The Leadership Capital Index
By Dave Ulrich
(Berrett-Koehler, 286 pages, $39.95)
When investors eye a company, they want to be sure it has solid management. But there are no numbers signifying strong management, as there are for revenue, market share, and profit. University of Michigan business professor Dave Ulrich hopes to change that with The Leadership Capital Index.
The result is a sweeping and ambitious book, setting out 10 factors to consider, each with five or six dimensions. As if that's not enough, he digs into those to suggest questions to ask and helpful metrics to assemble. In the end, he puts the spotlight on 57 crucial elements and shares 250 indicators that investors might select to evaluate a company's leadership.
Today, he feels that when investors consider leadership it's so haphazard that if they were honest, they would admit to having only 5 per cent confidence in their assessment. He had hoped to raise that to 90 per cent but after confronting the challenge, feels his approach will only take them to 30 to 40 per cent. Still, he says it's a big step forward.
"If investors can move from a 5-per-cent to 10-per-cent confidence in leadership to a 35-per-cent to 40-per-cent confidence in leadership, they can make dramatic improvements in their investment portfolio," he argues.
The first five factors in the index highlight the individual behaviour of leaders and the next five probe the nature of the organization:
This involves looking at the leadership team's past performance and experience, physical presence and vitality, emotional well-being, social skills, moral values, intellectual ability and resilience. Indicators include: Does the team maintain adequate diet, exercise and sleep habits; and does it encourage a code of ethics to shape behaviour in the company?
Do the leaders understand the business environment, have an overall strategic approach, and can they manage the strategic process? What percentage of the employees can link their daily behaviour to the strategy, and how committed are they to that plan?
Have clear priorities been established, and can the leaders adapt quickly when necessary? It also would be helpful to ask leaders what they are personally accountable to accomplish.
Leadership involves accomplishing objectives through others. Ideally, the company's leaders will have a positive people management philosophy, know and trust their people, coach and mentor ably, excel at communications, use teams well, and surround themselves with strong people who can be successors.
Leadership brand proficiency
Just as the company needs a marketing brand, it needs a leadership approach – the leaders' abilities should fit the brand promised to customers and the company's overall strategic situation.
Shifting from the personal to organizational factors, the investor must ensure the corporate culture – the pattern of how people think and act – is strong and effective. The company must understand the importance of culture, develop a clear cultural message, and ensure employee actions and management processes are in alignment with those beliefs.
Talent management processes
The company must have solid policies and procedures for acquiring and developing talent, preparing future successors, managing retention, and edging out personnel who don't fit.
Performance accountability processes
Despite the problems with formal appraisals, leaders must still hold employees accountable for performance. Indeed, Prof. Ulrich notes that companies with performance evaluation systems have higher financial returns than those without them.
Information is vital these days, so strong companies need a commitment and ability to use information for decision-making and innovation. In the best companies, information is transparent and flows across organizational boundaries, as well as pouring in from the outside. Investors need to know how well the organization shares information, electronically and socially.
The company needs to manage several paradoxes that lie at the heart of its work processes, including how much to focus on internal and external forces, the tensions between individual and team performance, and the balance between centralization and decentralization. Investors also need to assess the degree to which the organizational structure matches the strategy.
Prof. Ulrich says investors tend to have narrow and disorganized views of effective corporate leadership. This book is certainly not narrow and definitely is highly organized. But if the devil is in the details, there are too many details to grasp easily, and although Prof. Ulrich lists all the factors at the end and offers space for rating them, allowing investors to create an index with a final score, it's questionable how many will use the cumbersome system.
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