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Dave Ulrich: Companies should be rated on leadership

A company’s leadership should be rated and held to account in a similar vein to its credit rating, a leading HR thinker has said.

Dave Ulrich, professor of business at Ross School of Business, University of Michigan, is working on a new Leadership Capital index that aims to provide investors with better information on leadership.

Ulrich told HR magazine the index will assess five personal traits and five systems that create good leadership.

“It’s 10 dimensions, each with five indicators, so you can get really detailed, but it will help investors better measure the leadership risk of a company,” Ulrich explained.

“We surveyed investors and found about 30% of their decision-making is tied to leadership, but they don’t know how to do it. Leadership matters, but  there’s variance of what good leadership looks like.

“That’s an opportunity to have an impact – you want something that’s important but not defined. Money is important, but it’s defined. Leadership’s important, but it’s not defined.”

Currently when people assess leaders they look at traits such as whether a leader has style, charisma or authenticity. Ulrich said it was now time to focus on the outcomes of these traits.

“Many people are writing about leadership as authenticity – you have great style, you’re charismatic, you have wonderful eyes or a good look,” he said.

“They’re not seeing leadership as driving outcomes. That’s the next phase. Can leaders create outcomes investors care about?

“We say ‘leaders have these traits’; but what we should say is: ‘What’s the outcome?’”

Ulrich said the concept could not have gained traction three to five years ago because the link between investor knowledge and what we now know about leadership was not as apparent.

He said the Leadership Capital index, out next autumn, could form part of a broader set of performance indicators that also includes financials, sustainability indexes and credit ratings.

“In the financial capital market they have a Moody’s index, a Standard & Poor’s index, Fitch’s – the credit rating of a firm,” he said. “If you get a good rating you can borrow money at 4%, if you get a bad rating you pay 6% because there is a risk associated. Why not create that for leadership? What a simple concept. Why not have a leadership rating risk index?”

Leadership has come under the spotlight in recent years due to corporate failures and large pay packets.

Ulrich believes the major problems with leadership are not just the focus on traits rather than outcomes, but also a tendency to focus on individual leaders rather than leadership, which is the collective.

“In the crisis, the US banks went belly up, they had trouble,” he said. “The US government bailed out the banks. ‘Bail out’ is a terrible metaphor. It’s when you’re on a boat and it’s taking on water, and you throw the water over the boat. But if you don’t fix the hole, you are never going to solve it. The question I would ask is: ‘What’s the hole?’ A big part of that hole is leadership.”

He continued: “Leaders made bad decisions, but we didn’t hold them accountable, we started bailing out. What we should have had is some discipline around leadership that said: ‘You’re the hole in the boat’.”

On executive pay, Ulrich believes the issue isn’t so much the amount leaders are paid or remuneration models, it’s the inequality between leadership and workers.

“The answer, I think, is not changing that for leaders, it’s getting more employees to have [stock] options,” he said. “If the stock goes up and leaders made decisions that caused the stock to go up, they should get rewarded. But why not give the same option to a frontline manager? Why not allow others in the company to have the same privilege leaders have?”