In search of leaders: Whatever their strategy, CEOs are convinced that grooming top leaders is absolutely key to their companies' ability to compete.

Johnson & Johnson has a clear management challenge. The 117-year-old company consists of more than 200 distinct operating units, most led by a president or managing director. That gives each of these leaders operational autonomy. Yet at the same time, J&J needs to ensure that each of them maintains the company's reputation for scrupulously protecting the well-being of customers, as epitomized by how smoothly it handled the famous Tylenol recall case.

Running such a decentralized company allows Chief Executive William C. Weldon to move his top leaders from one challenge to the next, while bolstering their development with formal leadership training programs. "You have this wonderful developmental opportunity as an individual," says Weldon, at his office in New Brunswick, N.J. "As a company, you get to develop people."

Another important benefit of J&J's focus on grooming leaders has been management stability. The company, which has $36.3 billion in sales and 108,300 employees, has had only six chairmen in its history, all of whom rose from within the ranks. Weldon, 54, who became chairman and CEO in April 2002, was No. 6.

Not far away, in Armonk, N.Y., another leading CEO is spending a great deal of time on developing his top talent. IBM's Sam Palmisano is determined to push his vision of "On Demand" computing, in which IBM's software, hardware, services and even research units organize themselves to focus on delivering integrated technology solutions to customers. In Palmisano's view, that requires a dramatic increase in the willingness of his people to assemble themselves into cross-disciplinary teams that meet a need in the marketplace and then disband when that need has been satisfied.

Palmisano believes that if leadership development isn't connected to the company's strategy, it won't work. "We don't separate out strategy from leadership," he says.

Both Weldon and Palmisano are spending huge amounts of time and resources on leadership training--not because it's another passing management fad, but rather because they increasingly sec it as essential to their companies' ability to compete. "I talk to CEOs all over the world and I can't name anyone who doesn't think this is core and essential," says Palmisano, who says he spends 30 percent of his time on leadership development. With $81.2 billion in sales and 315,889 employees, IBM is spending more than $1.1 billion a year on training and leadership development. Like Weldon, Palmisano moved up the ranks to the top job, rather than parachuting in.

J&J and IBM tied for first place in Chief Executive's ranking of the Top 20 Companies for Leaders, conducted in cooperation with Hewitt Associates. (See box, page 29.)

Top 20 Companies for Leaders

Rank            Company                 Chief Executive

1. (tie)        IBM                     Sam Palmisano
1. (tie)        Johnson & Johnson       Bill Weldon
3.              General Electric        Jeffrey Immelt
4.              Colgate-Palmolive       Reuben Mark
5.              Dell                    Michael Dell
6.              United Parcel Service   Mike Eskew
7.              Medtronic               Art Collins
8.              Procter & Gamble        A.G. Lafley
9.              PepsiCo                 Steven Reinemund
10.             Southwest Airlines      James Parker
11.             Whirlpool               David Whitwam
12.             Microsoft               Steve Ballmer
13.             Cisco                   John Chambers
14.             Wells Fargo             Dick Kovacevich
15.             FedEX                   Fred Smith
16.             Pitney Bowes            Mike Critelli
17.             State Farm Insurance    Ed Rust
18.             General Mills           Steve Sanger
19.             Intel                   Craig Barrett
20.             Merck                   Ray Gilmartin

The ranking, and the reasoning that went into it, reflect important changes in thinking about leadership in the post-Enron age. One clear implication is that companies no longer believe they can find a glamorous, outsider CEO to magically solve their problems. "In this era of nervous boards, directors are interested in homegrown talent versus outside messiahs," says Jeffrey Sonnenfeld, associate dean of the Yale School of Management and one of five Top 20 judges. Adds fellow judge Rakesh Khurana, assistant professor at Harvard Business School: "What really matters are systems that develop and perpetuate talent. We're focusing on the systems that build people."

In third place is General Electric, which is famous for its leadership training, even if some GE "alumni" have struggled to lead other companies (see sidebar, page 31). Rounding out the Top 20 are such well-known names as Dell, FedEx, Procter & Gamble and Southwest Airlines, as well as a few surprises, including General Mills, PepsiCo, State Farm and Wells Fargo.

Related article: How "Exportable" are GE's Leaders?

By Catherine Fredman

As everyone knows, Jack Welch took leadership training very seriously. His alumni went on to head Home Depot, 3M, Albertson's, SPX, Polaris, Primedia, Owens Corning, Intuit and II other companies. Former Welch lieutenant Larry Bossidy himself produced five CEOs during his tenure at AlliedSignal before turning over the company, by then merged with Honeywell, to yet another GE graduate. Throughout the 1990s, GE enjoyed a sterling reputation as a CEO incubator.

But the GE mystique has dimmed somewhat. Questions are being raised about whether the graduates of the GE school can achieve the same success elsewhere. "There are some skeptics about the success of GE alumni," says Tom Neff, North American chairman of Spencer-Stuart. "I hear that the track record isn't great."

Supermarket chain Albertson's stock has slipped 32 percent since Larry Johnston joined in April 2001. Bob Nardelli has boosted the bottom line at Home Depot since taking the helm in January 2001, but the top line continues to disappoint. The greatest disappointment: Former GE Capital executive Gary Wendt was supposed to lead a turnaround at Conseco; instead, he led the company into bankruptcy.

Many GE transplants stumbled when faced with the lack of up-to-the-minute financial data, a tightly tuned operational infrastructure and the results-oriented culture that they took for granted in their former jobs. But does that mean that what works at GE works only at GE? Nardelli doesn't think so. "About 70 percent of the skills that you develop at GE are fully portable," he says.

There are a couple of factors that still give GE executives an edge. The company's structure is designed to give managers maximum autonomy and top-to-bottom accountability for each line of business. Procter & Gamble is a great brand-building factory but, Neff points out, "Manufacturing is someone else's responsibility, so they don't have the fully integrated general manager roles."

Thanks to its broad business portfolio, general manager roles are something GE has plenty of. Executives may have had half a dozen general manager jobs by the time they're 40 years old.

On top of that, GE adds formal management training at its facility in Crotonville, N.Y. "Most of the multi-business conglomerates don't bother with people development," says Noel Tichy, a University of Michigan Business School professor who helped create the training.

The challenge for any GE veteran is to know whether to adapt to a new company's culture or attempt to implement Welchian traditions. Jim McNerney has implemented a Crotonville-style training program at 3M, Larry Johnston is pushing a GE-style performance-based system at Albertson's and Nardelli is putting in place a process to track and develop high-potential managers.

Of course, there's always a degree of cultural resistance to a new CEO who wants to "GE-ize" a new company. And it's well nigh impossible to replicate all the elements of the GE style, such as Six Sigma processes. So it's clear that GE's training works for GE, but the jury is still out on whether the model works for everybody.

This is the second year that Chef Executive has ranked the Top 20 Companies for Leaders. The companies are selected according to three criteria: self-reported information collected by Hewitt Associates on their leadership practices, financial performance data and evaluation by a panel of outside judges. "The Top 20 companies differentiate themselves with active involvement by the CEO and board of directors, a maniacal focus on the highest potential leaders, and programs that link pay, performance and hiring to business strategy," says Marc Effron, head of global leadership at Hewitt Associates.

CEOs who are committed to leadership development benchmark their practices against one another. One debate they have is whether some formalized programs and processes can create too much bureaucracy. That requires a constant balancing act--developing talent without creating decision-making gridlock.

And their strategies for developing talent are different because each CEO has a different strategy in the marketplace. No one size fits all. J&J develops one kind of leader to help run a decentralized company with a consistent culture. IBM is much more centralized, yet needs leaders from different disciplines who can function together. PepsiCo is grooming leaders to help expand into new markets. And General Mills is developing leaders to help integrate two corporate cultures after a merger.

But there is a common thread. All of these leadership efforts are designed to instill values that represent a company's culture. J&J credits its "Credo," a one-page values statement, as being the building block for how it trains leaders. Among other things, it states that J&J must faithfully serve four constituencies: customers, employees, communities and shareholders. It was recently updated to say the company's first responsibility is not just to doctors, nurses and patients but also to "mothers, lathers and all others who use our products and services." The credo is 60 years old, yet Weldon says that to this day executives still consult it. "Everything starts here, with the credo, with the values," the CEO says.

J&J managers have to live up to the credo's standards, as well as make money. Says Weldon: "The values can never be compromised, but the business results have to be delivered. We don't compromise on either."

Once a Johnson & Johnson manager does well at a small division, he or she then heads a larger company, then an even larger one and then perhaps receives a promotion to become one of the 17 group operating chairmen. Weldon believes this decentralized approach provides more opportunity for managers to live up to their potential. "If you have this one centralized behemoth, you either get up there or you don't get up there," he says. "That's it."

Being decentralized also helps with succession planning, something that is never far from Weldon's mind. I le sits through eight all-day meetings a year on the topic with the board of directors. Moreover, he considers it his main legacy. "My son once said to me when I got this job, 'What keeps you awake more at night than anything?'" recalls Weldon. "I said, 'The future leadership of the company, who's going to sit in my job when I leave?' You think about it the day you come into it."

To knit together his top managers and get fresh ideas for solving problems, Weldon has chosen eight business issues and assigned a tears of people to investigate each over a four-to-six-month period, in addition to doing their regular jobs. Each project is headed by a "high potential" person, backed by one or more board-level executives and encompasses as many as 60 senior executives. One initiative is "Perspectives on Globalization," another the "Future of Medicine" and another on the latest global technology centers.

The group interviews the top companies around the world in the field. At the end of the project, they spend a week discussing their findings. "This brings a group of really, really outstanding individuals together who have learned from each other," Weldon says.

Like other CEOs, he believes that successful leadership training requires a human touch from the top. He recalls meeting with one manager to discuss a job offer he had received from another company. "He and I sat down and had a heart to heart," says Weldon. "I told him, 'You wouldn't get that opportunity here."' His personal philosophy: "Honesty. Letting people know they won't get a job. Caring."

IBM's brave new world 

Palmisano's main focus is a top management group of 300 people. It isn't IBM's technology or capital that will allow Big Blue to continue evolving into a company that offers more seamless solutions to customers, says Palmisano. Rather, it's all about his people.

He adds that he and his top managers have debated the ideal way to structure IBM so that representatives from manufacturing, services, software, marketing and sales, finance and research can smoothly come together to solve a customer's problems. But they concluded there is no ideal organizational structure. It has to keep shifting. In Palmisano's brave new world, multidisciplinary groups of employees will come together under a team leader, solve a problem, disband and then join a new team and tackle a new problem.

The reason it's critical to do this, he argues, is that the days of delivering piecemeal solutions, which may or may not be compatible with each other, are over. The disparate parts of the computer industry are reintegrating because customers are intensely frustrated with so much fragmentation. Instead of "15 different things" that customers put together themselves, says Palmisano, customers want IBM to "bring it together." "Our strategy has to have people who can work together as a team," he adds.

Just to make sure nobody misses the message, Palmisano is even paying his direct reports a bonus based on teamwork. He points to Linda Sanford, a senior vice president who is responsible for at least two projects, as an example of the new IBM teamwork. One of Sanford's teams is charged with moving IBM away from proprietary software dependence and toward a standards-based, open infrastructure. Another team Sanford heads is charged with making IBM an on-demand business and wringing $5 billion out of its supply chain. Her team members come from many different divisions of the company. "Teamwork today is more important than 10 years ago," says Palmisano.

IBM's chief is also trying to make sure that what's taught in leadership training is relevant to employees and also gets across the teamwork message. To that end, Palmisano is getting employees to participate in a redefinition of corporate values. He took a first draft produced by his top 300 executives and got comments from a focus group of 7,000 IBM employees.

Then, from July 29 to Aug. 3, he staged a "values jam." All 316,000 IBM employees were invited to participate in an online discussion with Palmisano, broadcast by broadband video. "Think about it in a corporate sense of 300,000 people IM-ing each other like my teenagers do all the time," says Palmisano, referring to instant messaging. "We have these core topics. How would you change? How would you work with customers?"

The updated values statements will become part of the training curriculum. "I feel that in today's environment, if it carne down from the top, the way it did in 1914 at IBM, with 'Business and its Beliefs,' written by then chairman Thomas Watson Sr., employees wouldn't buy in," says Palmisano. "It wouldn't be theirs. It would just be some stupid thing that came from Sam's office."

Growing into the top job

At No. 9 on the Top 20 list, PepsiCo, with $25 billion in sales and 142,000 employees, is using leadership development in pursuit of the company's growth strategy. In 2002, Pepsi, with its Frito-Lay, Quaker, Tropicana and Gatorade brands, saw its net income grow 24 percent. CEO Steven Reinemund's philosophy is that business growth and personal growth are intertwined. "If people don't grow, the company doesn't grow," he says.

Like Weldon and Palmisano, Reinemund credits his predecessors with helping him grow into the top job. One telling example occurred in the early 1990s with then PepsiCo CEO Wayne Calloway. Reinemund picked up Calloway at an airport, and offered him a new kind of low-fat potato chip that Reinemund was developing. Galloway put the chip in his mouth and shook his head. "Well, I wouldn't put the Lay's name on that," he said.

A few months later, the drill was repeated, with an improved chip. This time, Calloway put a chip in his mouth and said, "Yeah, I think this is a Lay's product." Says Reinemund: "It was a very high-impact way to learn that brand was important, that quality was important."

When Reinemund became CEO in 2001, he began a leadership training tradition that built upon what predecessors Donald Kendall and Roger Enrico had instituted. Once a year, Reinemund takes a group of 40 of PepsiCo's best and brightest middle managers on a retreat held at the Darden School of Business at the University of Virginia. The group talks about 27 attributes of leadership, including the spiritual, physical and academic aspects. "They have to leave with a goal that they want to work on," says Reinemund, such as getting in physical shape, receiving financial training or changing their leadership style.

"Successful adults are unlikely to change something unless they are under enormous pressure or the have the tools and reinforcement to change," Reinemund says. A runner for 30 years, he gives the example of jogging with his college-age son, who told him, "your upper body is terrible." They bought a universal gym and his son showed him how to work out, which he did--once. His point: "You may think you want to change, but the odds are relatively low."

Reinemund also uses the time to expose PepsiCo's directors to his up-and-corners, and vice versa. PepsiCo directors speak at the training retreats, including Fannie Mae Chief Executive Franklin Raines and former Sears CEO Arthur Martinez. "It gives the directors a chance to see what talent we have," Reinemund says. "The board is much more involved in executive development as a result."

At General Mills, leadership development has helped to integrate the company after its merger with Pillsbury in 2001. The merger doubled the company's size and presented the challenge of meshing General Mills, maker of Cheerios, Hamburger Helper and Betty Crocker, with Pillsbury, producer of chocolate chip frozen cookie dough and Green Giant frozen vegetables.

The $10.5 billion company's commitment to leadership training has smoothed the transition because it imparted a corporate culture. "We believe very strongly that [leadership development] not only drives our business, but drives the culture that supports our business," says CEO Stephen W. Sanger. "It determines the outcomes we care the most about."

One interesting twist is that General Mills encourages employees to do volunteer work with local nonprofits. Some 70 percent of General Mills employees are volunteers and the General Mills Institute, the in-house training arm, even helps employees find their nonprofit niche. The company sees volunteering as a way to get experience as a manager and stay in touch with consumers. "It starts with a central belief that community service is highly developmental and highly valuable," says Sanger.

Sanger also has two personal initiatives that are bridging the cultural divide between General Mills, with its greater expertise in dry and hot foods, and Pillsbury, which is more familiar with frozen foods. Sanger has committed himself to speeding up decision-making and to improving cross-boundary teamwork. Employees complained about both in an employee feedback survey last year.

Sanger's goal is to develop--and retain--great people. General Electric is not a role model for him. "We are not in the business of training great leaders for other companies," says Sanger.

Differences aside, the best CEOs feel they have to be involved in grooming the next wave of leaders. The era of the CEO as Lone Ranger is long gone. In companies of any size, some formalized methods of training and evaluation are seen as essential. And one conviction appears universal: Companies that don't take leadership development very seriously will be, sooner or later, at a severe disadvantage in the marketplace.

Palmisano on Leadership

Why is leadership training so important?

A lot of running a company is the leadership and the people, as much as it is good strategy and analytics, and good management systems and processes. It really gets down to the people who are driving the businesses for you, how they work with the customer and how they establish the strategy. You can't separate out the human factor.

What do you do that's unique?

We do not separate out executive or leadership development from the strategy. We absolutely book the strategy, and then based upon the strategy, we start building the executive teams.

Is it fair to say, in the past, that CEOs just paid lip service to leadership development?

I talk to most of the leading CEOs around the world. Most of us think the same way on leadership. You can't find anybody today who doesn't understand the importance of having a very strong team and developing that team over a sustained period of time. I can't name anyone who doesn't this is absolutely core and central to the execution of the business strategy.

Why is it such a hot topic at this moment?

The world has changed. More and more, the strategies tend to be based on intellectual property and human innovation. In the old days, your assets and your capital dictated success. That still may be true for some industries.

But increasingly it's not who has the most assets or the best capital structure. It's about having an innovative strategy. That competitive advantage is driven off of people--their thoughts, their ideas, their innovation. As a result, leadership takes on a whole different dimension.

In view of the new industry climate, what new characteristics do your senior team members have to possess?

The industry is reintegrating because customer behavior is changing. They don't want to take 15 disparate pieces of things, called technology, and put them together themselves to make it work.

If the industry is reintegrating, your strategy has to have people who can work together on a team. It's a whole different set of competencies.

For a more complete transcript, go to www.chiefexecutive.net.

How the Winners Were Chosen

For a second year, Hewitt Associates, a global human resources outsourcing and consulting firm, conducted our Top 20 Companies for Leaders survey. The research highlighted the key factors that differentiate the top companies, and identified companies that consistently produce great leaders. Human resource executives representing 320 major companies nationwide participated in the study and approximately 60 finalist companies were selected and interviewed.

Responses were analyzed based on several measures, including the breadth and depth of leadership development practices, degree of senior team support, performance management practices and company financial performance. "The methodology is not intended to be a formula or scientific, but to give the judges some direction as to how they might evaluate the companies," says Hewitt Practice Leader Marc Effron.

Chief Executive picked five judges to make the final evaluations. They were Judy Dobrynzski, managing editor, business news, CNBC; Marshall Goldsmith, executive coach and author; Rakesh Khurana, assistant professor, Harvard Business School; Robert Mittelstaedt, vice dean of executive education at the Wharton School, University of Pennsylvania; and Jeffrey Sonnenfeld, associate dean, Yale School of Management. The judges gathered in New York for a five-hour judging session.

The judges debated each company's strengths and weaknesses. The final order of the Top 20 companies was determined by the judges. To force agreement on the ordering of top companies, each judge was asked to distribute 100 points among his or her three most highly regarded companies. The result was a tie between IBM and J&J.