Quantifying the value of effective leadership
How many HR-based metrics do you have that would make the board members of your organisation sit up and take notice? What if you could measure the effectiveness of your leaders? What if you could quantify the impact that their leadership has on the performance of the organisation?
In a research programme at Kenexa, we have looked at what causes employees to view their leaders as effective. From this, we have created a metric, called the leadership effectiveness index, that measures the extent to which employees believe their leaders communicate their vision, handle challenges, value employees, are committed to improving quality and inspire trust. In a study of 143 multinational companies, we have found that leadership effectiveness accounts for 10% of an organisation’s earnings per share!
Clearly, a number of factors – such as your marketing approach, the quality of your products and the level of competition – will impact on your organisation’s ability to deliver earnings per share. However, if 10% of it can be accounted for by the effectiveness of your leaders, isn’t this a metric to which your board should be paying attention?
Five aspects of leadership
Our leadership effectiveness index was originally created by analysing employee perceptions of the following five items:
- Vision: Do senior managers give employees a clear picture of the direction in which the company is headed?
- Ability: Do senior managers have the ability to deal with the challenges we face?
- People: Do senior managers demonstrate that employees are important to the success of the organisation?
- Quality: Are senior managers committed to providing high-quality products and services to our customers?
- Confidence: Do I have confidence in my organisation’s senior leaders?
As part of a global survey of more than 29,000 employees in 21 countries, we asked whether individuals would ‘strongly agree’, ‘agree’, ‘neither agree nor disagree’, ‘disagree’ or ‘strongly disagree’ with each of the above statements.
Some 30% of employees in the study rated their leaders as effective on all five of these items (by ‘agreeing’ or ‘strongly agreeing’ with all five statements), while 19% of employees rated their leaders as ineffective on all five items (by ‘disagreeing’ or ‘strongly disagreeing’ with each statement). The remaining employees (51% of the sample) rated their leaders as effective on some points and ineffective on others.
Our analysis of the survey revealed some intriguing findings, such as:
- Employees who rate their leaders as effective have employee engagement index scores that are more than five times higher than those employees who rate their leaders as ineffective.
- In the eyes of their employees, leaders in India and China are seen as the world’s most effective. The UK ranked 17th out of the 21 countries surveyed.
- Leadership effectiveness differs across different industries. In the UK, effective leaders are more readily found in the manufacturing, healthcare and retail sectors. Government and financial services have the lowest rankings of leadership effectiveness.
Establishing a link to performance
Taking this research further, we wanted to find out whether there is a direct link between the perceptions that employees have of their leaders and the performance of the organisation. We found that there is indeed a tangible relationship between leadership effectiveness and business performance.
In our study, the performance of companies that ranked highest on leadership effectiveness was six times greater than the performance of those that ranked lowest on leadership effectiveness.
What constitutes effective leadership?
If business performance is significantly affected by leadership effectiveness, it becomes important to understand what causes employees to view their leaders as effective. In other words, what do ‘followers’ want from their leaders?
Our research shows that effective leaders are seen as people who:
- Inspire trust and confidence
- Value quality and customer service
- Are open and communicative
- Hold a multi-stakeholder perspective
- Hold lower-level managers accountable for being good managers
These are the behaviours and characteristics that leaders need to demonstrate to employees.
The implication here is that leaders should pay attention to how they are seen by employees, not simply how they are seen by the market. They should: be conscious of whether they are engendering trust and confidence; ‘walk the walk’; ensure lower-level managers are held accountable; give credit where it is due; take a multiple-stakeholder approach when prioritising actions; and communicate their thinking clearly and honestly.
You can assess how your employees feel about their leaders by asking them the following questions:
1. Do they trust the organisation’s leadership?
2. Do leaders emphasise quality and improvement as top priorities?
3. Is communication open and two-way?
4. Does the organisation only serve the interests of financial stakeholders or does it also serve the interests of stakeholders such as employees, customers, suppliers and the local community?
5. Are employees recognised for delivering outstanding customer service?
6. Is action taken on new ideas?
7. Are employees motivated to work hard?
8. Do they have confidence in the organisation’s future?
9. Are productive employees recognised?
10. Is performance evaluated fairly?
Where would your leaders be strong? Where would they be weak? For those involved in coaching or developing leaders, the answers to these questions can act as a training needs analysis.
HR professionals sometimes complain about not having a seat at the top table. Perhaps they are measuring the wrong things or not demonstrating the impact of their initiatives. Leadership effectiveness is no touchy-feely, flavour-of-the-month issue. This easily adopted metric can give you a greater understanding of your organisation. After all, 10% of your earnings per share is at stake.
Jack Wiley is executive director of the Kenexa Research Institute