“The shadow banking system filled a gap in the financial intermediation process that the traditional banking system couldn’t fully address.” – Paul McCulley
I was a year into my tenure at PIMCO when Paul McCulley coined the term “shadow banking system” to describe a network of non-bank financial intermediaries operating outside the traditional regulatory framework. This system includes entities that provide services akin to traditional banks but lack the regulation associated with standard banking institutions.
When conducting a recent study on succession candidate development, what emerged from the analysis reminded me of that phenomenon. The participants spoke about informal networks and development systems that operate outside of formal HR structures. They discussed that while there is recognition of HR processes in succession planning and other talent practices, much of the real-world talent growth and identification occurs informally. This what I am calling the “shadow talent system” which functions much like shadow banking, offering flexible, often relationship-driven paths for employee development that are overlooked in formal assessments.
Leveraging Informal Networks: The Backbone of Shadow Talent Systems
Informal networks often play a crucial role in talent development, operating similarly to how shadow banking functions outside the formal banking sector.
These networks are often driven by personal relationships, mentorships, or unofficial team dynamics, creating pathways for career growth that aren’t part of the official talent management processes.
Much like the shadow banking system—which operates outside traditional banking channels to fulfill financial needs—informal networks enable skills exchange, mentorship, and career advancement through relationships and unofficial connections.
Informal networks and overlooked talent pools exist outside the official HR processes, yet play a crucial role in employee development, skill-building, and career progression. These networks create “shadow pathways” that facilitate talent development and growth in ways that formal systems might not capture, thereby significantly impacting the organization’s overall talent ecosystem. Organization network analysis is one way companies attempt to uncover these pathways.
Shadow Talent System benefits and challenges
Aligning informal networks with talent strategies taps into trending discussions around employee engagement and development outside formal structures.
Research on informal networks in organizations underscores the significant role they play in talent development. For instance, Ibarra (1993) noted that informal networks, built on personal connections and social capital, offer employees access to diverse perspectives, feedback, and resources that aren’t available through formal channels. These relationships might span across departments, seniority levels, or even geographic locations, allowing employees to tap into diverse perspectives and expertise. Through these unofficial interactions, employees gain insight, feedback, and guidance, forming a type of “social capital” that helps them navigate the organization more effectively.
HR often faces challenges in determining how to add value to the shadow talent system. I once assisted a client in establishing informal training sessions, which were well-received and generated interest in formalizing the program with a senior sponsor. However, I recommend leaving the initiative informal. To support HR professionals in navigating these challenges, tools like Mentoring Toolkit for HR can help bridge the gap between formal systems and the untapped potential of shadow talent systems.
Introducing formal structures and metrics could risk diminishing its momentum and effectiveness. The primary objective was to add value to the organization, which the sessions were achieving. Formalizing the program might shift the focus to meeting specific KPIs rather than delivering value, potentially altering behavior in line with Goodhart’s Law, where metrics become the target rather than the means to achieve meaningful outcomes.
Shadow Talent System benefits and challenges
Aligning informal networks with talent strategies taps into trending discussions around employee engagement and development outside formal structures.
Research on informal networks in organizations underscores the significant role they play in talent development. For instance, Ibarra (1993) noted that informal networks, built on personal connections and social capital, offer employees access to diverse perspectives, feedback, and resources that aren’t available through formal channels. These relationships might span across departments, seniority levels, or even geographic locations, allowing employees to tap into diverse perspectives and expertise. Through these unofficial interactions, employees gain insight, feedback, and guidance, forming a type of “social capital” that helps them navigate the organization more effectively.
HR often faces challenges in determining how to add value to the shadow talent system. I once assisted a client in establishing informal training sessions, which were well-received and generated interest in formalizing the program with a senior sponsor. However, I recommend leaving the initiative informal. To support HR professionals in navigating these challenges, tools like Mentoring Toolkit for HR can help bridge the gap between formal systems and the untapped potential of shadow talent systems.
Introducing formal structures and metrics could risk diminishing its momentum and effectiveness. The primary objective was to add value to the organization, which the sessions were achieving. Formalizing the program might shift the focus to meeting specific KPIs rather than delivering value, potentially altering behavior in line with Goodhart’s Law, where metrics become the target rather than the means to achieve meaningful outcomes.
Mentoring Can Assist in Lighting the Path
Often, mentorship in informal networks occurs organically rather than through official mentorship programs. In the recent study I conducted with senior leaders in the UAE, 76% of participants reported having an influential mentor in their career.
However, most described these mentorships as starting informally rather than being part of a structured program.
Senior employees may provide informal coaching, tips, or industry insights to newer team members in casual settings, such as lunch breaks or after meetings. Through these relationships, employees are often able to expand their influence, access unique projects, and position themselves for career advancement based on reputation rather than through formal evaluations (McEvily et al., 2014). These mentor-mentee relationships play a significant role in helping employees build skills, confidence, and professional insight, fostering career growth in ways that formal training programs may overlook.
Informal networks often provide pathways for career growth and recognition that aren’t captured by formal HR processes. The shadow talent system impacts traditional programs like succession planning, talent reviews, and performance management. Employees who build strong internal networks might have greater visibility within the organization, allowing them to access special projects, gain endorsements for promotions, or receive recommendations for career development opportunities. This creates a parallel system of career mobility, driven by influence and reputation rather than strictly by official performance metrics.
Unrecognized Talent Pools
Many organizations have unrecognized talent pools—employees whose skills or potential are overlooked by traditional HR evaluations. This latent talent pool can be seen as a “shadow talent system,” similar to how unregulated financial institutions handle assets that escape traditional banking oversight.
These unaccounted-for skills and capacities contribute to the organization’s success yet escape traditional HR evaluations, creating a latent talent pool with potential for significant impact if properly managed.
Much like unregulated financial assets, the talents in a shadow talent system exist within the organization but remain invisible to formal evaluations.
Employees might have competencies acquired through diverse experiences—such as previous jobs, side projects, or self-driven learning that are not captured by standard performance metrics. This could include specialized knowledge, technical skills like writing code, or soft skills such as leadership and innovation. Shadow talent systems represent untapped potential that could be leveraged to support strategic initiatives. Highlighting overlooked talent speaks to common organizational concerns, driving interest among leaders focused on optimizing internal resources.
Leveraging the Shadow Talent System for Development
Similar to how shadow financial markets adapt quickly to emerging economic needs, a shadow talent system can offer a rapid-response capability. These hidden skills can be mobilized to meet evolving business demands more efficiently than formal processes.
Organizations that recognize this talent can reassign or upskill employees to address new challenges without waiting for lengthy hiring or training cycles. HR can only leverage these talents if they are aware of them, and they can only be aware if they are open to looking for them
Don’t Fear Hidden Talent: Embracing Informal Development
Employees in the shadow talent system may feel unrecognized or undervalued if their skills go unnoticed, which can affect morale, engagement, and retention.
High-potential employees in particular, may leave for opportunities where their full skill set is appreciated, resulting in a costly talent drain.
This mirrors the instability sometimes found in shadow financial systems, where assets may be pulled out unexpectedly due to perceived risk.
An example of this is crypto exchanges may experience sudden outflows of assets when users lose confidence due to hacking, insolvency rumors, or regulatory crackdowns
Off-Balance-Sheet Skills
Employees often acquire skills through self-learning, online courses, and informal on-the-job training, which may not be officially recognized by the organization.
This resembles shadow banking’s off-balance-sheet operations, as these skills exist but are not formally accounted for in official talent assessments.
These “hidden” skills enable employees to perform tasks more effectively and, in some cases, exceed the standards expected of their formal qualifications.
Shadow banking can introduce risks because assets are not regulated, much like the risk in organizations that fail to formally recognize or track these unofficial skills.
For example, an employee who possesses strong data analytics skills but holds a non-analytical position might be overlooked for relevant projects, leading the organization to hire externally for expertise that already exists internally (Burt, 2000).
There is a potential gap between an employee’s real ability and the organization’s perception of it, creating a discrepancy that could affect project planning, resource allocation, and succession planning. Organizations that ignore this hidden talent may experience skill gaps, inefficiencies in project staffing, and morale issues, as employees who feel undervalued may seek opportunities elsewhere (Granovetter, 2005). Recognizing and measuring these informal skills would enhance talent assessments, making it possible to align roles with employees’ actual competencies and optimize the development of high-potential talent.
Recognizing and measuring these off-balance sheet skills could significantly enhance talent assessments. By accounting for these unofficial competencies, organizations would be better positioned to align roles with actual capabilities, optimize succession planning, and drive high-potential development.
Embracing the Shadow Talent System
The concept of a “shadow talent system” presents a lens through which organizations can reimagine talent development, much like the impact of shadow banking on the financial sector. Just as shadow banking operates outside traditional channels, shadow talent systems thrive through informal networks, untapped skill pools, and “off-the-record” competencies that evade standard HR evaluations.
These unofficial networks and competencies often fill gaps, quickly responding to evolving business needs while fostering organic career growth. However, unrecognized skills and hidden talent pools can lead to missed opportunities, lower morale, and potential talent drain. Leveraging informal networks for talent development allows organizations to unlock unseen potential, leverage agile skill sets, and enhance succession planning, ultimately driving sustainable performance and a more aligned workforce.
Burt, R. S. (2000). The network structure of social capital. Research in Organizational Behavior, 22, 345-423.
Granovetter, M. (2005). The impact of social structure on economic outcomes. Journal of Economic Perspectives, 19(1), 33-50
Ibarra, H. (1993). Personal networks of women and minorities in management: A conceptual framework. Academy of Management Review, 18(1), 56-87.
McEvily, B., Soda, G., & Tortoriello, M. (2014). More formally: Rediscovering the missing link between formal organization and informal social structure. Academy of Management Annals, 8(1), 299-345.
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