by Dave Ulrich
We all resonate with the clarion call for leaders to build on their strengths, be authentic, and demonstrate emotional intelligence. We can envision these noble, resonant, and genuine leaders as icons of effective leadership. But these virtuous leadership attributes are not the essence of leadership effectiveness. Leaders are effective not just because of what they know and do, but by how their leadership affects others.
Building on one’s strengths is incomplete unless one’s strengths strengthen someone else. Leaders who set a vision that no one follows are not really leading. Authenticity without a positive impact on someone else is more narcissism than leadership. A politician who authentically speaks his mind may be genuine, but if his ideas do not serve others, he is more self-interested than other-focused. Effective leaders turn their emotional intelligence into helping others find their purpose and meaning.
An underlying principle of effective leadership is that value is defined by the receiver more than the giver. This value-added principle applies in almost every relationship. When I give my wife a gift, she defines the value of the gift. When I was newlywed, I got her tickets to sporting events and she suggested I enjoy myself. I have learned that the real gift is figuring out what will be meaningful to her, not me. Likewise, effective leaders recognize the stakeholders who are impacted by their personal style and demonstrated competencies. They then work to deliver value to these stakeholders in ways that matter to the stakeholders.
The most traditional and common stakeholders for an effective leader are the leader’s followers. Leaders inspire, motivate, and help employees become more engaged. They give employees a sense of shared purpose and remove barriers for employees to reach their goals. Additionally, leaders help their organizations have a clear purpose (strategy, mission, vision) and discipline to execute and deliver results against this purpose.
But I would propose that an additional stakeholder to determine leadership value is the shareholder, a debt or equity holder. Investors care deeply about financial results to provide a positive return for their outlays. Investors who seek increased financial returns have traditionally examined the ability of a firm to have a positive cash flow. Investors rely on assessments like the Moody’s Index or Standard and Poor’s index to assess if a firm’s credit worthiness. Recently, investors have started to look at a firm’s intangibles, including things like strategy, brand, research and development, market position, and technological savvy. These intangibles often explain the quality of a firm’s earnings and drive up to 50% of market value.
In today’s world, investors are increasingly going beyond financial and intangible assessments to fully appreciate a firm’s market value. Investors find that quality of leadership shapes intangible value and stabilizes financial performance. In our research, we found that investors allocate bout 30% of their investment decision on the quality of leadership of the firm where they invest. But, while they have rigorous and comprehensive assessments of financial and intangible value, they rely on intuitive and haphazard judgments of leadership. Based on extensive research on leadership and decades of personal experience, I believe it is now time to offer investors a leadership capital index to completely and thoroughly determine the quality of a firm’s leadership.
Effective leaders convince investors that they have the personal skills to deliver results and the organizational savvy to create high performing culture and teams. By assessing leadership through the eyes and expectations of investors, a leader’s strengths, authenticity, and emotional intelligence are successful when they increase investor confidence in intangibles and long-term financial results. A leadership capital index brings rigor, focus, and discipline to assessment of effective leadership.
A leadership capital index clearly benefits investors who can reduce the risks of their investments, but it also helps board members know how to select and evaluate future leaders. C-suite executives who manage succession and leadership teams will focus on successors who give investors confidence that increases market value. HR professionals and others charged with building leadership will focus less on personal charm and more on investor confidence through specific personal and organization leadership actions.
It is time to look beyond a leader’s personal charm and define how leaders build value from investors through a leadership capital index.
Dave Ulrich (ude.h1524764589cimu@1524764589uod1524764589) is Rensis Likert Professor of Business at the University of Michigan and a Partner at the RBL Group. His latest book is Leadership Capital Index (Berrett Koehler, September).