Illustration by Jordon Isip

WHEN JOSEPH GALLI ANNOUNCED he was leaving Black & Decker after almost two decades to become president of Amazon.com, it was news. It was news again when he left Amazon.com to become president and CEO of VerticalNet Inc., and yet again when he jumped to Newell Rubbermaid. Hidden behind such increasingly familiar headlines is an emerging crisis of leadership that will only grow in size in teh years to come

As recruiters for officer-level talent for technology-based companies, we have been early witnesses to this phenomenon. The blistering demand for top-notch corporate leaders has been a boon for our industry, but it has turned the hunt for executive talent into a zero-sum game for many companies. A shuffling and reshuffling of the leadership deck means that when one company lands a quality executive, another loses. Worse, this does not appear to be a temporary blip.

Some numbers will help to define and quantify the problem. To start, there are more businesses today than ever before, and more large businesses. In the United States alone, according to Dun & Bradstreet, business startups have averaged about 3,000 a week for three years. Of course, many of these companies are small, and many will ultimately fail. But lots of small companies bloom into industry titans (like Cisco, barely 15 years old). Back in 1971, the New York Stock Exchange (NYSE) listed fewer than 1,400 companies; the fledgling NASDAQ exchange, just over 2,800 companies. Today, the NYSE lists just under 3,000 and the NASDAQ nearly 5,000. That increase comes despite an unprecedented wave of mergers and acquisitions over the past 20 years, as American industry struggled to streamline operations.

Recruiting for big-dollar, high-prestige executive jobs was once a clubby affair, where relationships, especially those among Ivy League elites, counted for a lot. More often than not, though, companies looked inward, preferring to draft new corporate leaders from their ranks. Succession planning—the idea that a Fortune 500 company could groom prospects internally and follow an orderly plan of senior executive replacement—made sense.

No more. The growth in the number of companies, and therefore in the number of leadership positions, along with the ease with which corporate upstarts can use venture capital and stock options to lure seasoned executives away from established companies, has made relying too heavily on grooming from within a risky business. Even with the economy settling back into a more normal rate of economic growth, the situation will only get worse because corporate growth is only part of the problem.

SHRINKING POOL OF EXECUTIVES

A second, more ominous dilemma is America’s dwindling cadre of seasoned corporate executives and the prospect that in the future there will be no one around to take their place. Forget about the World War II leadership generation. They are retired and no longer an effective force. But worse, so is the generation behind them, the Baby Boomers. As a group, they are just now assuming responsibility for running corporate America. But even this sizable and relatively young group—the oldest of the 76 million boomers turned 54 in 2000—has peaked. According to the Census Bureau, immigration during the Boomer years has failed to offset deaths, and the Boomers’ ranks are shrinking for the first time in history. Recent estimates indicate that there were 100,000 fewer Baby Boomers alive in 2000 than just a year earlier.

These demographic trends affect the size of the workforce generally, but another trend aggravates the situation for corporate leadership positions. Despite the large number of Boomers who moved into corporate ranks, many yearn for another kind of life. The Boomers are the best-educated cohort in U.S. history, with a deep admiration for art and the intellect. 

The combination of these factors has sent a sizable—and growing—number of Boomers into nontraditional pursuits. Many of them, given the opportunities provided by an early retirement package, a sizable inheritance, or a golden parachute, are willing to bail out of corporate life. Their path to self-realization may lead to a late-life acting career, an entrepreneurial pursuit, a position with a charitable group, an academic institution, or some other nonprofit organization. In short, Boomers have more options, and the net result is fewer competent leaders for American business.

What about Generation X? The leading edge of the Gen Xers has yet to make it into the 38- to 48-year-old age group generally thought to be grist for the leadership mill. And there are just too few of them (remember this is the “baby bust” generation) to make a difference even as they get older and more experienced. No matter how the numbers are parsed, the conclusion is the same: The U.S. faces a 10-year or longer period during which the ranks from which it recruits its leaders will grow smaller and smaller.

All of these trends make the search for the “best and the brightest” leaders neither cheap nor fast. “Internet speed” may be the business catchphrase of the moment, but it has little to do with the recruiting process. It is not at all uncommon to see critical executive positions going vacant for six months to a year, sometimes longer. The true cost of these leadership blackouts never appears as an expense line item in a P&L—Failure to Hire New CEO in a Timely Manner … Cost: $14,357,000. These costs—lost opportunities, decline in corporate morale, missed initiatives—are hidden, camouflaged in a sense, as “revenue misses,” “cost overruns,” and “unexpected charges.”

INCREASING THE ODDS

The root causes of the executive gap are far too complex and pervasive for any fast and easy fix. There are, however, a number of strategies companies can employ to improve their individual chances of winning the “war for talent.”

To start, companies must cast a wider net. They must look beyond the traditional cadre of candidates, including actively promoting women and minorities to executive positions throughout the organization. They must also encourage the outside recruiters whom they retain to seriously target these groups. Ironically, pure economic necessity may prove successful where years of social, legal, and legislative initiatives have failed in opening the upper echelons of business to women and minorities.

To recruit effectively from the ranks of nontraditional candidates, companies must develop the skill of recognizing leadership ability in those who have never really led—at least at the level of the job they are being screened for. Looking further down the leadership bench—or even down into the minor leagues, to extend the sports analogy —will expand the prospect base by including people who, in a different era, simply would have been overlooked. The key to recruiting success in this environment is pattern recognition, or the consistent ability to spot inchoate leadership traits. Can it be done? Yes. Easily? No. But the company that refuses to try does so at great peril.

Casting a wider net also means looking to older candidates, who in an earlier, less-demanding era would have been thought of as over-the-hill. “Pasture recruiting,” to coin a phrase, makes sense at a time when people are living longer, healthier, and more vigorous lives.

Companies also should think globally, not only for new customers and production but also for managerial and leadership talent. A corollary to global recruitment is rethinking the headquarters concept. In an age of cell phones, Palm Pilots, teleconferencing, and nearly nonstop business travel, is it necessary for a CEO to live in the city where his company historically has maintained its headquarters? Probably not.

Finally, companies can change the nature of their relationships with recruiters. Today, those relationships are typically one-way, short, and transactional. They need to become two-way, long-term, and relational.

The human resource departments of most major companies have responded to tighter labor markets by spending more time and money developing ongoing recruitment programs for low-level administrative and mid-level managerial positions. They establish relationships with employment agencies and headhunters and dispatch teams of recruiters to colleges and universities, job fairs, and career seminars. They maintain vast files of previous job applications and resumes, regularly post job openings on their Web sites, and tap the resources of larger Web-based recruitment services. In contrast, senior-level recruitment is episodic, all too much like trauma medicine, in which the short-term survival of the patient—the company—is paramount. Recruiting under pressure almost always leads to expedient rather than judicious hiring—quick fixes that rarely work out.

Regular planning sessions that include senior executives, the board of directors, human resource staff, and the outside recruiter would greatly reduce the need for trauma medicine. Planning should include careful attention to cataloging the experience, skills, personality, and leadership style needed for each position at the top of the organizational chart.

The more familiar an executive search firm is with the corporate culture and the specific needs of its client, the more successful it will be in finding the right candidate for the job in the shortest amount of time. We have begun to see this emphasis on planning in the private-equity world, where the dearth of management talent has grown so severe that venture capital firms are forming close affiliations with executive recruiters, sometimes even bringing them in-house.

The leadership gap is real and it is growing. Companies of all sizes and in all industries are feeling its harmful effects, though dampened recently by a generally booming economy. Companies must acknowledge this problem and make the improvement of their internal and external recruitment practices a top corporate priority.

Mel Connet, MBA ’85, and Jane Carmena are partners at Menlo Park, Calif.–based Connet & Company (www.connetcompany.com), a global executive search firm focused on officer-level searches in the technology industry.