The business impacts of leadership
Updated: Apr 27
While the popular press and business schools have long stressed the importance of good management processes and good leadership, empirical economists have had relatively little to say about leadership practices (i.e. process and behaviour). In the last decade empirical research (Bassi L, McMurrer D, 2007) has revealed a core set of human capital management drivers that predict business performance across a broad array of organisations and operations. These drivers fall into five major categories:
leadership practices;
employee engagement;
knowledge accessibility; workforce optimisation; and
organisational learning capacity.
Effective leadership has become acknowledged as a proven key business driver. Economists have long speculated on why large differences in performance exist between companies within countries and within narrowly defined industry sectors. For example, labour productivity varies dramatically even within the same industry, and these differences are often highly persistent over time (Baily,Hulten, and Campbell 1992; Bartelsman and Dhrymes, 1998; Bartelsman and Doms 2000; Foster, Haltiwanger and Syverson 2005). Technology is one part of the story, and a substantial productivity differential still remains, which data econometricians label as the effects of leadership quality (Mundlak 1961).
In the last decade, when quality data was gathered and analysed, economists observed a surprisingly large spread in leadership (and management) practices across firms and corresponding performance spread (Bloom N and Van Reenen J, 2007). A small number appear to be well led and their results are significantly above benchmark.
Managers are fond of the maxim “Employees are our most important asset.” Yet beneath the rhetoric, too many still regard and manage employees as costs. That’s dangerous because, for many companies, people are the only source of long-term competitive advantage. Companies that effectively lead employees enhance their own success and even survival (Bassi L, McMurrer D, 2007).
The Value of Effective Leadership
Since the 1990's we've had robust methods for measuring the bottom-line contributions of investments in leadership development for human capital management. And research findings increasingly link effective leadership behaviour and habits with business success.
Researchers compared the average three-year compound annual growth rate in income for sales offices across a number of companies (Bassi L, McMurrer D, 2007). Growth rates for offices that recorded the best leadership maturity scores ranged between about 60% and 130% higher than the offices that had the smallest scores. In other companies the mean accident rates for plants with high leadership scores were between about 10% and 30% lower than the rates for plants with low leadership scores.
Gallup Organisation conducted in-depth interviews of 80,000 managers in 400 companies over a 25 year period and concluded that people join companies, and quit managers (Buckingham M, Coffman C, 1999). The same exhaustive, decades-long study sought to answer the question “What sets great organisations apart?” In the end, the results of this research boiled down to one simple truth. There are no great companies. Every company is made up of separate teams, and the performance of those teams, no matter how successful the company may be, varies widely. And for the individual employees, the experience of the team trumps the experience of the company.
What then, determines the experience of the individual? Their immediate supervisor. People who feel their manager cares about them are more productive, contribute between 25% and 40% more to profits, and are significantly more likely to stay with their company long-term (Gallup, 2012).
The links between leadership, engagement, discretionary effort, productivity and profitability are solid, with Aon-Hewitt Best Employers delivering on average 9% more profit per employee and double the revenue growth of other organisations. Despite this, and the increasingly competitive global market, only around 30% of Australian and New Zealand organisations are improving employee engagement levels. This would suggest that the majority of the widespread leadership development programs are not delivering leadership improvement.
In our work with clients we measure a number a number of very specific critical competitive edge front-line leadership behaviours. The results consistently show, from industry to industry, client to client, a direct and high correlation (around 80%) between a small subset of critical leadership behaviours, leadership fitness scores, team engagement and team results. High performing managers who score in the first quartile are leading teams that are 10% or more ahead of targets. While low performing managers who score in the third quartile are up 15% or more behind target.