Catastrophic Failure of Leadership—Why Analysts Get It Wrong

Business analysts are short-sighted in their evaluations of company leadership, focusing too much on CEO past performance and not enough on future leadership
 
04 February 2010

When evaluating businesses, analysts severely underestimate the importance of leadership development practices, according to new research from global talent management consultancy DDI.
 
The research found that when making investment recommendations analysts do not look much further than the CEO, make conclusions based on superficial information and rarely examined future organisational leadership strength. 
 
The research also examines whether analysts should be taking a far more in-depth view of the leadership potential within an organisation before making predictions on its future success and recommending its stock.
  
The research included 50 analysts from top banks and financial organisations in Europe and the US and was undertaken at the close of 2009.
 
A Myopic View of Leadership
One of the most significant conclusions is that the large majority – 36 of the 50 – think of leadership purely in terms of the CEO and almost never looked beyond this individual’s performance in making recommendations.
 
Their analysis is also often based on past and current performance—rarely on qualities the CEO possess that might help see them through an unexpected crisis, grow the organisation or enter a new market. 
 
Instead, analysts overwhelmingly rely on short-term financial results to judge a CEO’s performance, and lack the insight to judge how well the organisation is preparing its leaders for the future. Growth rates, shareholder value, the ability to innovate and a clear vision tend to be the main CEO measures used. Interestingly, growing organisational talent is high on the CEOs’ agenda.

Simon Mitchell, Director at DDI UK, comments;
“Investors may risk putting all their proverbial eggs in one leader’s basket. With executive turnover at an all time high, the risks to portfolios seem far too high. Even in good times one in three senior executives are likely to fail. Analysts in the research tell us that good leadership will be even more important in the future, to help control costs, cope with increasing change and tackle the expected upturn. Yet they rely on blunt instruments and lag measures to assess the CEO.” 
 
“Companies that invest in the development of their leaders and CEOs outperform those that do not, yet analysts do not seem to be looking at this. And it’s not just about having future CEO candidates available; analysts have little idea if the business is developing leaders at every level to be able to meet present and future business challenges.”
 
Future, what future?
Most financial analysts in the research did not consider leadership development or succession management in their stock recommendations—meaning that they’re only looking at the ‘here and now’ of performance. In fact, only eight of the 50 analysts even considered an organisation’s talent management or succession planning strategy; and none of them felt fully conversant in this area.
“I don’t spend my time worrying about how companies are fostering their next generation of star managers,” one analyst said. 
 
However, more seasoned analysts do try to understand how well a business is developing its senior leaders or if there are strategies in place to ensure there is a steady supply of future leaders from within the organisation.
 
Analysts placea great deal of emphasis on track record, and are apparently willing to recommend a struggling company with a new leader with a strong track record. Yet there is little consideration as to whether the leader has skills the business needs now.
 
Further key findings in the report include;
  • Leadership skills of senior managers below board level are rarely considered by analysts, with only a minority of more senior analysts recognising the importance of this. Forty four of the fifty analysts said this would affect their likelihood to recommend a stock slightly or not at all.
  • Many analysts do not make the link between processes to ensure there is a steady supply of future leaders and having an effective CEO in place.
  • Analysts recognise that different CEO skills are needed at different times, but only hold a short-term view of the success of the top position.
 
The key attributes analysts look for in CEOs are:
  • Track record or experience (94%)
  • Consistent growth in turnover or shareholder value (84%)
  • Innovation and the ability to respond to changing market conditions (68%)
  • A clear vision and the ability to carry the management team along with them (56%)
  • The ability to recognise and manage risk (52%)
While CEO track record is clearly the critical factor in assessing CEOs, their ability to develop talent lower down in the organisation is not seen as a key skill.
 
Advice for analysts 
From this research, DDI has created advice for analysts to help them spot-check the health of leadership development and succession processes:
 
  • Ask if there is a talent management strategy in place – and if so how it links to business goals. How is the organisation ensuring it has enough of the right people with the right skills needed to meet future business goals?
  • Consider the non-tangibles of leadership effectiveness. It’s not just past performance that counts, but also those “people skills” that make a strong leader.
  • Expand your perspective to the entire senior leadership team—what does the top 100 look like?
  • Appointing a CEO from within the business is often a more successful route. Learn to recognise what a solid succession management process, one which will ensure a good supply of potential CEO candidates, looks like.
  • What development is in place for mid-level and senior leaders in the business? Often these are the real ‘drivers’ of the organisation. These are the leaders whose effectiveness will often make the difference between success and failure.
  • How is the organisation measuring the effectiveness of its people and talent strategies – how do they measure what’s working and what’s not?
-Ends-

About the research
The research included 50 analysts from top banks and financial organisations in Europe and the US and was undertaken at the close of 2009 by Illuma Research. 25 US analysts and 25 European analysts were interviewed.