Leadership: do investors invest in leadership’s ability to execute?

leadershipLeadership undoubtedly has an impact on the value of the business, especially from an investment perspective. Companies have always been indexed with a market value based on a measure of their finances. And, while the finances of a business are important, potential investors may seek to base their investments on intangible metrics like brand, strategy and leadership.

A recent debacle after decades arming American soldiers, first with the Vietnam era M16 and later the modern M4 rifles carried in Iraq and Afghanistan, famed gun manufacturer Colt lost its contract with the military in 2013. It never recovered. Colt Defense LLC filed for bankruptcy after 179 years in business.

The downturn for Colt seems to have started after the company, which had relied on sales to the government, lost a multimillion-dollar bid to arm the military, Colt’s chapter 11 filing came after earlier, failed attempts to restructure its $350 million debt were rejected by the company’s bondholders. Last November, The Wall Street Journal reports, Colt borrowed $70 million from Morgan Stanley in a bailout loan to allow the company to pay down interest on its debt, but was this a leadership issue?

Here’s an interesting contradiction: According to a survey from executive team consultancy Gap International, executives overwhelmingly agree that talent can make or break a company; yet only a minority actually say they invest in leadership development programs.

How important is maximizing a company’s talent? Very, said 85 percent of execs surveyed. In addition, 83 percent said the same of empowering employees to succeed. The problem: the “maximisation” bar is set too low.

Only 37 percent of leaders surveyed said they believe their employees can become top performers. What’s more, less than half said they would “invest innovation efforts” in leadership development or employee performance training this year

That data points to a disconnect between how employers think and how they act regarding talent development. If it’s really that important, why aren’t more companies investing in leadership training programs?

Leadership brand is a reputation for developing exceptional managers with a distinct set of talents that are uniquely geared to fulfil customers’ and investors’ expectations. A company with a leadership brand inspires faith that employees and managers will consistently make good on the firm’s promises. A Nordstrom customer knows that the retailer’s employees and managers will give her white glove service. Parents who take their kids to a Disney theme park assume that ride operators and restaurant personnel will be upbeat, friendly, and gracious. McKinsey clients understand that smart, well-educated consultants will bring the latest management knowledge to bear on their problems. A leadership brand is also embedded in the organization’s culture, through its policies and its requirements for employees. For example, the tagline of Lexus is “the pursuit of perfection.” Internally, the Lexus division translates that promise into the expectation that managers will excel at managing quality processes, including lean manufacturing and Six Sigma.

Previously, there had been no index of how companies’ leadership affects their value. Harvard Business Review, however, has developed a leadership rating index, created from a number of studies based on the effects of leadership.

Their index is broken down between individual — personal qualities of top leadership — and organisational — systems created to manage leadership throughout the organisation. Below is Harvard Business Review’s index on leadership.

Individual:

Personal proficiency: To what extent do leaders demonstrate the personal qualities to be an effective leader (e.g. intellectual, emotional, social, physical, and ethical behaviors)?

Strategist: To what extent do leaders articulate a point of view about the future and accordingly adjust the firm’s strategic positioning?

Executor: To what extent do leaders make things happen and deliver as promised?

People manager: To what extent do leaders build competence, commitment, and contribution of their people today and tomorrow?

Leadership differentiator: To what extent do leaders behave consistent with customer expectations?

Organisational:

  • Culture capability: To what extent do leaders create a customer-focused culture throughout the organisation?
  • Talent management: To what extent do leaders manage the flow of talent into, through, and out of the organization?
  • Performance accountability: to what extent do leaders create performance management practices that reinforce the right behaviors?
  • Information: To what extent do leaders manage information flow throughout the organization (e.g., from top to bottom, bottom to top, and side to side)?
  • Work practices: To what extent do leaders establish organization and governance that deal with the increasing pace of change in today’s business setting?

In the end, successful leaders are able to sustain their success because these individual and organisational traits ultimately allow them to increase the value of their organisation’s brand – while at the same time minimize the operating risk profile.   They serve as the enablers of talent, culture and results driven people.

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