This interview is based on Dave Ulrich’s book The Leadership Capital Index: Realizing the Market Value of Leadership, Berrett-Koehler Publishers, 2015.
Q: What exactly is the Leadership Capital Index?
One of the things I really like to do is to bring together two different fields and find an intersection. In this case one field is leadership and the other one is investment. That intersection between leadership and investors is the leadership capital index. A leadership capital index is really a simple idea. It’s like a Moody’s, Fitch or S&P index for leadership. It says, “when an investor looks at a firm how do they know it has a good quality of leadership?” How do I know that my leaders are doing things that investors have confidence in? And in the field of leadership it’s not about what leaders do; it’s about the value they create for others. So being a leader is not about emotional intelligence or authenticity; it’s how they use that to help stakeholders inside and outside the company. Investors are among the primary stakeholders. How does what we do in leadership affect the investor?
If you’re an investor, you want to reduce your risk and increase your profit. Does the firm make money? Does the company have intangibles that predict future earnings? The intangibles are strategy, brand, research, innovation, collaboration, etc. Does the firm have these intangibles? And then there is the leadership behind the intangibles. From the leadership point of view, you want to add value for those inside and outside the company. From the investor point of view, you want to reduce your risk by managing leadership and understanding it.
Q: Not likely to be a very popular idea with leaders. No one likes being graded.
Part of that is true. Actually what we find is that if you score well and you have a leadership premium, you want to be graded. Everyone likes getting graded when they get a 90 or 95 percent. They don’t like being graded when they get a 70…
I’ve been meeting with a lot of leadership teams, and I said: “as you try to build your leadership team, either through your training programmes, your hiring or your succession planning, are you using your investors as a stakeholder who will set a criteria about what you’re doing? And almost nobody does. We build our leadership training programme and our competencies by looking at ourselves. We don’t look at ourselves through the eyes of investors.
Q: Could you explain the mechanics of the leadership capital index? How do you go about measuring leadership? Do you do a survey? How do you assign value?
We’ve got ten dimensions of leadership (in the book you will find 250 measures) divided into three columns. Column one is a site visit that includes an interview and observation. We want to find out things like “does the leader have personal presence?” One of the questions that we ask is “when you leave the interaction with the leader, do you feel better or worse about yourself?” It gives us the sense of confidence that person communicates. So, one column is the site visit, the due diligence that the company could do.
The second column is the reporting information on the firm. Things like the firm’s price-earnings ratios, succession planning, retention rate of top-performing employees, etc.
The third column is measured on social media. The idea is to go into the social media space to see reputation indices, articles, and rate the firm based on social media. The three columns are the three ways to do it: site visit, reported data and social media.
Q: So you use subjective evaluation too.
In the first column yes. Let me say, when I interviewed investors I said to them “on a scale from 0 to 10, how critical is leadership for a firm you invest in”? These are active investors, not index investors or day traders, but those who really want to get to know the company. And they almost always say 8, 9 or 10. Leadership matters. Then I say “how do you assess it today”? And they hem and they haw. One of them said “we want to look at a firm, so we send a psychologist in to interview the leadership team.” That’s a good idea. It’s a team, not an individual. What does the psychologist ask them? They said, “well, this is a developmental psychologist, and they ask them how they got along with their mother.” You’re going to help determine an investment based on a perception of how somebody got along with their mother? The reason I say that is “I’m not sure our index is perfect, but it’s a whole lot better than how you got along with your mother”. It is somewhat subjective. The first column is observation and perception.
Q: This seems to be taylor-made for corporate CEOs, how about other kinds of enterprises, not for profits, or even politicians. Can this be used to measure the quality of a political leader?
That’s a good question and in fact there’s some of the same work being done with politicians. The outcome is not investment or reducing your investment risk, the outcome is “do those politicians gain credibility? Are they able to create goodwill? Some leaders are better than others in creating political good will. And we don’t have a way to document that.
In not for profits, same kind of idea. When the World Bank does micro-financing, one of the things they’ve learned is that just financing a project is not sufficient. That if they give money to an agency or a start up company or start up government agency, they may not have wisdom or good judgment about how to use it, and so the leadership capital idea is to begin to say we don’t want to just do micro-financing without deep management understanding. And so we see people like the World Bank say we want to do something like this, we want to use something like this to really reduce the risk of micro-financing.
Q: Do you think the L.C. I. can be used by business schools to train leaders?
When you build a leadership training curriculum at a company, you should bring in some of your investors as advisors, so they’re in the advisory group, in the board group, and you say to them: here’s our physical plant, our hardware, here’s our software, here’s what we’re going to train. Are these the things that would give you as investors more confidence in what we do? Second, when you’re doing training programmes, have investors come as faculty. They will be able to say: “You know we’ve just moved you from a buy to a hold. Here’s why.” And third, when we’re designing our curriculum, make sure that the things we’re teaching our leaders are things that give investors confidence in our future.
Now back to business school: I think that same logic could apply to a business school. Is this business school creating leaders who will give investors more confidence? And I think that’s a really interesting question. Any business school of any reputation can teach leaders the basic business: how to do finance, income statements, a balance sheet, marketing, strategy. They create leaders who do the basics great. And research says this is 50 to 70 percent of leadership. But business schools should be able to say, “we are creating leaders that have something unique. There’s a differential brand about our leaders.”
- This post gives the views of the interviewee, not the position of LSE Business Review or the London School of Economics.
Dave Ulrich is the Rensis Likert Professor at the Ross School of Business, University of Michigan. He has published over 30 books on leadership, organization, and human resource topics. He is passionate about building talent, leadership, and organizations that add value to employees inside and customers, investors, and communities outside the organization. firstname.lastname@example.org