You are here

Connecting financial performance with effective leadership

Thursday, December 17, 2015 - 18:11

By AIM Business School Design and Research Director Dr Richard Carter

This article originally appeared in Training & Development magazine December 2015 Vol 42 No 6, published by the Australian Institute of Training and Development.

CEOs and their boards intuitively understand the important role leadership behaviour has on organisational culture and financial performance. Unfortunately, until recently they haven’t had the data or analytical tools to financially justify the estimated US$40 billion annual investment globally in leadership development.

Thankfully, two recent studies by Boston Consulting Group (BCG) and McKinsey provide strong proof of the crucial link between financial performance with leadership, talent management and organisational health. BCG’s study found leadership and talent management capabilities had a surprisingly strong correlation with financial performance while McKinsey’s study proved that the healthiest companies are more than twice as likely to have an operating profit margin (based on earnings before interest, tax, depreciation and amortisation) above their industry mean. Now the question for CEOs and their boards isn’t whether to invest in leadership development but how, and how much.

At the same time as the pressure to invest in leadership capability increases, the very nature of what being an effective leader is rapidly changing. As Wesfarmers CEO Richard Goyder pointed out in this year’s John Monash Oration, “It is very difficult for leaders to lead these days just by being persuasive and eloquent. We now live in a world where most of us are empowered individually through information, education, and the ballot box. In the business world, we can create a burning platform and use incentives to get changes in behaviour, and ultimately, better outcomes. But how often do once successful companies fall into the trap of hubris, and as a consequence performance deteriorates. Leaders need to be aware of this and be honest with themselves.”

So what does it take to be honest with oneself as a leader? A good starting point is to boost your self-awareness by undertaking a 360 analysis. This process allows you to truly see how the people you lead see you – and how close that is to how you see yourself. Leaders often have significant differences between how they rate their leadership behaviour compared to how others see them. Many leaders discover they are self-enhancing (ie they see their behaviour more positively than others) and need to be more honest with themselves about their weaknesses as well as acknowledge their strengths. At the other end of the spectrum, there are many leaders who discover they are self-effacing (ie they see their behaviour less positively than others). In either case, an honest leader has work to do.

Nearly three quarters of the leaders that have gone through LMAP Assessment for example, discover they have meaningful work to do on improving their self-awareness and become more effective leaders. Typically leaders with scope for improving their effectiveness fall into one of two broad profiles. First there are leaders who are perceived as domineering: high need for control, rigid and hostile. Second there are those who are perceived as deferential: dependent, approval seeking and tense. Aspiring leaders with either profile risk derailing their career aspirations. Indeed, the Centre for Creative Leadership has studied executive derailment across North America and Europe and have identified specific factors that lead to success and other factors that force once successful careers off the track. Managers who are aware of those factors and conduct an honest self-assessment of their leadership skills can go a long way toward keeping a career headed in the right direction.

The Centre for Creative Leadership defines a successful manager as one who has reached the general management level and is a likely candidate for promotion. A derailed manager has also reached the general management level but is fired, demoted, or reaches a career plateau. Crucially organisations saw derailed managers as having high potential for advancement, impressive track records, and solidly established leadership position – until they derailed. Five key characteristics have been observed in derailed executives. Leaders who derail have problems with interpersonal relationships; fail to hire, build, and lead a team; are unable or unwilling to change or adapt; fail to meet business objectives; and lack a broad functional orientation.

Conversely four key characteristics are associated with successful executives. Leaders who succeed: establish strong relationships; hire, build, and successfully lead teams; adapt and develop during transitions; and have outstanding track records of performance. From a behavioural perspective, aspiring leaders simply need to focus on three words: relationships, teams and adaptability. That is where 360s and coaching help – boosting self-awareness and overcoming behavioural deficits. Aspiring leaders with a domineering personality need to learn how to temper their behaviour in order to build strong interpersonal relationships and high performing teams. They also need to become great change leaders – able to tolerate uncertainty and ambiguity and bring their people with them through the journey.

From a capability perspective, aspiring leaders need to be seen as knowledgeable cross-functional managers. That’s where business education helps – building a wide disciplinary base to help you achieve outstanding performance. And the knowledge you gain will also boost your ability to establish strong relationships, lead teams more effectively and grow your confidence and ability as a change leader.

So if you are an aspiring leader, the best investment you can make is in yourself. First, enrol in further education to learn the requisite business knowledge you need to achieve outstanding results. Second, grow your self-awareness by undertaking a leadership 360 and then learn how to manage your behaviour to be the most effective leader you can be. Third, be willing to be honest with yourself and avoid the trap of hubris – both personally and organisationally.

The 21st century demands better leaders – and the financial outcomes will be there for both you and your business when you become one.

References

‘The Global Leadership and Talent Index’, Boston Consulting Group, 2015

‘Organisational Health Index’, McKinsey & Company, 2015

Sir John Monash Foundation 2015, Richard Goyder on the age of the god CEO is over – 2015 John Monash Oration, viewed 2 November 2015, http://johnmonash.com/richard-goyder-on-theage-of-the-god-ceo-is-over-20...

Dr Richard Carter is the Design and Research Director of the AIM Business School. He is an organisational psychologist, business educator and leadership development consultant with wide experience at working with senior leadership teams. Contact via richard.carter@aim.com.au