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Think talent. Businesses anywhere would do well to dig deep for this X factor than keep on chasing shareholder returns at any cost.

No one will dispute this sentiment, but when the person making the earnest pitch is Dominic Barton, Global Managing Partner at McKinsey & Company, one sure needs to take a bit more notice.

“Just to be clear — we are not saying that businesses should not care about shareholder returns,” said Barton. “I think the issue is when they focus too narrowly on short-term returns, to the exclusion of other things that are very important to long-term success, such as their innovation rate, organisational culture, and the quality of their talent pool.

“Too many boards and leadership teams deprioritize investing time and resources in the health of their talent pipeline. If you believe that talent is the most important source of lasting competitive advantage, then this hurts the company’s performance in the long-term.

“Outstanding young leaders do not want to wait decades to take on real responsibilities and work their way up rigid career ladders. Companies that want to attract and retain leaders will need to respond to these preferences if they want to win the increasingly heated war for talent.”

Barton has just brought out a book — “Talent Wins” — co-authored with Ram Charan and Dennis Carey on why corporate chiefs, boards and managements need a rethink on where they should place talent in the overall scheme of priorities.

“What we say is that boards need to shift their time from the traditional definition of “TSR” — total shareholder returns — to a new TSR — talent, strategy, and risk,” Barton insists. “When we survey board members, we find that they themselves do not think they spend enough time on these areas — particularly on talent.

“The most important ally for a CEO who is trying to drive more focus on talent is a board that is equally committed to talent as a driver of the long-term success of the company.

“In his recent letter to CEOs, (Chairman and CEO of the US fund management giant BlackRock) Larry Fink urges them to develop a long-term strategy and to focus on benefiting all stakeholders — including shareholders, employees, customers, and the communities in which they operate.

“As investors continue to become increasingly focused on metrics beyond just shareholder returns, I think companies will start to shift their compensation schemes in that direction as well.

“Many compensation systems focus too much on short-term returns — I do think we are starting to see a shift on this front.”

Barton’s book tells businesses of the need to create extremely mobile talent units to have a crack at specific issues. “As the lifecycles for strategies and products gets shorter across many industries, companies need to be able to form, disband, and re-form teams focused on specific missions,” he adds. “Rather than have individuals in static roles that do not change very often.

“That is exactly why more dynamic talent allocation is important. This is not about having the same team trying to crack every problem.

“Many companies already do some form of this with cross-functional project teams, but there are organisations like ING and Haier that have taken this concept much further and have completely done away with the traditional hierarchical structure to fully empower these teams.

“Over the last nine years, I have met with an average of two CEOs per day, and one question I always ask them is “What advice would you give to yourself as a new CEO, based on what you know now that you didn’t then?”

“By far the most common answer to this question is that they would have focused more on talent — they would have moved people out of roles more quickly, they would have promoted talented young people earlier. And, overall, would have spent more time on people issues than they did.

“What they have lacked is a clear playbook for how to do this in a way that is fully integrated with their strategy and financial capital allocation.”

BOX

Even M&As need to be careful about managing talent

Don’t ignore the talent in any M&A play. “The old ways of running businesses and pursuing M&As need changing — and the trends pushing the change are not going away,” says Dominic Barton at McKinsey & Company. “Once upon a time, it was enough — and it was possible — to know where your industry was headed. But now, thanks to technology, your next competitor could come from anywhere — so understanding, recruiting, and integrating talent from the world beyond the walls of your own company is critical.

“We talk about the importance of talent-driven M&A, including using acquihiring strategy that are becoming standard at tech companies that need to pivot quickly from one technology wave to the next.