The Importance of Leadership
Business success can be attributed to many causes. These range from the industry you are in, a dramatic new technology that you’ve discovered, an unusually well-designed product, a brilliant strategy, the timing of beginning your enterprise, and yes, plain old good luck. We acknowledge that all of these can account for a business’ success.
There is one factor, however, that is consistent and predictable in its impact on the success of every business. That is the quality of leadership inside the organisation. This blog post addresses the evidence we have for the relationship between leadership and business outcomes, and explores the likely reasons for that occurring. Finally, it describes what organisations can do to develop excellent leaders.
Can ExtraOrdinary Leaders Double Profits?
They can. It doesn’t always happen, nor does it happen in the short run. But let us review an example of where it did. Our partners Zenger-Folkman were commissioned to conduct a study for a division of a Fortune 500 mortgage lending organisation. In doing so, we discovered compelling evidence that leadership effectiveness has a direct impact on net income. Fortunately, this was an organisation in which the profit was easy to measure on a granular, branch by branch level (in general this is not the case).
In this instance, we were able to isolate many of the external factors that influence business results, thus clearly revealing the significant impact leadership had on its bottom line. The organisation included more than a hundred offices in cities scattered across North America. They provided mortgage loans to home buyers. Interest rates were consistent between offices. Policies and procedures were generally alike. Profitability metrics were readily available with no added or burdensome cost. Each branch had from 25 to 35 people reporting to a branch manager. To assess the leadership effectiveness of each branch manager, we used a 360-degree assessment to measure their leadership competencies. This process included a self-assessment by the branch manager, a rating by that person’s boss, ratings by the peers within the organisation (i.e. other branch managers and corporate or regional staff), plus a number of subordinates or direct reports. We arbitrarily divided the branch managers into three groups based on their 360-degree feedback scores. We defined the top 10% as the best leaders, the bottom 10% as the worst leaders, and the middle 80% comprised the rest of the leaders. This division provided dramatic contrast about the impact of poor and extraordinary leaders.
We then cross-referenced this data with the operating profits of each of the offices those leaders managed. As you might expect, the results show the bottom 10% did poorly and the top 10% did exceptionally well. But it’s striking to see just how significant the differences were.
The chart on the right shows:
Net loss of $1.2 million for the bottom 10% of branch managers
Profit per branch of $2.4 million for the middle 80% of leaders
Profit of $4.5 million for the branches managed by the top 10% of branch managers
The middle group actually triples profits per branch in comparison to the bottom 10%. The top 10% more than doubled the average profit per branch of the other 90%.
The Trend Line
Do extraordinary leaders double the organisation’s profit in every case? While they did in the previous case study, we acknowledge that the answer to that question is “probably not.”
However, we do have the data to show that the trend line will likely look the same. Regardless of whether the raw numbers or percentages show a poor leader losing $1 million or breaking even or an excellent leader doubling profits or increasing them by 20%; the contention remains the same. Good leaders create more economic value than poor leaders, and extraordinary leaders create significantly more economic value than the rest.
How Leadership Drives Profit
It’s not always possible to measure the link between leadership and profitability directly, but there has been much research about the various elements that drive profit. We can measure the factors that consistently lead to profitability. These indirect influences, or what some would call intervening variables on profitability, include:
Ability to recruit good talent
Percent of employees who “think about quitting”
Satisfaction with pay
The link between leadership effectiveness and each of these business outcomes is often easier to determine than the single ultimate outcome of profitability.
Developing ExtraOrdinary Leaders Who Can Double Profits
The next question you might logically ask is “Can we develop extraordinary leaders?” The simple answer is “yes!” We can develop leaders who inspire people to perform at a higher level, and thus increase organisational productivity. There are many organisations that show consistent improvement in productivity over time as a direct result of their leadership development programs. For instance, General Electric had a 5% per annum growth in employee productivity at a time when many organisations were languishing with 1% and 2% productivity improvement.
We have found that the most sure-footed way to accomplish this is to follow a process combining the following elements:
Create a competency model based on hard data and analysis, versus the pooled opinions of a few executives.
The organisation must rely on a leadership development model that defines the competencies which will make a difference. Competency models define the key leadership behaviours that will lead to organisational success. This doesn’t bode well for a trendy leadership program that has no evidence of changing behaviour and fails to focus on those behaviours that truly help the organisation to create value.
Provide leaders with insightful awareness about how well they currently perform against this model. Any journey begins by knowing the place from which you are starting. This self-awareness first illuminates the strengths that the individual possesses. It also needs to call attention to any serious failings that detract from the leader’s performance. We think it wise to utilise a world-class, 360-degree feedback instrument that is easily understood and digested by the participant.
Make feedback motivational. Telling everyone in the organisation where they fall on a bell-shaped curve of IQ scores or performance measurements is virtually guaranteed to be demotivating and discouraging to 95% of the population. Only those few at the very top will have positive feelings. Everyone else is deflated. But feedback can be enormously motivational when delivered in a caring and constructive way. When the feedback emphasises strengths, and when it is translated into specific actions, it becomes a positive experience. This allows participants to translate this new awareness into a self-development plan to which they are committed.
Assist in creating personal development plans. Most participants have not, and probably will not, create a personal plan of development without some organisational support. Motivation and confidence increase when a practical and actionable plan is created.
Provide appropriate skill development. Greater self-awareness helps most leaders identify areas in which they can be far better. Often it is in the skill of coaching. Most leaders acknowledge that giving colleagues corrective feedback is something they postpone and duck. Other managers benefit from presentation skills training, or developing greater comfort in the strategic thinking process.
Involve the manager. Our research forcibly points out the huge differences in the outcomes of any leader’s development process when the manager is intimately involved versus not being engaged. Clearly the manager’s involvement greatly elevates the participant’s motivation, not to mention the practical contributions that the manager can make to a subordinate’s development efforts.
Boiling it down to the simplest of terms, good leaders create more economic value than poor leaders, and extraordinary leaders create far more value than good ones. With that being the case, and clearly the importance of leadership, you may wisely choose to invest in developing exceptional leaders in your organisation.
Our strengths-based leadership development programs are built on research gathered by Zenger Folkman from more than 850,000 individual 360-degree assessments. LeaderSHAPE Consulting leadership training programs are packed with action-oriented information grounded in hard science and proven to increase leadership effectiveness.