The conventional way to value a business, based on its assets and financial performance, accounts for about 50% of its market value. But every investor knows the actual value of any business is way beyond just financials. Given the dynamic environment in which businesses strive today, a basket of intangibles like strategy, brand, talent, R&D, innovation, risk, etc. play a vital role in determining the business’s success and competitive health. The latest book of Dave Ulrich is primarily written to facilitate investors in forecasting and anticipating drivers that affect this intangible component.
The extent to which these intangibles perform depends a lot on leadership within the business and most investors acknowledge this fact. However, there is little evidence displaying the yardstick for weighing the value addition of business leaders. This book gives insights on evaluating organizational leadership. Ulrich and Freed believe that investor judgements of leadership should go beyond isolated observations to more rigorous audit. This revolutionary book is packed with in-depth observations and research drawn from surveys and interviews with investors, business leaders and also synthesized work of consulting firms and leadership experts. The research, which lasted about a decade, has resulted in a leadership capital index which would help investors move from an intuitive and vague approach to a more objective and clear approach in measuring the quality of leadership and its impact on performance of the business.
Ulrich and Freed propose a leadership confidence index, similar to Moody's or Standard and Poor's, to assess leadership meticulously through the eyes of investors and in turn determining a business’s realistic value. Ulrich advocates, “The index is intended to help assess firm value and also become part of conversations about risk, social responsibility, governance, mergers and acquisitions, and leadership selection or development.”
The book draws on holistic and systematic thinking, providing detailed insights along with practicable tools, the right questions to be asked and the indicators allied to them condensed within a two – dimensional framework of individual behavior and organization capabilities. Each dimension is further bifurcated into five elements to provide more detailed metrics, innovative ideas and analytical methods for evaluating the company's management and organization. Individual behavior includes the personal traits and attributes of the senior leadership group (personal proficiency, strategic proficiency, execution proficiency, people proficiency, and leadership brand proficiency). Organization capabilities refer to systems created by leaders to manage the overall operations of business (cultural capability, talent management, performance accountability, information management systems, and work process). The intersections of these two domains create leadership capital.
The authors state, “When investors accurately assess leadership, they are indirectly, but accurately, assessing the future intangible value of a firm.” By striking off the feature of intuition and subjectivity in leadership evaluation, investors will be able to make better observations thereby increasing their ability to realize full and sustainable market value.
The book goes on to mention that ‘companies ranked annually among the most highly admired and best place to work for are also the ones ranked among those most profitable and those having high capital value.’ Success of any business depends on the quality of its leader and leadership team. Quoting an example of Warren Buffet, Ulrich says that good leadership is a mix of strategic, personal and external proficiencies complemented by strategic thought leadership and the willingness to share accountability.
The combination of research analytics and aspects of management and leadership, has led to an intersection of HR with investor expectations ultimately benefitting both. HR can create more internal and external value by supporting leaders in inspiring the right behaviors and impacting the company’s market worth. Ulrich beliefs this index would also benefit equity and debt investors, board of directors, trade associations, chief executives, advisory firms, government and rating agencies leadership development specialists and leaders.
Ultimately, studying leadership from the perspective of investors provides direction to the reader in understanding the necessity of and by what means can the leadership capital index reap market value for business. This 1.0 version of the book will assist key users to focus on sharpening leadership improvement efforts and other interested parties can benefit from a set of guidelines to assess leadership.