The Top 20 Companies for Leaders: CEOs explain how they got on the list -- and why they're likely to stay there. (Cover Story).

"I have always believed that investing in people is the strongest investment you can make," declares Home Depot Chairman and CEO Bob Nardelli, wrapping up a 100-word-a-minute oration about leadership development. It's one of his favorite topics, and the passion he brings to it is one reason that The Home Depot nailed the No. 4 slot on our list of the Top 20 Companies for Leaders. "As we create aggressive strategy and operationalize it, we have people who possess or [can] acquire the skills to implement it. That's the differentiator for us."

Once viewed as a touchy-feely topic relegated to the human resources department, leadership development is now seen as a business tool that gives companies a competitive advantage. To find the companies where it matters most, Chief Executive teamed with global human resources consulting firm Hewitt Associates to identify the Top 20 Companies for Leaders. A panel of judges selected those who made the list, choosing from CE and Hewitt's survey of 240 major companies (see "How the Project Was Put Together").

The Top 20 are recognized for what some call "the leadership brand." Marc Effron, who co-directed the project and heads Hewitt's leadership practice area, defines the term: "Are you known as a company that will develop and produce great leaders? Will you be able to attract the best? If you have a great brand, people will be banging on the door to work [for you] because they know they will have a great experience.

To build a leadership brand, companies follow several key principles. Above all, they're committed to the cause. Often that requires a sizeable investment of time if not money, and constant, informal coaching as well as formal training programs and annual leadership forums. These companies clearly define what they're looking for in up-and-corning leaders and generously reward those who measure up. And they recognize that leadership development must be tailored to individual companies; one size doesn't fit all.

Companies that spawn leaders boast alumni who run other successful firms. The leadership brand is the reason that General Electric, for instance, is pure catnip to executive recruiters: At least 10 sitting CEOs of public companies, including Nardelli and Honeywell's David Cote, are graduates of its Croton-on-Hudson training center. Peter Crist, vice chairman of executive search firm Korn/Ferry International and one of the deciding judges for this list of 20, ticks off other companies with bench strength to spare: Kraft (a division of Philip Morris) alumni now occupy the corner offices at Gillette, Hershey Foods, Sears and Mattel; AlliedSignal, now Honeywell, peopled the top slots at PerkinElmer, Raytheon, Great Lakes Chemical, American Standard and Thermal Electron. IBM and Citigroup are also plentiful providers.

Microsoft is an equally powerful talent magnet, celebrated for attracting smart people, throwing them at tough challenges and rewarding them for their achievements. Microsoft alumni may not be seeding the executive suites of Fortune 500 companies, but that only proves Microsoft isn't developing corporate leaders in the traditional mold. "If there were a list of the 500 best entrepreneurial firms out there, you would probably see a lot of Microsoft alumni," says Effron.

Whether they're funneling talent to start-up firms or the country's largest corporations, companies known for incubating tomorrow's CEOs maintain a virtuous circle composed of four equally crucial and interrelated steps. They hire great talent; make sure that talent is aligned with the company's culture, objectives and strategy; develop that talent aggressively; and reward the talent significantly.

The engine is the company's degree of commitment. Consider the statistics that came out of the CE/Hewitt leadership study: 91 percent of the top 20 companies have a process for early identification of leaders, compared with 61 percent of the overall group; 82 percent of the top companies have formal mentoring programs, compared with barely half of the firms in general; 73 percent of the best sponsor coaching relationships, compared with 41 percent of the rest. "You start to see a more consistent use of best practices," Effron comments.

The CEO, meanwhile, provides the high-octane fuel. "The written process exists in just about every company, admits Honeywell's Cote. "How robust your process is, is a function of that starting at the top."

Here's how he--and other chief executives--won their place in the Top 20.

Hire right from the start

It's been said that leadership development takes more time than money, and no one would agree more than Southwest Airlines President Colleen Barrett. "We have always spent a disproportionate amount of time on initial hiring decisions," she says. It takes a minimum of three interviews to land even an entry-level position at the company. People skills trump technical experience whenever practical, and it's up to the manager to decide whether the candidate has the right attitude. Bringing on the right people in the first place helps Southwest avoid corrective measures later on.

Similarly, Microsoft candidates undergo rigorous examinations designed to dissect not just the depth of their technical know-how and problem-solving skills, but also how well they interact with potential team members. The idea is that a job may easily change or disappear in a dynamic company, so the employee has to be able to scale up to other jobs, in other groups and with other sets of people.

In other companies, the leadership screens are set in place a little later. At Colgate-Palmolive, senior managers are trained to spot future stars after their first promotion from entry positions. "These are people who deliver results consistently, people we see developing the skills and behaviors we judge necessary for a senior position," explains Ian Cook, president of Colgate North America. "By identifying people early in their careers, we are beginning to stage the next two to three generations of Colgate leaders."

Match the culture to the strategy

Even companies that excel in spotting future stars need to offer a corporate culture that gives them the language and behaviors to fulfill strategy. More companies are offering those lessons in a structured format, according to a recent survey by the American Management Association. It found that companies spend the largest portion of corporate training budgets on leadership development, and that the average number of managers participating in earmarked development programs has soared 45 percent over the past five years.

One of Nardelli's significant steps upon moving into the corner office was to implement a new initiative linking strategic operations and leadership development. The 225 candidates in the store-leadership program spend two years in a structured curriculum, rotating through a different division every four months in a combination of hands-on experience and core classroom learning. Each candidate is supervised by a mentor as well as by a program leader in each division to facilitate a smooth assimilation into the company's culture. "You can't invest enough in the selection, in creating a learning environment and then continuing to nurture that with mentorship," says Nardelli. "We make sure the individual has every opportunity to be successful with candid, constructive feedback--no winking, no blinking. It's fair to them and it's a requirement for us."

Nardelli distinguishes between training and learning, as does Honeywell's Cote: "Training courses are an interesting adjunct, but they're the tail wagging the dog. Leadership development is the way you act, something you do every day."

Everyday actions include coaching that is so constant as to be baked into management behavior. Managers are clear about Honeywell's leadership model, about identifying what causes people to succeed or to derail, and then leveling with those people in a very candid appraisal. "I don't think a meeting goes by where there isn't some assessment of the people in the meeting," says Chairman and former CEO Larry Bossidy. "Forget what the subject was. That goes on day after day after day."

Develop talent aggressively

Companies that know how to develop leaders throw strong candidates a good deal of responsibility early on. At Colgate-Palmolive, high-potential candidates are quickly plucked from a local position and pushed into global postings. Cook's career as a Colgate lifer illustrates the company's determination to constantly strengthen its management bench through a combination of global job opportunities and personal development.

After joining a marketing division of the firm in 1976, the British-born Cook spent six years getting European exposure from the company's base in England. He then moved to New York to work with a new global business development group interacting with management and research and development. His passport has been getting a workout ever since: three years in the Philippines as marketing director; 18 months in the Dominican Republic as general manager; a stint in Colorado to help integrate a newly acquired business; off to Copenhagen to lead Colgate's Nordic division; then back to the United States, first as the head of marketing, then directing U.S. operations and, most recently, leading the North American division.

What Cook learned in Colgate's leadership development program continues to shape him today. 'You pick up a sensitivity and a real ability to listen," he says. "It's easy to lose both along the way, the more senior you are in an organization."

Like Cook, Paul Otellini is a product of one company's leadership development program, having joined Intel when he graduated from college 28 years ago. After starting in finance, he moved to marketing, then to a position as general manager. He was recently appointed president and is CEO Craig Barrett's designated successor. "We've always encouraged horizontal movement to continue learning, by making sure the jobs are available to people," he says. "Ten percent of our population changes jobs [within the company] every year."

Intel is famous for developing its managerial talents in house, rather than bringing in leaders from the outside. Barrett is an exception, but he worked with Intel for many years as a consultant before becoming its chief operating officer. In fact, 90 percent of managerial promotions are from internal candidates. "When you have that kind of continuity, you have not just a depth of experience but a depth of interrelationships and comfort that's unparalleled in the industry," Otellini says.

Reward significantly

It should come as no surprise that companies that allocate premium salaries to high performers top the leadership development charts. People who aspire to be leaders are ambitious; if they're not recognized for their contribution at one company, they'll switch allegiance to one where they are. "Your best people produce in value 100 percent to 150 percent more than average performers," calculates Bob Gandossy, Hewitt's global practice leader for people value management. "If they see only 5 percent pay increases, it's not particularly motivating."

But when they are motivated -- and appropriately rewarded -- the value such high performers contribute to a company's bottom line can be impressive. According to CE/Hewitt statistics, firms that significantly differentiate pay between average and high performers in the same position racked up shareholder returns of 24.5 percent over three years, while egalitarian firms posted 17 percent over the same period.

Surprisingly, though, only 42 percent of the firms participating in the overall survey identify high-potential leaders. And of those that do, 20 percent don't give promising individuals special attention and more than half don't even tell them they're considered to have high potential. "What an incredibly wasted opportunity," says Effron. While a company might refrain from spotlighting an above-average employee for fear she'd jump ship, ignoring her skills guarantees that she'll make the leap sooner rather than later. On the other hand, Effron points out, smart companies are defining and widely publicizing those behaviors that push an employee into the rising star category.

IBM, for example, evaluates its leaders on 13 competencies, including such innate traits as decisiveness and breakthrough thinking, as well as learned behaviors such as customer insight. Each leader has a responsibility to renew the organization, so he or she is also assessed on coaching and teamwork. An elastic compensation scale rewards the top 10 percent by as much as four times more than the bottom 10 percent.

Dell recently revamped its compensation system to tie its managers' rewards to their leadership development performance. By using employee opinion surveys, as well as prescriptive measures about how often they meet with their direct reports and how many formal mentor relationships they maintain, Dell can glean enough metrics to assess not only what they do but how well they do it. "We pay in base salary, bonus and stock options," says Paul McKinnon, senior vice president of human resources. The difference in compensation between high and median performers can be 30 percent or more.

Colgate-Palmolive, in keeping with its desire to perpetuate its homegrown culture, links its managers compensation to body count. "One of the key criteria for our long-term incentive plan is a 90-percent retention of all high potentials," says Cook.

At FedEx, a process called "survey feedback action" yields a numerical "leadership average" that accounts for between 40 and 60 percent of compensation. "If you're looking to have some skin in the game, there's definitely some here in the way these programs are structured," says Larry McMahan, vice president of human resources, performance and support.

Involve the CEO

Here's a typical day's schedule for Nardelli when he's visiting one of Home Depot's eight divisions: a 7 a.m. meeting with the division president; a meeting with the executive staff to talk about their individual organizations, with a focus on high-potential candidates for career development; two 45-minute lunches with each group of 25 to 30 associates tapped as emerging talent; then a town hall meeting with 260 to 300 store associates. "My involvement is critical," says Nardelli. "It allows me to be the thumb on the pulse of what's happening on the ground with training associates, their development opportunities and the resource redeployment for them."

Colgate's Cook is another high-touch executive. "I know 500 people by name and have in my head the development plan we have laid out for each of them," he boasts. "In my travels around the U.S., I would venture to say that I know most of the people in the organization by face and by name."

For these executives, like the others heading up the 20 companies on our list, the time and effort they put into leadership development has a direct impact on the bottom line. The CE/Hewitt study reveals that in S&P 500 companies whose CEOs are actively involved in talent management, shareholders were rewarded with average returns over three years of 22 percent. By comparison, during the same period, returns of the others were -4 percent.

There's no such thing as a one-size-fits-all leadership development program. The companies that are most successful at developing leaders apply the same tools and techniques that everyone else does but in ways that support the company's specific role of the leader, says John Cone, founder of Dell University. "They focus on what works best for their culture and strategy."

Centex learned that lesson firsthand. "We started thinking [about leadership development] three or four years ago," recalls CEO Laurence Hirsch, "and kind of couldn't get it right." Initially, Centex worked with management consultants and looked at the leadership development programs of large companies known for producing top leaders. But this approach failed to develop a program specific enough for Centex's philosophy and needs.

The Dallas-based building services company is extremely decentralized, to the point where its 15,000 employees have "dual citizenship"--a responsibility to their individual operating company and to Centex as a whole. As a result, leadership development is informal at the operating level, where it is tied to the specific operating needs of the company, and offers formal forums only at the corporate level. Managers know that building a talent pool is as much a core competency as is creating strategic advantage or championing change. This approach, says Hirsch, "enables us to foster an environment of doing, and doing is the best leadership development program you can do -- having people out there with a lot of responsibility."

In his forthcoming book, Helping Successful People Change, executive coach Marshall Goldsmith warns CEOs to beware of blindly modeling their company's leadership development strategy after one that has succeeded at another company. "There's been too much copying," he says. What works well at one company may not work at yours, he warns. "Try to look at what they do, figure out what works and what doesn't, and rigorously figure out how that works in your own culture," he says, cautioning companies to use benchmarks "as a guideline, not gospel."

The heart of leadership development is not in learning institutes, training courses or programs. It's not in brick-and-mortar structures, but in the way a company's leaders live on a day-to-day basis. "It's about having architecture in which the line executives cause things to happen in an orderly way," says Stephen Drotter, co-author of The Leadership Pipeline (Jossey-Bass, 2001). "It requires tremendous repetition--you do it over and over and over. And it doesn't stop when you master the skill of the moment. There's always more.

And, as the CEOs of the Top 20 Companies for Leaders would agree, too much is never enough.

Send comments to CE at [e-mail].

Where Tommorrow's CEOs Are Being Trained

      * Total
      Shareholder
Rank  Return       CEO              Company

 1    26.89        Sam Palmisano    IBM
 2    26.25        Steven Ballmer   Microsoft
 3    21.15        Jeff Immelt      General Electric
 4    36.0         Bob Nardelli     The Home Depot
 5    52.27        Michael Dell     Dell Computer
 6    18.45        Frederick Smith  FedEx
 7    24.72        Henry McKinnell  Pfizer
 8    21.71        Reuben Mark      Colgate-Palmolive
 9     9.33        Louis Camilleri  Philip Morris
 10    6.41        James Keyes      Johnson Controls
 11    8.77        John Browne      BP
 12    1.85        David Cote       Honeywell International
 13   27.85        Charles Cotros   SYSCO
 14   25.46        Laurence Hirsch  Centex
 15   14.17        Craig Barrett    Intel
 16   28.67        Sandy Weill      Citigroup
 17   34.19        Robert Ulrich    Target
 18   33.75        Jim Parker       Southwest Airlines
 19   11.34        Iven Seidenberg  Verizon Communications
 20   30.82        Scott McNealy    Sun Microsystems

* The return that a shareholder realized through stock-price
appreciation and divedend reinvestment for the five-year period ending
December 2001.

RELATED ARTICLE: How the Project Was Put Together

TO CREATE THE TOP 20 COMPANIES FOR LEADERS special report, global human resources consulting firm Hewitt Associates began by conducting a survey to explore the organizational levers that contribute to leadership strength and depth. The purpose was to identify companies that attract, develop and retain leaders. It was also to bring to light the programs, policies and procedures that lead to well-honed leadership development processes and a strong reputation. Human resources executives and CEOs representing 240 major companies nationwide were surveyed. Their responses were analyzed based on several measures, including net income (allowing both private and public companies to be considered), reputation and human resources programs, and practices. The list of possible organizations was narrowed to approximately 80, from which a panel of judges, selected by Chief Executive, chose the Top 20.

Nine Things CEOs Need to Know About Leadership

These are the judges responsible for selecting this year's Top 20 Companies for Leaders. Here they offer ideas for executives.

1 "There's no question, companies that are committed to developing good leaders attract good people. Even those who leave the company spread the word after moving on." --William A. Cohen, professor of marketing and leadership, California State University in Los Angeles, Maj. Gen. USAFR Ret. and author of The New Art of the Leader.

2 "[Leaders] try to engage employees at a level where they actually transform themselves to make things happen that would not have been possible with just ordinary employees." --Jay Conger, professor of organizational behavior, the London Business School and author of Building Leaders.

3 "The key issue is that the board of directors and the CEO must embrace leadership development as a business tool. They must espouse it, invest in it and view it as a necessary competitive advantage." --Peter D. Crist, vice chairman, Korn/Ferry International, an executive search firm.

4 "Everyone in a leadership position takes responsibility for developing the people under them. They're measured on it, rewarded on it and own it. There is no substitute for it." -- Stephen J. Drotter, president, Drotter Human Resources and co-author of The Leadership Pipeline.

5 "The leader is a person who does not do it himself. The leader is a person who works with and through others to achieve a vision." --Marshall Goldsmith, founding director of leadership development network Alliance for Strategic Leadership and co-editor of Coaching for Leadership.

6 "Leadership is creating an impression of yourself and your company that other people want to emulate." --Russell S. Reynolds Jr., chairman and CEO, The Directorship Search Group, an executive search and consulting firm.

7 "The tough aspect of leadership development is reflection and feedback. No matter how great you are, until you sit back and figure out how what you've learned makes sense for you and the company, you won't develop as a leader." --Lt. Col. Scott Snook, Academy Professor, Department of Behavioral Sciences and Leadership, the United States Military Academy at West Point and author of Friendly Fire.

8 "Strong [CEOs] create effective followers not through fear and intimidation but through realistic performance appraisal and risk-reward applause." --Frederick W. Wackerle, executive coach and corporate board adviser and author of The Right CEO.

9 "For decades, we have talked about the traits of successful leaders and tried to find ways to develop those traits. But I would say that's only half the equation. Leaders can look pretty, talk nice and dance well, but if they don't get results, they're not good leaders." --Warren Wilhelm, president, Global Consulting Alliance, a human resources management firm, and author of the forthcoming Learning Architectures.