Leadership Evolution: From Personal Style to Organization Impact to Investor Value

“What makes effective leadership?” That is the dominant question when it comes to the study of leadership, and its exploration has filled countless books, many thicker than this one. Nonetheless, it is useful to review the overall development of the idea. The answer to what makes effective leadership has evolved over time, each new stage building at least in part on its predecessors. Some firms have celebrity leaders or an individual leader who gains notoriety. While these charismatic individuals become important to a firm’s success, more often it is the depth of leadership talent throughout the organization that builds long-term success. When my colleagues and I talk of leadership, we mean the collective group of leaders throughout a company, not just the CEO or another individual senior executive. Thus, while individual leaders matter, increasingly the entire cadre of leaders, the leadership, matters more.

Assessments of effective leadership have moved from a stance of believing that leaders excelled by first leading themselves, then being the sort of people others follow. Later assessments examined how leaders looked to others by leading in the organization, and the more modern view has them looking outside by creating value for external stakeholders.

WHO YOU ARE

Early leadership theorists tried to identify a core set of demographic traits that characterized an effective leader: height, gender, heritage, speaking style. They also tried to identify personality traits and backgrounds that made leaders more effective.

All to no avail.

It turned out that successful leaders could come from a variety of backgrounds and display a variety of physical and personality traits. The only trait that seemed to consistently differentiate better leaders was being somewhat (not too much) smarter than their followers. Traits eventually combined to form a leadership style, often a trade-off between people and task. Generally, leaders exhibited a preferred style, but the best leaders could be both soft and hard, caring about people and managing tasks.

Defining effective leadership by looking inside a leader is still an active field, with some useful observations to offer. The focus is now on the core competencies—the knowledge, skills, and values—of successful leaders. My colleagues and I have synthesized this competency-based work into what we call the leadership code, suggesting that leaders master five competency domains to be effective (strategy, execution, talent, human capital, and personal proficiency). I discuss these domains in more detail in Chapter 2 and throughout the book.

While many leadership theorists and advisers emphasize one competence area (for example, authenticity, emotional intelligence, strategy, execution, talent management, or human capital development), my colleagues and I have found that effective leaders master all five competency domains to be effective. Personal approaches to leadership primarily focus on helping leaders become more attuned to who they are and who they can become to be effective.

WHAT YOU DO FOR OTHERS IN YOUR FIRM

Leadership theorists eventually recognized that looking inside the leader was not enough to define effective leadership. Leaders also had to deliver results according to the task at hand. Part of this effort was to determine which leadership approaches worked in which situations. In this view, effective leadership depends on the requirements of the situation. Situations may vary by maturity of team members, complexity of the tasks at hand, time horizon for doing the work, or uncertainty in predicting outcomes of the work. Any individual leadership style will work better in some situations than in others, and truly effective leaders can tailor their style to the needs of the moment.

The other part of looking to others means that leadership effectiveness is less about a personality trait and more about how leaders help make organizations more effective. Leaders can drive organization effectiveness through employees, organization cultures, or financial performance.

The impact of leadership on employee performance has been studied extensively. Leaders' actions shape employee sentiment at work, a phenomenon that may show up as satisfaction, commitment, and engagement—or the reverse. Thousands of studies have shown that leaders drive employee response to work. Leaders also create strategies that differentiate their firms for long-term success. In addition, leaders shape an organization’s culture or identity. Culture has often been represented as the values, norms, beliefs, and unwritten rules of an organization, and it tends to take on the personality of the leader. Leaders create culture through managing people, performance, information, and work practices. Culture in turn drives financial performance.

Leaders also drive financial performance within a firm. Many studies have shown that leadership has about a 12% to 14% impact on firm performance.注2In one study, extraordinary leaders doubled company profits. Strategic leaders help make choices that help position their organizations for success. For example, in her research, Alison Mackey wanted to find out how much CEOs affected firm performance. She looked at fifty-one firms over ten years with ninety-two CEOs. She was able to show that the CEO affected a 29.2% variance in firm performance, which was somewhat higher than corporate impact (7.9%) and five times the industry impact. In particular, in smaller and faster-growing firms, CEOs have more impact.

注2：There are five significant studies on leadership and its impact on performance: S. Lieberson and J. F. O’Connor, "Leadership and Organizational Performance: A Large Study of Corporations,” American Sociological Review 37 (1972): 117–130; Nan Weiner, "Situational and Leadership Influence on Organizational Performance,” Proceedings of the Academy of Management (1978); A. B. Thomas, "Does Leadership Make a Difference in Organizational Performance?” Administrative Science Quarterly 33 (1988): 388–400; N. Wasserman, N. Nohria, and B. N. Anand, "What Does Leadership Matter? The Contingent Opportunities View of CEO Leadership,” Harvard Working Paper no. 02-04 (2001); Alison Mackey, "How Much Do CEOs Influence Firm Performance—Really?” September 1, 2005, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=816065. These results are summarized in the following table:

Both the personal and organizational approaches to leadership effectiveness find that leaders' ability to match skills to situation enables them to deliver success within the organization.

WHAT YOU DO FOR EXTERNAL STAKEHOLDERS

More recently, in a further step in leadership thinking, the definition of leadership effectiveness has gone beyond the person or the organization outcomes and addresses what happens outside the walls of the organization. Effective leadership in these terms is not merely what leaders know and do but also how their actions shape the experiences of customers. If customers choose to buy Lexus because of the quality and design, then leaders inside Lexus should make sure their actions drive quality and design to new and yet more attractive heights.

Leadership matters not just because employees are more productive, organization cultures are more conducive to strong results, or financial outcomes are better, but because external stakeholders receive value from what leaders do within the firm. For customers, leaders are effective when they link internal organization processes in ways that deliver on customer expectations. Culture becomes less focused on the norms and values inside the company and more on making the external identity of the firm (its brand) consistent with the internal culture. For leaders, this means not only creating an internal culture consistent with an external identity but also building a leadership brand. Such a brand exists when leaders ensure that the behaviors of employees reflect the expectations of customers outside the company. Work has begun to define leadership effectiveness through the expectations of customers.

Linking leadership actions to investor expectations would be part of measuring what this book calls leadership capital. Chapter 2 reviews how people have approached the connection of firm valuation and leadership, but to highlight the importance of this connection here, I offer some snippets from Warren Buffett’s annual letters to his shareholders. (Warren Buffett is among the most influential and successful investors of all time, and his annual letters highlight his philosophy and approach. Similar sentiments appear every year, but these are some of the most vivid from the past decade.)

Selected Quotes from Warren Buffett Annual Shareholder Letters

2007

“A terrific CEO is a huge asset for any enterprise. … At Berkshire … their abilities have created billions of dollars of value that would never have materialized if typical CEOs had been running their businesses.”

“But if a business requires a superstar to produce great results, the business itself cannot be deemed great.”

2010

“An outside investor stands by helplessly as management reinvests his share of the company’s earnings. If a CEO can be expected to do this job well, the reinvestment prospects add to the company’s current value; if the CEO’s talents or motives are suspect, today’s value must be discounted. The difference in outcome can be huge.”

2011

“The primary job of a Board of Directors is to see that the right people are running the business and to be sure that the next generation of leaders is identified and ready to take over tomorrow.”

2014

“For good reason, I regularly extol the accomplishments of our operating managers. They are truly All-Stars, who run their businesses as if they were the only asset owned by their families. I believe the mindset of our managers to be as shareholder-oriented as can be found in the universe of large publicly-owned companies.”

As definitions of leadership effectiveness move from inside the person to inside the organization to beyond the organization’s borders, it is important to recognize the emerging connection between leadership and investors. Leaders are more effective if and when they meet investor expectations. Investors are effective if and when they understand and realize the market value of leadership.