Business leaders in London, New York, and Shanghai agree: In an environment of slow economic growth and limited opportunity for double digit business expansion, continuous improvement of internal capabilities is no luxury or fad. It’s a prerequisite for organizational survival. So finds The Conference Board CEO Challenge 2013, a report published today based on a survey of CEOs, presidents, and chairmen from the world’s leading companies.

Between September and November 2012, over 700 senior executives were asked to identify and rank the most pressing challenges they face, and their strategies for addressing each one. Worldwide, human capital - how best to develop, engage, manage, and retain talent - was named the leading challenge (out of ten choices). Operational excellence stood in second place, followed by innovation and customer relationships. Significantly, leaders in Asia, Europe, and the United States all included these same four among their top-five challenges. Both the challenges named and the high level of regional convergence mark a shift from previous editions of the annual survey.

“The results of this year’s survey are quite illuminating,” said Bart van Ark, Executive Vice President and Chief Economist, The Conference Board, and a co-author of the report. “Since 2008, we had seen CEOs express extreme concern about external pressures on the business environment, especially in those regions hardest hit by the economic crisis. Last year, we saw ‘global political/economic risk’ and ‘government regulation’ both ranked as top-four challenges worldwide. In CEO Challenge 2013, leaders seem to be turning away from macro factors outside their control to look hard at their own organizations, employees, customers, level of efficiency, and capacity for innovation.”

Controlling the Controllable

The convergence across regions toward “controlling the controllable” in a tough environment can be seen in each of the top challenges and strategies named.

- Human capital was named the number-one challenge in both Asia and Europe. In Europe it rose dramatically from seventh place a year ago. In all three regions - as well as in China and India individually - CEOs’ top strategy for addressing human capital is growing talent internally. Globally, provide employee training and development and raise employee engagement are also primary responses.

- A new challenge category, operational excellence, encompasses strategies for creating a more efficient, cost-effective organization. (It replaces CEO Challenge 2012’s cost optimization category.) Across regions, raising employee engagement and productivity is seen as key to this objective. In Asia - where growth has tempered but is still relatively strong - invest more in key technologies is also a major strategy for CEOs. Perhaps unsurprisingly, U.S. and European CEOs are focused more on reducing baseline costs.

- Innovation, last year’s top global challenge, fell to third. Although Asian CEOs named invest in new technologies as their key approach, six of the top ten global strategies for innovation draw on human capital, including creating a culture of innovation, develop innovation skills for all employees, and find, engage and incentivize innovative staff. In the U.S. and Asia the high rank given to engage in strategic alliances with customers, suppliers, and/or business partners reflects a longer-term strategy for growth.

- Globally, customer relationships rose from 2012’s seventh most-pressing challenge to fourth. CEO’s top-two strategies reveal a mutually supportive two-pronged approach to the challenge: enhance quality of products/services and sharpen understanding of customer/client needs.

People-Driven Strategy

The survey finds that among the many strategies that CEOs mention to tackle their main challenges, the focus on using the firm’s human capital is predominant. The people focus is also clearly much broader than just developing an organization’s leaders.

“On a global basis as well as across regions, this year also saw a shift toward internal talent development as opposed to strategies focused on management or the senior team,” said Rebecca Ray, Senior Vice President, Human Capital at The Conference Board, and a co-author of the report. “In a time of uncertainty, this appears to be a long-term approach that will assure the right talent is in place to take advantage of the next boom, whenever it comes. As CEO Challenge 2013 shows, human capital is not only a critical business function in itself, but is also intimately connected with innovation, operational excellence, and other challenges.”

Risks and regulatory concerns remain

While concerns about global political and economic risks and the business impact of government regulation, have dropped on the list of CEO Challenges, they surely haven’t disappeared. In Europe, global political and economic risk is still a top-three challenge. And in the United States, government regulation still scores second after operational excellence and before strengthening customer relationships, innovation and human capital.

“Of course, the risks of economic or geopolitical shocks haven’t gone away,” said van Ark. “The world in 2013 remains an uncertain place, from Beijing’s leadership transition and Washington’s deficit and debt battles, to the still-unresolved Arab Spring and European debt crisis. But CEOs have become used to frequent crises. Now they’re focused on people-driven strategies to create value in what may be a slow-growth landscape for years to come.”