DDI research reveals that business analysts are short-sighted in their evaluations of company leadership, focusing too much on CEO past performance and not enough on future leadership
When evaluating businesses’ investment potential, analysts severely underestimate the importance of leadership practices, according to new research from global talent management expert Development Dimensions International (DDI).
The major findings of the research are: when making investment recommendations, analysts do not look much further than the CEO; US analysts trust a leader’s track record more than European analysts; and analysts rarely examine the future of the organization’s leadership.
The research also explored whether analysts should look more in-depth view at the leadership potential within an organization before making predictions on its future success and recommending its stock.
The research included 50 analysts from top banks and financial organizations in US and Europe, and was conducted at the end of 2009 through a series of in person and telephone interviews.
A Myopic View of Leadership
One of the most surprising conclusions is that the large majority – 36 of the 50 – think of leadership purely in terms of the CEO and almost never looked beyond this individual’s performance in making recommendations. Only 6 out of the 50 said the leadership skills of senior managers below board level would impact their likelihood to recommend a stock to a fair or great extent.
“You’re putting all of your eggs in the CEO’s basket—and turnover at that level is astronomically high, so your basket is likely to topple along with stock portfolios,” said Rich Wellins Senior Vice President with DDI.
In fact, in 2006, one out of every three global CEOs were banished from their corner offices due to performance, according to research from Booz/Allen/Hamilton in their annual CEO turnover study. This was up over 300% from the mid-90s.
Also ongoing research from MIT’s Sloan School of Management found that the CEO doesn’t have the impact on the business that many believed.
Analysts’ perspectives are often based on past and current performance—rarely on qualities the CEO possesses that might help see them through an unexpected crisis, grow the organization or enter a new market.
The research revealed that analysts overwhelmingly rely on short-term financial results to judge a CEO’s performance, and don’t exercise judgment on how well the organization is preparing its leaders for the future. Growth rates, shareholder value, the ability to innovate and a clear vision tend to be the main CEO measures used, but they’re not looking at the CEO’s ability to develop talent lower down in the organization.
Those that do look at CEO skills also recognize that different CEO skills are needed at different times, but only hold their lens up to the current scenario when making valuations, and almost never look at their ability to develop talent.
The key attributes analysts look for in CEOs are:
- Track record or experience (94%)
- Consistent growth in turnover or shareholder value (84%)
- Innovation and the ability to respond to changing market conditions (68%)
- A clear vision and the ability to carry the management team along with them (56%)
- The ability to recognize and manage risk (52%)
Future, what future?
The research revealed that most financial analysts did not consider leadership development or succession management in their stock recommendations—meaning that they’re only looking at the ‘here and now’ of performance.
However, senior analysts do try to understand how well a business is developing its senior leaders or if there are strategies in place to ensure there is a steady supply of future leaders from within the organization.
“I don’t spend my time worrying about how companies are fostering their next generation of star managers,” one analyst said.
US analysts put more emphasis on a leader’s track record than European analysts, when asked about their likelihood to recommend a struggling company with a recently appointed leader with a successful track record (80% of US analysts said very or quite likely versus only 50% of European analysts who were more likely to ‘wait and see’ before recommending.)
“This emphasis on past success has little consideration as to whether the leader has the skills the business needs in the future,” Wellins said. “This focus on a leader’s past performance—without consideration for the qualities that could make the organization strong in the future—is exactly why CEO failure is high.”
Invest in Leadership
Only eight of the 50 analysts considered an organization’s talent management or succession planning strategy, and when asked if management processes affect their likelihood to recommend a stock, one analyst explained:
“If you accept that, if [management processes are] properly done, it can affect the whole ethos and culture of an organization, then I can also see how it should [affect profitability/share price] but the link is too tenuous.”
However a study conducted in 2007 had 94 companies rate their use of leadership practices and then compared that to organizational performance. The result was that stock price growth was 204 percent for companies with strong leadership practices compared with only 76 percent for companies with a weak implementation of leadership practices. Many other studies confer with strong correlations between leadership practices and company performance.
Taking a Longer Look at Leadership
Strategies to spot-check the health of management processes:
- Ask if there is a talent management strategy in place – and if so how it links to business goals. How is the organization ensuring it has enough of the right people with the right skills needed to meet future business goals? Have they supported innovation, strong global acumen?
- Consider the non-tangibles of leadership effectiveness. It’s not just their financial performance that counts, but also those “people skills” that define a successful leader.
- Look at the entire senior leadership team—what does the top 100 look like? How are they growing the next generation of leaders for the organization?
- Appointing a CEO from within the business has better success in most cases, so a solid succession process helps define that leadership pool.
- What development is in place for mid-level and senior leaders in the business? These are the leaders whose effectiveness will often make the difference between success and failure.
- How is the organization measuring the effectiveness of its people and talent strategies – how do they measure what’s working and what’s not?
- Match the leader to the organization—a very effective leader can thrive in one organization and perish in another.