Sunday, February 10, 2013

What’s the Optimum Number of Direct Reports for a CEO?

Gary Neilson and Julie Wulf wrote in the Harvard Business Review (2012) that “if senior executives are feeling ever-increasing pressure on their time - and few would suggest that’s not the case - why would they add more to their plates? It seems counterintuitive, but according to our research into C-level roles over the past two decades, the CEO’s average span of control, measured by the number of direct reports, has doubled, rising from about five in the mid-1980s to almost 10 in the mid-2000s. The leap in the chief executive’s purview is all the more remarkable when you consider that companies today are vastly more complex, globally dispersed, and strictly scrutinized than those of previous generations.” 
Part of the increase is due to functional roles now being considered much more important today than they were twenty to thirty years ago; when some roles which were considered ‘administrative’, like human resources and IT, often reported through to the Finance Director, rather than directly to the CEO. 
Gary Neilson and Julie Wulf highlight how “new CEO’s in particular are taking on a broader array of responsibilities as they seek a comprehensive understanding of the business and as new technologies allow them to reach more people more directly. But over time - once they attain a steady state - they gradually reduce their span of control until the number of reports approaches the old norm.” 
Executive roles have also changed in many organisations from the once ‘myopic’ functional roles, to where some CEO’s today are ‘developing’ key executives, giving them significant responsibilities outside of their official jobs - with projects meant to expand their functional skills and individual development. Ian Read, the chairman and CEO of Pfizer, shifts responsibilities among his leaders to foster individual and team development. “I try to look for ways to help top individuals bond as a team, so if I’ve got somebody running a business unit, I might also charge him with running a cross-functional team looking at sustainable cost-reduction ideas. Or I’ll ask a functional leader, like our general counsel, to take the lead on a business issue such as our strategy in India, working closely with our head of emerging markets and his team. I recently moved oversight for the nutritionals business from one executive, asked that leader to oversee our corporate strategy, and asked a functional head to lead nutritionals.” 
Gary Neilson and Julie Wulf found that “timing wields a significant influence when it comes to designing the structure at the top. The length of your tenure matters. You might think that as you gain experience, you should broaden your purview - that the more experience you have, the more you should directly control. In fact, the opposite is true. For any senior executive, the first year on the job is a time for learning and assessing. New CEOs are likely to expand their span of control as they set their strategic agenda, evaluate existing talent, get up to speed on all aspects of running the business, and, oftentimes, undertake transformational programs. The span of control is typically highest at the start. As they gain experience and enter the steady state of running the organization, CEO’s begin to reduce the number of direct reports and adjust the mix. At this stage they take a relatively hands-off approach to many aspects of the business.” 
Of course it’s not simply the number of reports that is the key but the capability of the people in those positions. Through the years there has been a ‘tradition’ to have a certain structure with certain ‘key roles’ covering the functional requirements of the business and then having drawn up the ‘bog standard’ organisation chart – it was just a matter of filling the boxes with people. 
But in reality it goes way beyond this, where the CEO needs to know that his executive team are diversified and talented enough to ensure that the long term strategy is constantly being challenged and the focus is on sustainable growth. Executive ‘clones’ will not challenge the status quo and hence numbers of reports in this instance become meaningless – where the structure can be ego driven rather than operationally driven. 
Further you want an executive team that can work together optimally, where more in numbers will not always mean more ‘in output’ if the ‘team’ isn’t wired together and personalities become more important than operational performance.  
Gary Neilson and Julie Wulf also found that “on average, four out of five positions added to a Fortune 500 CEO’s span of control in the past 20 years have been functional specialists rather than the more traditional pick - the major business-unit head.” 
In the right hands increasing the number of reports makes sense, as human resources and IT should always be an executive role and organisations that still see HR, for example, as nothing more than an admin function are missing out on optimising their growth through their talent management and development. There has also been a move away from the COO and this ‘number two’ role, where more modern organisation structures rotate the deputy role when the CEO is away, giving the whole executive team exposure to sitting in the CEO’s seat – it’s good for development and good for team cohesion. 
In conclusion Gary Neilson and Julie Wulf suggest that CEO’s “take a look at the more mature areas of your business and consider consolidating some of the activities under a few strong leaders. Ask yourself if you are spending sufficient time and attention helping the organization execute a forward-looking strategy. Too many leaders populate their team with the usual suspects - the same roles that have always reported to the position - and include different roles only if there is some room. Our advice is to turn this logic on its head: Start with the capabilities and roles needed to push your strategy forward.” 
Neilson. G.L. and Wulf. J. (2012) How Many Direct Reports? Harvard Business Review. April

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