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There is scope for measuring leadership competence with a balanced scorecard type method. For example; the ability for leaders to Define Realities of the current organizational situation and to Declare the Mission, Declare the Strategy and finally communicate and engage others with consistency and clarity. These can be measured, and often are, using internal feedback tools. This much is quite common place though criticism of senior leadership is still seen as taboo by middle management. Assessment can be a combination of views from above, peers and subordinates. There may be and usually is some measurable improvement in performance from the perspective of others – but what of improved financial performance and indeed other less tangible commercial or operational improvements? It depends on the function and sphere of influence that the leaders exercise of course; the measures will change with the function, be its sales, legal, HR, operations or Research & Development.
In a US study by 'The Leadership Challenge' it was demonstrated that profits generated by individuals and the groups they were leading significantly increased with no other variables changing significantly. In their study, the correlation between leadership development and financial performance was clear. Four leaders made a 31% profit increase over the previous year. A fifth person delivered process improvements valued at nearly $400k. The leaders in question also noted how their behaviours (and habits) had changed. They felt more like they were leading and noticed greater innovation, initiative and risk taking in people around them. Also increased were collaboration, self-confidence, and shared values.
In my own experience the most obvious manifestation of ROI is in the area of sales leadership. When leadership skills are enhanced and there is a culture of leadership then the sales teams outperform their previous periods and other divisions where there was no investment in leadership. This change can be marked in the extreme. I have seen this happen repeatedly. Sadly I have also seen the reverse effect. Namely, an improved team that then acquires an autocratic or worse still, a divide and rule individual leader. In this situation the performances go into reverse, sometimes quite quickly and not least because staff turnover also usually increases.
Functions and their measurement
Beyond the 'hard metrics', what are the other aspects of business that leaders have to get right? It's important to consider this because these critical criteria are what need to be assessed by investors and the governing board.
This is not an exhaustive list but here are seven major areas of responsibility and value creation in an organization with accountability lying with various leaders and their teams.
Commercial metrics The key metrics such as turnover, profit, balance sheet value, debt and growth/retention of customers are changes that are easy to measure and monitor. But the reasons and the leadership traits that enable the metrics to perform well come through as a result of some of the headings below.
Financial information and control The provision of accurate and timely information on the financial condition and health of the business at any time. This should be easy to measure too but then along came Enron in the US and Connaught in the UK. Though steered by well-educated people, the capacity for huge error and obscured misdemeanour still exists. How companies measure themselves and report on their standing remains a grey area despite the regulations around it. Quality of leadership matters so much here and yet dependence on the data to measure leadership may not be enough – even when an auditor raises a red flag.
Operational efficiency. The efficiency with which materials are sourced, products are made, stored, delivered and supported. Another relatively easy area to measure but also a very complex one with many extraneous factors able to get in the way. None the less, it is widely and deeply measurable.
Products and service innovation. Every business needs a fresh product portfolio and new products to maintain strength in its markets. It takes a particular style of leadership in this area to keep up with the James Dysons of the world. Innovation may come from within or be contracted in or acquired. Whatever the methods, the activity is measurable in relation to leadership competencies.
Staff quality and retention. It always surprises me how little this area gets measured given its importance. Two UK companies serve as examples. Comet will not be remembered by its customers for the general quality of its staff, yet B&Q is now lauded for the helpfulness of its staff. Businesses need a good brand to attract staff and good staff to build a strong brand so this is an area with critical measurables.
Stability. Companies need to change to adapt and evolve but when they have a number of new leaders come in, and then excessive change tends to follow. But for the business to operate well it needs a degree of stability too. Continual change in structures and people creates fatigue and confusion.
Brand value. When all of the above components measure up well then the brand value also rises. Brand value is now evaluated as goodwill once was – businesses such as Coca Cola are almost solely defined by their brand value. The value of organizations may be defined by brand but brand value can only be delivered by people and their leadership, as G4S in the run up to the UK Olympics found to its cost in 2012. Great brand value is behind great leaders – not great logos. So great leadership can be priced in some accordance with brand value.
All of the above areas of delivery can be traced back to leadership. This is done when we fully understand the components of leadership and how each one plays to deliver performance. This applies to the CEO, the board and the middle management leaders throughout the organization.
Given then that we know which leadership behaviours will drive performance, it is surprising that leadership skills are not looked at and measured far more closely and indeed financially assessed with forensic attention.
It's not always easy to show absolute cause and effect of leadership in organizations. There are always a number of other variables which are hard to isolate and account for. Much is rightly attributed to the simple belief in the importance of leadership. But good leadership makes a difference. It inspires people to outperform. Courageous leaders are needed to advance organizations during times of uncertainty and stress so investment in leadership is worth the investment to increase the probability of success.
What we see though is that leadership does show through quite measurably in a number of ways and many of these are measures already there. When a CEO gets removed for poor performance the justification is poor financials, the reality is shareholder concern about the effectiveness of the leadership. Mark Bolland at M&S is an interesting and ongoing subject under this heading.
Copyright: Stephen Archer 2013