Dave Ulrich on calculating the market value of leadership: An interview by Bob Morris

Posted on: October 25th, 2015 by bobmorris

UlrichDavid-1Dave Ulrich is the Rensis Likert Collegiate Professor of Business Administration at the Ross School of Business, University of Michigan, and a partner at the RBL Group a consulting firm focused on helping organizations and leaders deliver value. He has been ranked as the #1 management guru by Business Week, profiled by Fast Company as one of the world’s top 10 creative people in business, a top 5 coach in Forbes, and recognized on Thinkers50 as one of the world’s leading business thinkers. Dave has written 30 books and over 200 articles that have shaped three fields:

o He has influenced thinking about organizations by defining organizations as bundles of capabilities (Organization Capability) and worked to delineate capabilities of learning (Learning Organization Capability), collaboration (Boundaryless Organization), talent management (Why of Work), and culture change (GE Workout).

o He has articulated the basics of effective leadership (Leadership Code), connected leadership with customers (Leadership Brand), and synthesized ways to ensure that leadership aspirations turn into actions (Leadership Sustainability). Dave’s current work on The Leadership Capital Index (published by Berrett Koehler in September 2015) creates a “Moody’s index” for leadership. This work examines leadership through the eyes of investors and helps realize the market value of leadership, thus bringing the fields of firm valuation and leadership together.

o He has shaped the HR profession and been called the “father of modern HR” and “HR thought leader of the decade” by focusing on HR outcomes, governance, competencies, and practices (HR Champions; HR Value Added; HR Transformation; HR Competencies; HR Outside In). He spearheaded a “gift” book on the future of HR (The Rise of HR, distributed to over 1,000,000 HR professionals), in which 70 thought leaders freely share their insights.

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Morris: Before discussing The Leadership Capital Index, a few general questions. First, how do you exp-lain the fact that the average tenure of CEOs now is less than half of what it was only a decade ago?

Ulrich: Performance demands coupled with transparency make the CEO (and other senior leadership jobs) much more difficult. Investors have less patient capital and the competitive landscape is more demanding than ever with technology enabled information and global players. CEOs who don’t perform quickly are identified and pressured to meet global standards.

Morris: Opinions are sharply divided about how important charisma is to effective leadership. What do you think?

Ulrich: Of course, we resonate with charismatic leaders. The inspire us and give us confidence. But it is useful to get underneath charisma (is it presence? Communication skills? Style? Or something else?). And, we have learned that any array of personal attributes that do not lead to clear results will not create sustainable leadership. Finally, leadership is less about what a leader is, knows, or does, but how that personal style makes others better. For example, authenticity or emotional intelligence without creating value for others is more narcissism than leaders. Leaders should build on their strengths that strengthen others.

Morris: Opinions are also divided as to whether or not to motivate another person. I doubt it but do believe that it is possible to [begin italics] inspire [end italics] another person’s self-motivation. What are your own thoughts about this?

Ulrich: Most people are motivated by something to do something. For example, we have had students at the university who are labeled “unmotivated” then we find out they are whiz’ at video games, dress up in costume and arrive hours early to a football game, and plan and deliver great parties. These students are very motivated, just not to what faculty think matters. Leaders’ tasks are to help others see that doing things the leader values will help the other better meet their goals, not just the leaders’ goals. If students have more academic discipline, they will have more opportunities for play and pleasure through their lives not just while at college. Leaders need to direct motivation.

Morris: In your opinion, what are the defining characteristics of a workplace culture within which personal growth and professional development are most likely to thrive?

Ulrich: Managing “culture” has become and I think will become an increasingly “hot” topic in the next few years. The war for talent will evolve to victory through organization where the organization becomes more important than the people. Individuals may be champions, but teams win championships. The organization culture area is murky at best with dozens of overlapping and competing ideas and frameworks. Without clarifying this in a short answer, let me say that culture should begin by identifying the “right” culture, which I believe is the identity of the firm in the mind of key customers and investors outside. In this logic, culture inside a firm should be tied to firm brand promises made to customers and investors outside. When employees see that their daily actions will generate value for customers and investors, they are more motivated to pursue those actions.

Morris: In 1924, 3M’s then chairman and CEO, William M. McKnight, observed, “If you put fences around people, you get sheep. Give people the room they need.” In today’s business world, to what extent (if any) are there still “fences” that restrict and demoralize workers? Please explain.

Ulrich: Organizations succeed because they respond to the environment in which they operate. Most hierarchical organizations define clear roles, responsibilities, rules, and routines … called bureaucracies, that enable organizations to have clarity about what is expected in a world of high complexity. Today, the environment is not only complex, but also enormously uncertain and changing. Building bureaucracy will not respond to change. Organizations today have to be building around empowerment, involvement, engagement, and decision making so that employees can respond at the pace of environmental change. This means changing fences which constrain behaviors to networks that invite new behaviors and opportunities.

Morris: In your opinion, does the Chief Human Resources Officer (CHRO) or equivalent today have more, less, or about the same influence on the most decisions made at the highest level as was the case fifteen years ago? Please explain.

Ulrich: Last year we published an interesting finding … the 14 leadership characteristics of the top CEOs were most matched by the top CHROs (more than those of a CFO, CMO, or CIO). We find that top CHRO’s know and do what CEOs need to succeed. High performing CHROs help define and deliver individual talent, collective leadership, and organization capabilities that enable organizations to win.

Morris: What is the single greatest challenge that a CHRO or equivalent faces in an international organization that has more than 100,000 employees located in dozens of different countries?

Ulrich: The basic question for any CHRO in a large or small company, public or private, global or domestic is to answer the question: “How will my work add value to this organization?” This value is defined not only by internal outcomes (more productive employees, more likely to accomplish strategies), but also increasingly by external outcomes (customer commitment, investor confidence, community reputation). HR professionals should define and deliver talent, leadership, and organization insights that create internal and external value.

Morris: Now please shift your attention to The Leadership Capital Index. When and why did you decide to write it?

Ulrich: I am passionate about ideas with high impact, which was the title of our learning organization research. To have impact, means to create value for others, not oneself. We have written quite a bit about customer value from HR (e.g. HR Outside In; Leadership Brand), but when I listen to or observe investors, they want to serve their investors (debt or equity). So, with Norm Smallwood, we began to explore how internal practices could be linked to investor value. Or, more poignantly, why do two firms in the same industry with the same earnings have different market value? This led us to explore intangibles which are emerging in investor discussions and to then see quality of leadership as the driver of these investor values.

Morris: Were there any head-snapping revelations while writing it? Please explain.

Ulrich: The ideas in the book move two disciplines forward. For investors, they move from studying financial results to intangibles to leadership. The more they make this move, the more they reduce risk and fully value a firm. But they don’t really know how to fully grasp leadership. For those who study leadership, we need to move from descriptors of personal traits (e.g.. authenticity or emotional intelligence) to the value leaders can create for others. There is a wonderful body of knowledge about leadership that has not been applied to investors. The intersection of investors looking at leadership and leadership through eyes of investors results in a leadership capital index. It will help investors fully value a firm and leaders take more targeted actions.

Morris: To what extent (if any) does the book in final form differ significantly from what you originally envisioned?

Ulrich: Wow! This book took 10 years to write! I started by thinking I could help investors have over 90% confidence in their assessment of leadership. So, Norm Smallwood and I interviewed lots of investors from around the world. It was clear that while they intellectually valued leadership, they did not have rigorous or thorough ways to assess it. I spent 10 years trying to go from 5% confidence to 90% and got frustrated with the demands of this task. So, I concluded that going from 5% confidence to 30 to 40% would be a real value to investors. Thus this book is a leadership capital index 1.0, knowing that 2.0, 3.0, and others will follow. But I want to integrate some wonderful work by others and shape some new conversations.

Morris: To the best of my knowledge, there has not been a Leadership Capital Index (LCI) or equivalent until now. Is that true? If not, why not?

Ulrich: Some very talented and thoughtful people have looked at the value of leadership and how it firm performance. But what has happened is that people often look at one dimension, e.g., executive compensation or personal integrity or ability to manage talent or some other personal trait. No one has put these pieces together into a comprehensive and cohesive leadership architecture that investors can use to evaluate quality of leadership. It is a bit like measuring credit worthiness only by looking at house payments versus the overall financial picture. A Moody’s index offers a more complete view of credit worthiness rather than merely looking at a single criterion or metric. This is what I want to do in Leadership Capital Index.

Morris: What are the major benefits of the LCI?

Ulrich: For investors, the LCI will help them reduce their investment risk. They will have better information about the quality of leaders and leadership at both the individual and organization domains. This will affect asset managers who want to make investments to have more information and reduce their risk. It is like someone placing a bet on a sports team and having more information about the players than someone else. For organizations (board, CEOs, heads of HR), they can communicate to investors the quality of their leadership to build confidence in the future and affect market value. They can also recognize which leadership improvements will have the most impact on investor confidence. This work opens the door for serious discussion of leadership in board rooms and on investor calls. We would envision a LCI discussion being 10 to 15% of all investor conferences and calls.

Morris: To what extent can the LCI measure a leader’s so-called “soft skills” such as those associated with emotional intelligence? Please explain.

Ulrich: I spent years trying to “find leadership” on the income statement and balance sheet. Baruch Lev and his colleagues have done this by essentially looking at productivity and efficiency measures and claiming this is leadership. My “Aha!” moment when I realized that income statements and balance sheets were created to measure cash flow, not leadership. We need to find new measures of leadership that we can rigorously track. This logic leads to the two dimensions (individual and organization) and 10 elements of leadership and 250 measures in the book. We are now doing pilots and studies to focus on the key indicators that can be reliable and comparable. We will get there with some creative ways to measure including social media, interviews, and existing data.

Morris: By which criteria should leaders of an organization decide whether or not to adopt the LCI?

Ulrich: Here are some questions to ask: Would you like more market value for the same earning? Are your investors realizing the quality of leadership that exists within your organization? Do you have a rigorous and regular way to help investors know the quality of your leadership team? Are you investing in building leadership in smart ways? Are you getting a good return on your leadership investment?

Morris: What are the unique advantages of determining the bottom-line impact and value of individual and organizational leadership from an investor’s perspective?

Ulrich: Value is defined by the receiver not the giver. Leaders who do not create value for others are not really leading. A leader may say, “I built my company and I am worth $10B”. I would challenge this leader. First, how many millionaires did you create? Leadership is NOT that you made $10B, but that you created many millionaires. Second, “you” did not build your company; many many people built it. How did you lead so that they became better.

Harvard just published a wonderful list of the top 100 companies that created market value in the last decade, then they listed these leaders and claimed them as successful. The challenge is that this correlation (naming leaders of market cap increases) is not causation. What did these leaders know and do to make this valuation happen? Without these deeper insights, leaders are not going to be able to sustain their success for the next generation of leaders. The LCI offers leaders deeper insights into 10 elements of leadership that they can pass to the next generation.

Morris: You focus on two broad domains: the individual and the organizational. To what extent are they interdependent ? Please explain.

Ulrich: Individual leaders and the leadership team are critical. We like to look at a leader at any level of the company and see their personal traits and success. But organizations exist that outlast individual leaders. When leaders can create organization systems around culture, talent, performance accountability, information, and work, they build sustainable success not dependent on them.

Morris: In your opinion, what is the single greatest challenge to measuring the bottom line value of individual leadership? Why?

Ulrich: We like to assume that measurements are precise, clear, replicable, and stable. By definition, measurements are judgment calls. But, we can get more precision, clarity, replication, and stability around leadership that drives value. Some have told me they want “one or two” indicators of leadership and don’t want to get lost in more complex thinking. Others have said they have found the “key” to leadership and don’t need to explore more. I hope they are riding unicycles because single indicators are not stable over time. Nor are they indicative of the real value of leadership.

Morris:
To what extent will the LCI improve the value of due diligence in conjunction with M&A negotiations? Please explain.

Ulrich: There are many implications of a viable leadership capital index. In our work on mergers, for example, we have found that we can go from a 20 to 30% success rate (return the cost of capital in 5 years) to about 60 to 70% by rigorously evaluating leadership and organizational issues in advance of given the merger. While we are not starting the LCI on mergers, it has huge implications for them.

Morris: In your opinion, what specifically can the LCI contribute to the executive search process, especially when evaluating candidates for a C-level position??

Ulrich: One of the common mistakes in succession is that the discussion starts with the candidates for the job: should we promote person A or B? This person-centric succession completely ignores the current and imminent requirements of the position. Good succession starts with “what will success require the person in this position to contribute?” For example, will our strategy focus on growth through innovation or cost through efficiency? Better succession will also weave in leadership by asking, “what will our investors want to see in our future leaders?” This gets into the question of who are our investors (growth or value) and what can, indeed must our leaders do to meet their expectations?

Morris: Is any special training needed to use the LCI properly? A background in finance, for example? Please explain.

Ulrich: My sense is that leadership capital index will be used at the intersection of finance (mastering numbers and market valuations), HR (mastering talent and cultural issues), and information (putting information into data that will have insights that lead to impact). Bringing together these three components (money, people, and information) will offer an integrated approach to building investor confidence.

Morris: For more than 25 years, it has been my great pleasure as well as privilege to work closely with the owner/CEOs of hundreds of small companies, those with $20-million or less in annual sales. In your opinion, of all the material you provide in The Leadership Capital Index, which do you think will be of greatest value to leaders in small companies? Please explain.

Ulrich: First, SMEs often have a challenge of moving from a leader (often founder) to leadership (next generation). LCI will help leaders recognize what to pay attention to in moving to the next generation of leadership. Second, SME’s need to move from a focus on individual leaders or leadership to an understanding of the value of the firm, not just the leader (e.g. culture). The LCI elements around organization give SMI leaders a roadmap for building organizations that outlive themselves. Often entrepreneurs are not as wsell-qualifiued at institutionalizing their work as they are at initiating it. This index raises key questions that will help them to do so.

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Dave cordially invites you to check out the resources at these websites:

His Amazon link

His website link

RBL Group link

Ross School of Business link

Forbes interview on “The Future of HR” link

Harvard Business Review link

 

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