Importance of Leadership: Business impact of good and poor leadership

 

Leaders in all areas of life – a for-profit company,  non-profit organization, government, military, or a sports team – play a crucial role in whether the endeavor succeeds or fails.  When an organization succeeds, the leader gets the credit.  When an organization fails, we usually blame the leader. 

 

Good leaders inspire everyone on their teams to put in their best efforts.  Poor leaders often drain the motivation and the energy of the team, and people do only what is necessary to keep their jobs.  We want to follow good leaders, and we do our best to avoid bad leaders.  Intuitively, we know that leadership makes a difference.  But, can we back it up with hard numbers?  In this article, I want to discuss studies by the Korn Ferry Hay Group and Zenger Folkman to demonstrate the importance of leadership.

 

 

 

The importance of leadership -A study by the KF Hay group

 

Korn Ferry Hay group conducted a study to find out what factors impact the bottom line or the profits of any company.  They found the five factors listed below

 

1. Strong franchises: Strong brands act as a moat or a competitive advantage. Example – Coca-cola, Apple, etc.  Strong franchises drive profitability.
2. Beneficial environments: An environment helpful to business. Example – Silicon valley for technology.  A supportive ecosystem and a beneficial environment drive both performance and profits.
3. Intellectual Property Rights: Patents and copyrights protect companies against competition and hence help their financials. Example – Qualcomm, Pharma companies.  Intellectual property rights prohibit competitors from copying a successful company and hence drives sales and profits.
4. Regulatory Barriers: Regulatory barriers protect the entry of competitors benefiting the existing players -telecom in the middle-east, and some African countries are expensive, but companies are highly profitable.  
5. Massive Resources: Capital, natural resources, the scale of operations act as a competitive advantage. Example: Google, P&G, Nestle, etc.  Even if a competitor can duplicate products, services, technology, or business model, it may be extremely difficult to match the scale of operations.  

 

Korn Ferry Hay Group found that these 5 factors combined account for 65% of the financial performance of any organization.

 

What factors account for the other 35% of the bottom line?

 

The five factors listed above drive 65% of the financial performance of any organization. What factors account for the other 35% of the bottom line?  Korn Ferry attributed it to leadership behaviors and the culture it creates! Leadership behaviors account for 35% of an organization’s financial performance, making.   

This clearly demonstrates the importance of leadership, not just to employee engagement, but also to the profitability of the organization.  In fact, leadership is the single most important factor. Leadership behaviors drive organizational culture. Organizational culture, in turn, drives business performance. How did Korn Ferry measure performance? Based on the profits, balance sheet, and people engagement levels in an organization.

If leadership accounts for more than a third of an organization’s performance, what are the implications? It means that leadership development is the single largest lever available to drive an organization’s performance! And it is probably the only factor that is entirely within the circle of the organization’s influence.

 

The importance of leadership -Gallup surveys

 

Gallup organization conducts a yearly survey of employee engagement in large organizations.  According to numerous Gallup polls over the years, less than a third of employees are engaged and committed to work. What are the implications?  Two-thirds of the workforce is disengaged at work!   What causes two-thirds of the employees in companies to be disengaged? Simply put, poor leadership!

To quote Marcus Buckingham – People don’t leave bad companies, they leave the bad managers!

Bad leadership creates a toxic culture. 

 

Read: Your Executive Leadership Development – Sink, Swim or Setup for Success

 

Importance of leadership – Zenger Folkman & Harvard studies

 

Zenger Folkman study – Does leadership impact the bottom line?

 

Leadership experts Zenger and Folkman initiated a study for a Fortune 500 commercial bank. These leaders were heads of different branches for the same bank and were responsible for the profitability of their respective branch operations.

Zenger and Folkman started with the 360-degree assessment of the leadership competencies to gauge the effectiveness of a leader. Based on the 360-degree feedback scores, they divided the leaders into three groups: the top 10% were the best leaders, the bottom 10% were the worst leaders, and the middle 80% were the rest of the leaders.

They then compared the performance of these three groups on two performance indicators

1. Net income the Profit (or loss) of the branch

2. Employee engagement in terms of the percentage of % employees who think about quitting.

Here are the results

As you might expect, the results show the bottom 10% did poorly and the top 10% did exceptionally well, but it is striking to see just how significant the differences are.

The bottom 10% of leaders had a net income of minus 1.2 million or a loss. In addition, over 80% of the employees under these leaders wanted to quit the organization.

The middle 80% generated a net income of $2.4 million.

Compare that with the top 10% of leaders. They had an average net income of $4.5 million. Only 3% of the employees under these leaders thought about quitting the company.

Although the specific numbers in other organizations may vary, Zenger and Folkman found this trend in multiple leadership studies across several organizations.

 

Conclusion of the Zenger Folkman Study

 

• Poor leaders lose money; good leaders make a profit; extraordinary leaders double profit!

• If you want to find out the effectiveness of a leader, ask those who are led. (through an anonymous 360-degree assessment)

Want to double your revenue? Turn your leaders into world-class leaders through a good leadership development intervention!

 

 

Harvard & other studies on the importance of leadership

 

• According to a Harvard study, subordinates of leaders who are in the top 10 percentile are 2.5 times more effective leaders themselves compared to subordinates of leaders who are in the bottom 10th percentile.  Good leaders develop more leaders. This has a cascading effect and improves the organization’s performance.
• While researching their book “Leading People,” authors Rosen and Brown scoured various studies on more than 3000 US companies. They found that the current leaders were utilizing only half of their human capital. It is hard to believe, but poor leadership costs companies half of their human capital.

 

With good leadership development, we can double the productivity of people by engaging most of the disengaged employees under a poor leader.

 

• DDI research found that a single poor leader’s cost to a company is $126,000 per year! The main contributors to this cost were employee dissent, dissatisfaction and turnover, poor morale, and bad teamwork in the leader’s team. But it is just the beginning. Bad leadership has a cascading effect all the way down to the frontline employees. If the managers’ poor performance one and two levels below a bad leader were included, a single bad leader’s real cost would be a lot more than this figure.

 

Have you read a book on POOR leadership?

 

I am willing to bet that you have read many books on good leaders and good leadership – it could be about Nelson Mandela, Jack Welch, or any one of the many admired leaders.  But have you ever read a book about a bad leader or poor leadership?  Again, I am willing to bet that the answer to this question is no!  And yet, we see bad leaders and bad leadership all around us.  Almost everyone has had the misfortune to work under a bad leader at some point in their career.  How was it?  What did that do to your morale?  What was the effect on your performance?  And that is just the human side of the high cost of poor leadership.   There is also a significantly high financial cost of poor leadership that we often are unaware of. 

 

Read: Poor Leadership Behaviors & its Collateral Damage

 

Poor leadership has a detrimental effect on all aspects of business performance.

 

• Poor employee engagement and high turnover
• Lack of clarity regarding direction, priorities, and roles
• Cost of turf wars and conflicts that linger under poor leadership
• Poor decision making, inability to change or innovate
• Negative impact on revenue and customer service numbers

Good leadership has a cascading effect on multiple aspects of a business’s performance.

 

• Increased employee engagement and retention
• Increased sales and revenues
• Improved customer satisfaction
• Responsiveness to change and innovation
• Increased profits and bottom line
• Cascading leadership and develop other leaders down the line

The evidence is conclusive. Good leadership supercharges performance. Bad leadership puts the brakes on performance.

 

The equation is simple.

Good leadership = Employee engagement = High performance

Bad leadership = Dissatisfied employees = Poor performance

Bad leadership is a drag on your bottom line.  Good leadership is an accelerator of performance.

Think your company doesn’t need leadership development?  Think again!

Think leadership development is costly?  Think again!

The cost of not developing your leaders may be insanely high.

When clients ask me about the cost of leadership development – I ask them, “Have you considered what is it costing you not to develop your leaders?”

 

The critical success factor 

 

Business success depends on a multitude of factors.  According to these multiple studies Korn Ferry Hay Group, Zenger and Folkman, DDI, and others – there is one factor inside the organization that is consistent and predictable in its impact on any business’s success.  What is this factor?  It is the quality of leadership within the organization!  And leadership development is probably the only factor that is entirely within the circle of influence of the organization.

If leadership is important, it makes sense for the organization to focus on leadership development.  Unfortunately, most of the leadership initiatives fail to deliver measurable behavior change or significant business impact.

 

Read: Is your leadership development effective? Or is the money going down the drain?

 

Is leadership development important?  Does it justify the ROI?

 

The related question is – “Is leadership development important?”  It is worth the cost?  Does the ROI justify the investment in leadership development?  Some companies think that they don’t really need leadership development.  Often companies perceive the costs of leadership development as expensive. My question to both is – “Do you know what it costs you to have poor leadership?”  

 

Fortunately, we offer the NAL Triple advantage coaching that delivers both measurable and guaranteed results, both in terms of behavior change at work and significant business impact.

 

NAL Triple Advantage Leadership Coaching.

 

That delivers guaranteed and measurable leadership growth.  It is based on a stakeholder-centered coaching process with a 95% effectiveness rate (in a study or 11000 leaders on 4 continents).  It is used by companies ranging from startups to 150 of the Fortune 500 companies to develop their leaders.

Here are some of the salient benefits of NAL Triple Advantage Leadership Coaching

Time and resource-efficient: The leader does not have to leave work to attend training programs.  We go to the leader and her team.  And it only takes 1.5 hours per month. The rest of the time, the leader is working to implement with her team.

Separate and customized improvement areas for each leader: Every leader is different.  One size fits all approach doesn’t work.  Individual development areas for each leader aligned to the business strategy.

Involves entire team: Unlike most leadership programs, NAL Triple Advantage Leadership Coaching involves the leader’s entire team, and it has a cascading effect – increasing the team effectiveness and improving organizational culture.

The leader becomes the coach: for continuous improvement for leaders themselves and their teams. It is like kaizen for your leadership development.

Cost-Effective: Our entire one-year coaching engagement often costs less than sending the leader to a short-duration leadership program at any reputed B school.

Guaranteed and measurable leadership growth: as assessed – not by us – but anonymously rated by the leader’s own team members.

Pay us only after we deliver results! : We work with many of our clients on a pay for results basis.  What does it mean?  If the leaders don’t improve, you simply don’t have to pay us.

Schedule an exploratory 15-minute conversation with our leadership adviser today

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References

The High Cost of Poor Leadership

The Trickle-Down Effect of Good (and Bad) Leadership

 

Watch the video – Is Leadership Development worth the cost?