The carnage caused in the financial markets by the sub-prime mortgage meltdown isn’t just hurting those at the intersection of Main and Wall Streets. It’s reaching deep into corporate boardrooms, as accountability for hundreds of billions of dollars in risky loans comes home to roost. Stanley O’Neill and Charlie Prince are only the first CEOs who’ll face the music. And their firms, like many that follow, will make the usual round of “celebrity star searches” to find an outside candidate to fill the breach. Indeed, it’s already been reported that Merrill Lynch is looking to tap the New York Stock Exchange’s John Thain.

This lack of attention to building bench strength now seems typical of the financial sector. By and large, this industry has shown little interest in developing good leaders internally – through job rotation, coaching, and participation in executive development programs. Since this kind of leadership development takes years, many firms prefer now to simply walk across the street and hire the talent they need from their competitors.

But this strategy makes sense only in companies that are myopically focused on quarterly gains. Over time, it can actually backfire and have a detrimental effect on the one piece of the corporate puzzle that’s most critical to long-term success: culture.

When the dust settles from the sub-prime crisis, financial analysts will re-examine the complex nature of financial risk and how it’s managed, packaged and re-sold. But the root cause of this crisis isn’t technical. It’s cultural. And a full recovery will require a cultural solution – one that will take time, but will also instill core values and bedrock principles – and a stronger focus on building leaders the old fashioned way.

At issue are two incompatible beliefs: that organizational crisis is the fault of either individuals who fail or cultures that fail to provide a value system robust enough to address unanticipated problems. Unfortunately it’s easier to blame good people when bad things happen than to pin blame on something as soft and squishy as culture, and that’s exactly what happens in many cases. Now two great companies have lost experienced CEOs, and the root causes of the problem – culture and leadership development – still haven’t been addressed.

The reliance on outside talent is by no means unique to the financial sector. Our experience with young companies in their “entrepreneurial” stage, for example, shows that many see a higher potential for growth coming from talent outside the company than within. And as they evolve, their boards begin to look for leaders who can achieve the next phase of growth – quality control, process improvement or whatever – and internal candidates for senior positions are again overlooked.

Hiring from outside is necessary at times, of course. Building bench strength, after all, is a luxury for most start-ups, and it’s not uncommon for fast-growing firms to experience an exodus of talent to competitors. But when recruiting externally becomes the hiring norm, the ultimate loser is culture. Values and beliefs become a hodgepodge of cultural identities from outside, while internal talent remains uncultivated and untapped.

This pattern won’t change until a CEO comes along who understands the simple truth that leaders don’t spring from the womb full-blown but are taught how to lead. Just as teachers and mentors play critical roles in guiding the futures of the young, modern global businesses also need to develop, nurture and gently punish, when necessary, the emerging talent within their organizations. This is, in fact, how great companies are made: They enter the Culture and Leadership Building stage.

Some of our most successful clients have reached this stage of development. These are the four signs of their commitment to building culture and leadership:

1. Promoting and hiring people on the basis of results alone are a thing of the past. Jack Welch has eloquently described the need to find leaders who get results and, at the same time, build the leadership talent they manage. Leaders who can hit bottom-line targets but leave a wake of dead bodies behind aren’t long-term players, says Welch, and they’re definitely not doing their job right.
2. Line managers own the performance management and succession planning process. Using annual processes defined by HR, line managers hold ongoing performance dialogues with their direct reports and conduct periodic discussions (“career dialogues”) about what their people need to succeed.
3. Line managers seek feedback from bosses, peers, direct reports and customers. Whether it’s from informal dialogues or 360° surveys and other formal assessments, line managers have a wealth of solid information they can use to effectively evaluate performance, set clear expectations for the future, and build better leaders.
4. Leadership development is institutionalized through formal management development programs. To build the “front-wheel” skills that will help them steer their companies through good times and bad, executives have a variety of educational options: public development programs (where they learn from executives in other companies), internal corporate universities (where they can focus on projects in progress), or working with a mentor or coach. In companies at this stage, coaching, mentoring and executive development are ongoing processes that are seen as critical to renewal and survival in a rapidly changing business environment.

The frantic search for successors at Citigroup and Merrill Lynch shows the importance of bench strength and the need to methodically develop internal leaders who can guide their companies through new challenges in the years ahead. Indeed, we believe that the more turbulent the business environment, the more disruptive the shifts in technologies, and the faster emerging markets appear (and collapse), the greater the importance of leadership development at all organizational levels.

We enjoy working with clients who’ve learned this lesson. They’ve discovered that developing their own leaders can be fun and exciting, that it injects a new meaning and sense of purpose in their management ranks, and that as a corporate tool it’s truly critical to their long-term success. Just as important, they’ve learned that the mark of good leadership isn’t in quarterly earnings, but in the ability to develop, coach and inspire the great executives of tomorrow.