Everyone says that leaders are imperative assets to organizations, but where is the proof? Right here, and it shows that leadership impacts the financials, the company’s operations, potential investors and much more.
From August 2011 to January 2012, Deloitte Australia ventured out to establish the correlation between a corporation’s performance and senior leadership. Deloitte Australia completed 445 surveys and interviews on investment analysts in order to get to solve the puzzle. What they found is that investment analysts no longer only looking at the bottom line financials, but instead are “incorporating judgments about senior leadership into their equity valuations”. Incorporating their senior leadership judgments were found to account for up to 15 percent of a company’s value, which may make or break an investment deal.
A second criterion that investment analysts evaluate is the team effectiveness of senior leadership, which 50 percent of the analysts surveyed/interviewed reported to Deloitte that they evaluate team effectiveness as well. In addition to this, 80 percent of the participants said that team effectiveness among senior leadership would lead to a premium evaluation, while an ineffective team structure would lower the equity valuation. It is interesting to see how investment analysts approach an investment and what qualities they are now looking for in their prospective investments. It’s clear that people are no longer interested in only how the company is currently operating, and instead want a sense of security that the company will not go bankrupt right after the investment. Effective leadership is shown to create that safeguard for investors and show a glimpse of future operations as well.
Deloitte Australia also found that the correlation between performance and leadership varies by industry. As shown in Figure 1, some industries such as consumer goods and financial services, place a larger emphasis on expected performance during their investment review process. This is because industries these industries are more standardized than the rest, meaning that they require less research and development. As a result of this, changes in leadership personnel and methods can be seen quite quickly, which allows analysts to judge the quality of the investment with the new adjustments. In contrast to this, an industry such as technology has a lag in the performance impact of leadership changes. This is because with the constant restructuring of the industry, the leader’s impact is not as easy to quantify. 
Figure 1. Source: “The Leadership Premium”, DTTL 2012
With the evolution of the marketplace and the ability to obtain more and more information, investment analysts are able to cover there bases and make the more informed decision possible. In their eyes, senior leadership is ensuring them that they are invested in a quality company that has a bright future. But what about the leaders themselves? Do you think that too much scrutiny is being placed on the leaders, or is it a part of their job to be analyzed as if they were the product for sale? I understand that people want to make the most out of their investments and I kind of feel like leaders, such as CEOs and COOs, should accept this evaluation as a part of their job description. They did sign up to lead the company, so they should do whatever’s best for the company, right?
I believe leaders should definitely be measured on some scale in their company, especially if it is allowing the firm to perform better in their industry. Especially with the current market place, consumers are more cautious about buying and investing so if there is some proof that strong leadership has a direct correlation with performance, which would make things such as standardized investments better products, then some sort of valuation system should be implemented.
I definitely agree with the above comment. Strong leadership reflects a strong company. For example, when Steve Jobs returned to Apple, Apple began to work on the details of their supply chain management which has evolved to one of the best in the world today. Without strong leadership to direct a company, a company can flounder in its industry and lose to its competitors. Strong leadership is also needed to inspire confidence in its employees and all of its stakeholders. Therefore it makes sense for there to be a correlation between leadership and performance.
I am very interested to know exactly how “effectiveness of senior leadership” is calculated. I do believe investors look into more than the numbers now a days. I think a company’s “culture” and mission statement are as important as ever, and I also believe that the type of people who are hired are a key component to a successful company. Although I agree with the gist of the article, I don’t think they give enough information on how exactly they are calculating this “effectiveness of leadership” component.
I completely agree with your opinion on the scrutiny of high ranking company officials. A company can only be as strong as the people that are leading it. A huge part of how well a company can perform depends on the actions of these leaders. I think that high ranking officials in a company need to take responsibility for the fact that this judgement by others is part of their job. Threre are always going to be downsides and opportunity costs to doing anything in business and this is one of those downsides. Company officials should instead welcome the scrutiny placed on them as an opportunity to shine and show analysts how well they can do. It should be looked at from the perspective that the scrutiny can lead to an increase in their company’s share price if officials show they are doing a good job.
By no means is too much scrutiny placed on today’s public company leaders. Yes this trend of increased scrutiny has improved recently but more can still occur. A combination of factors leads to how well a company performs though without effective leadership these inputs tend to lose significance. Analysis’s most have confidence in a company’s senior management team. If not that company’s future cash flows will be discounted at a much higher rate.