry and are based all over the world. But what's most striking are traits they share - specifically, nine practices that combine to create world-class leadership development.

INVEST TIME AND MONEY

You don't build leaders on the cheap, and you don't just bolt a development program onto existing HR procedures. Indeed, the biggest investment involved may be the time of the CEO and other executives. At McDonald's (Charts, Fortune 500) (No. 14), CEO Jim Skinner personally reviews the development of the company's top 200 managers. At GE, Immelt reviews the top 600. Bill Hawkins of Medtronic (No. 12) spends 50% of his time on people issues, and many of the other CEOs report similar percentages - making it the largest commitment of time they have.

Lots of companies claim they're interested in developing leaders, but the University of Michigan's Noel Tichy, a top authority on the subject, says that checking their commitment is easy: "Just show me the CEO's calendar." Yet the CEO's time is only the beginning. As those who report directly to the boss see what the focus is, they also become devoted to developing talent, as do their subordinates. It's called the cascading effect. Not that these companies rely solely on the power of example. Virtually all of them evaluate executives partly on how well they're developing people; at American Express, 25% of an executive's variable pay depends on talent development.)

Running leadership programs can also be expensive, but no CEO seems to doubt their value. GE's Crotonville, a beautiful 52-acre campus an hour north of New York City, obviously costs a bundle, and running thousands of managers through it every year costs even more. But "we fund it through good times and bad," says Immelt. "I learned that from Jack [Welch, the former CEO], and I still do it." Whirlpool (No. 15) decided a few years ago to upgrade its off-the-shelf development curriculum by creating its own. The program is now bigger than ever and worth every cent. CEO Jeff Fettig says, "This is the single best investment we make in our company."

IDENTIFY PROMISING LEADERS EARLY

"We begin to evaluate leadership capability on day one of employment," says GE's John Rice. Sometimes that's because employees have interned at GE for at least one summer, enabling the company to observe the way interns get others to work with them when they have absolutely no authority. Spotting leaders early means working on their development early. That's a big change at most companies, where programs were long reserved for an elite group several years into their careers.

Many of the companies on this list are trying to move past that. They believe that nurturing future leaders earlier than other companies creates a competitive advantage that lasts for decades, as their talent pipelines become bigger, better, and more reliable.

CHOOSE ASSIGNMENTS STRATEGICALLY

John Lechleiter, president and COO of Eli Lilly (No. 13), offers a typical model: About two-thirds of leadership development comes from job experience, about one-third from mentoring and coaching, and a smidgen from classroom training. Mixing job assignments seems obvious in theory, but in practice it's tough. Organizations tend to assign people based on what they're good at, not what they need to work on.

No company builds careers better than GE. Of course, it has an advantage over most firms, since its breadth of businesses lets it offer a wider range of experiences that few can match.

One secret weapon: the job of running GE Transportation, which makes locomotives in Erie, Pa. The person running the shop - currently 21-year GE veteran John Dineen - gets experience dealing directly with CEOs of customer companies. The business is unionized, so he learns about labor negotiations. The product is complex, as is the supply chain. Erie is sufficiently remote and unglamorous that the CEO can develop without national media scrutiny. And if, heaven forbid, the leader is a washout, GE is big enough to handle the trouble without bottom-line trauma.

Dineen's pre-locomotive career is a great example of what GE can do and most other companies wish they could. He was a manager in the company's appliance and plastics businesses, both highly valued developmental posts, one of which makes consumer products and the other industrial products; he has worked in a couple of finance assignments, also very important at GE; and he has held two large jobs in Asia, one staff and one line. You can't do much better than that.

Executives consistently report that their hardest experiences were the most helpful. P&G chief A.G. Lafley was in charge of the company's Asian operations during a major Japanese earthquake and the Asian economic collapse. That's when he discovered, he says, that "you learn ten times more in a crisis than during normal times."

His crisis experiences happened by chance, but such experiences can also be engineered. In 1988, when compressors in millions of GE refrigerators were found to be faulty, CEO Jack Welch and HR chief Bill Conaty decided to put Immelt in charge - though he had zero experience with appliances or recalls. "It was a hurricane," he says. "But Welch and Conaty knew exactly what they were doing. And there's no question I wouldn't be CEO today if I hadn't had that job."

DEVELOP LEADERS WITHIN THEIR CURRENT JOBS

Many CEOs report new tension between the need to develop people by moving them through different jobs and the need to develop their expertise in certain domains by leaving them put. One reason: A division has a tough time competing when the boss moves on after just 18 to 24 months, a typical pattern.

Eli Lilly is one of many companies trying harder to get the benefits of job rotation while leaving leaders in place. One technique: short-term work assignments. Managers don't leave their jobs, but they take on an additional assignment outside their field of expertise or interest. The company says the approach has been a big hit. Nokia (Charts) (No. 3) is trying the same thing and reports similar results.

BE PASSIONATE ABOUT FEEDBACK AND SUPPORT

It's the most elementary principle of learning: If you don't know how you've performed, you don't learn and you soon stop caring. Yet at many companies, feedback is rare, candid feedback even rarer. The companies on our list combine frequent, honest assessment with plenty of mentoring and support. So when people are told what skills they need to improve, they're also offered programs or coaching for doing it.

Many of the CEOs of these companies, when asked how they reached the top, tell similar stories about the importance of a few key mentors who consistently evaluated them. Whirlpool's Fettig is typical: "I am here today in part due to a handful of people who, before it was in vogue, provided coaching and mentoring to me early in my career. That helped me to develop." At Natura Cosméticos (No. 16), Brazil's largest cosmetics company, emerging leaders may even shadow a high-level executive for three to six months.

DEVELOP TEAMS, NOT JUST INDIVIDUALS

"At the GE I grew up in, most of my training was individually based," says Immelt. That led to problems. He'd attend a three-week program at Crotonville, but back at work "I could use only 60% of what I'd learned because I needed others - my boss, my IT guy - to help with the rest." And maybe they weren't onboard. Now GE takes whole teams and puts them through Crotonville together, where they make real decisions about their business. Result: "There's no excuse for not doing it."

Sometimes the team approach is cultural. The Finnish culture of Nokia rejects the concept of stars; the company focuses on leadership rather than leaders, and decisions depend heavily on consensus. In some companies that would be a recipe for low motivation and gridlock, but it works at Nokia.

EXERT LEADERSHIP THROUGH INSPIRATION

Yes, you can make people do what you say by firing and demoting. We all know how well that works. It works even worse in today's information-based economy, where most employees aren't turning wrenches but instead are using knowledge and relationships with results that may not be easily observed day to day. Try making them do what you say, or even telling them exactly what to do. Says Lafley: "The command-and-control model of leadership just won't work 99% of the time."

Most companies on our list agree, which is why one of their favorite words is "inspire." P&G runs a development program called Inspirational Leadership. At American Express, a program called Leadership Inspiring Employee Engagement is mandatory for everyone at the VP level and above. When Chenault says he wants emotional engagement, inspiration is part of what he means.

All these companies realize that they inspire through a sense of mission, which for some of them - Medtronic, Eli Lilly - is deep-rooted.

ENCOURAGE LEADERS TO BE ACTIVE IN THEIR COMMUNITIES

The advantages are many. Most companies have enunciated values that include respect for the individual, good citizenship, and integrity. When company leaders also become leaders of charities, schools, and other nonprofits, they show their commitment to those values, encouraging and inspiring employees. Other benefits are more pragmatic. Most employees will never serve on the company's board or on any major corporate board. But many of them can serve on a local nonprofit's board, and the experience is an excellent leadership developer. At General Mills it's an explicit part of many employees' development plans to serve on a nonprofit board.

MAKE LEADERSHIP DEVELOPMENT PART OF THE CULTURE

Though executives at these companies talk about their leadership-development programs, they realize the term isn't quite right. Developing leaders isn't a program; it's a way of living. For example, honest feedback has to be culturally okay. At many companies it isn't. Devoting significant time to mentoring has to be accepted. Working for nonprofits has to be encouraged, not just tolerated.

Such cultural norms can't be dictated; they have to be in the air. That's a big reason GE tops this list. Charles Coffin (CEO, 1892-1912) realized that GE's real priorities weren't light bulbs or electric motors but business leaders; developing them has been the company's focus ever since. All these companies are working on that kind of culture.

Good as these companies are, not one of them is satisfied with the way it develops leaders. They all have plans for improvement, mostly by involving more people, working more with teams, and refining their views of what skills tomorrow's leaders will need. None are scaling back.

It's important to realize that circumstances sometimes prevent companies from becoming academies, and some shouldn't even try. Yale's Sonnenfeld notes that the model won't work in "strategic contexts such as turnarounds in distress, or highly volatile, fluid, creative enterprises, which would suffer from the rigid lines of authority that underlie academies." But even companies in those situations need better leadership and could take at least a few lessons from these Top Companies for Leaders. In a world economy built on human capital, any company with a prayer of thriving will have to learn from their examples.

Reporter Associates Telis Demos, Jenny Mero, John Elliott and Jia Lynn Yang contributed to this article. Top of page