Evaluating the importance of leadership on business performance

How important is effective leadership in determining the success of a business? It’s a key question not just for shareholders and investment analysts; A2 business students need to think about this too. The role of leadership in setting an appropriate strategic direction, guiding a business through significant change, or communicating the vision and aims for the organisation is a common source of exam questions.

As part of their supporting resources for a CEO Summit, the Times newspaper printed a handout (12 June 2012) which provided some superb research evidence for business students. I have summarised some of the key findings from this below.

There is a great quote from Warren Buffett on role of leadership in determining business performance: “Invest in businesses that any idiot can run - because sooner or later, one will” - suggesting that the reputations of business leaders are mainly based on the quality of the businesses they end up running rather than their personal characteristics. However, not everyone agrees with that perspective.

The resource included a summary of a survey conducted amongst investment analysts - whose job it is to analyse and evaluate the likely future performance of firms whose shares are quoted on stock markets. How do they perceive the difference between effective and ineffective leadership.

The survey found…

What analysts cite as factors which determine the effectiveness of leadership:

A clear strategy (26% of responses)
Innovation (17%)
Financial results (13%)
Knowledge of markets and products (9%)
Market positioning (4%)

When asked what analysts look for in identifying ineffective leadership, the following factors were cited:

Lack of strategic clarity (26% of responses)
Dishonesty (14%)
Ineffective decision making (14%)
Failure to adapt to change (11%)
Lack of knowledge (9%)
Lack of direction (8%)
Poor results (7%)
Short-term thinking (6%)

The survey was conducted by accountants Deloitte and they came up with another useful stat that links leadership effectiveness with financial performance (and therefore shareholder returns):

“Deloitte found that companies viewed as having particularly strong leadership could enjoy a stock market valuation premium of more than 15 per cent). Those seen as having ineffective leadership suffered discounts of up to 20 per cent”

However, despite the importance most firms place on leadership (and their analysts too), Deloitte found that the majority do not have effective leadership training programmes (particularly at middle-management levels of the organisational structure (here they believe that management training has the biggest impact on business performance). Deloitte also concluded that Uk firms were too reliant on external recruitment of senior management rather than internal promotion (which also suggests weaknesses in the effectiveness of succession planning)