Effective leadership pays off. Measuring leadership effectiveness in organizations tells us a lot about the future performance of an organization. Towers Watson’s Human Capital Index provides striking data showing leaders that are trusted by their employees generate higher employee commitment and return 42% more to shareholders. It is well recognized that good leaders are effective decision makers. But that does not entirely explain the high return to shareholders.
Effective leaders engage their employees by:
Increasing their awareness of task importance and value.
Getting employees to focus first on team or organizational goals, rather than their own interests.
Activating their higher-order needs such as: Achievement, Self Respect, Belonging. Competency and Recognition, etc.)
Leadership in Action
From 1991 – 1993, IBM lost more than 15 billon dollars. Lou Geistner was hired as CEO to turn things around. By carefully making sure the right people were in the right positions and installing a team-oriented compensation system, Geistner eliminated silo thinking and expanded cross functional cooperation. He returned IBM’s focus to its cultural roots: ardent customer service and discipline. Promotions and performance management shifted the culture focus from entitlement to achievement. Geistner once remarked, “I have come to see in my time at IBM that culture is not just one aspect of the game, it “IS” the game.” By the early 2000’s IBM had shed 14 billion dollars in inefficiencies and become the world’s largest and most influential information technology company.
How do you know if your managers are creating value or destroying it? James Collins said it best in How the Mighty Fall, “People do not have jobs, they have responsibilities.” Performance based job descriptions define measurable leadership responsibilities. Establishing specific leadership measures encourage managers to do more than act as coordinators. They must get the best out of their people. Accurately defining and measuring leadership provides a mighty incentive excel at every level throughout the organization.
There are several ways to measure leadership effectiveness. One way to establish leadership effectiveness is to measure employee responsiveness:
How long does it take for employees to take action (Agility)?
How well do employees perform in activities that drive strategic objectives (KPI’s)?
What percentage of employees go beyond just meeting job requirements e.g., exceeding customer expectations or suggesting better ways of doing things (Discretionary Effort)?
How many ideas from employees are initiated and implemented? (Innovation)?
How many employees can directly link their daily activities with mission or strategy (Strategic Alignment)?
Ensuring the performance range between top performers and poor performers does not exceed 10% year after year.
While extremely valuable, quantitative data does not always provide richness of analysis, and may focus on lag, not lead indicators of future sustainability. A rigorous qualitative analysis, e.g. of management quality and human capital practices, helps to distinguish lead indicators of an organization’s future performance. Consider the limitations of quantitative measures alone.
Consider what the numbers didn’t tell us about Enron:
Enron appeared in many general and social investing mutual funds when it failed.
In 2000, it received six environmental awards and issued a triple bottom line report.
The CEO was a speaker at ethics conferences.
Enron’s CFO was awarded CFO of the Year by CFO magazine three months before the Enron scandal was made public.
Since then we have had numerous well respected organization names added to the Business Hall of Shame. Quantitative metrics provide additional insights to the investment process. As we know from Towers Parrent Human Capital Index, measuring the soft skills accurately predicts future organizational performance. They also provide a closer alignment with disclosure requirements of the Financial Services Reform Act. There is increasing pressure from stakeholders on equity research analysts to understand and report on soft variables such as:
Management quality – systems and processes
All can be termed as “human capital.” Today, it is no longer sufficient to have great technology. You must wield great employee skill and commitment to compete in the global market place. The future of business today is dependent on the installation and measurement of effective leadership practices.
Both market analysts and senior leadership can benefit from information accurately measuring the rate of return on their Human Resources today. There is obviously money to be made for anything that helps us predict the future better. Leadership is critical. Jim Collins, in How the Mighty Fall, says it this way, “When an organization grows beyond its ability to fill the key seats with the right people it has set itself up to fall.” This may explain why some organizations never get off the ground. Harvard’s John Kotter, generally acknowledged as the world’s foremost authority on leadership, remarked, “I am completely convinced that organizations today lack the leadership they need and the shortfall is often large.” Kotter believes the root of the problem is the over emphasis of management versus leadership. The concern over effective leadership is not new. What is new is Performance Path®, a next generation management system that provides insights into leadership effectiveness and the future of business success.