Leadership Development and Business Performance: Proving the Link
I’ve had several occasions over the years when executives have asked me whether the time, effort and dollars invested in leadership development makes as difference. My answer is always a qualified, “Yes”, if the leadership development focus and approach is built from the company’s strategy (and not the latest fad) and the organization uses development to reinforce or change behaviors that impact the organization’s culture.
There’s plenty of research evidence confirming that deliberately and systematically developing leaders has a payoff (See below) . For me, the the strongest business case for leadership development is the effect that leaders’ behavior has on organizational culture.
Research confirms that organizational culture is a driver of organization performance (See Denison and Hallagan 2017 and Boyce, et al., 2015 ), including revenue growth, market share, returns, quality, productivity, customer satisfaction and innovation. The eminent culture scholar, Edgar Schein, described culture as “one of the most powerful and stable forces operating in organizations.” Culture comes first; performance follows. But what drives culture? The single biggest factor is the behavior of an organization’s leaders (See Sarros et al., 2002)
Want some additional evidence? Check these out.
- Research conducted by the Centre for Economic Performance and the McKinsey Company found that, even accounting for economic factors, well-managed companies significantly outperformed poorly- managed firms in terms of productivity, return on capital employed (profitability), and sales growth (Bloom et al, 2005)
- Studies that analyzed the impact of top leader self-awareness consistently found a strong positive correlation between high self-awareness and key business measures such as employee satisfaction, net profit, return on investment, and stock performance (Okpara and Edwin, 2015, Wexley, et al 2017, Zes and Landis, 2013)
- A study of 60 Fortune 1000 firms showed that ability to lead effectively explained almost twice as much of variance in the firms’ profits as did economic factors (Hansen and Wernerfelt, 1989)
- A large financial services firm mined their extensive multi-rater (360) competency assessments to answer the questions, “Which competencies drive revenue and which drive retention of high-performers?” They uncovered a key set of competencies that differentiated between low-performing and top-performing field managers. The result: they estimated that they could reduce annual turnover costs about $580,000 per field manager and boost sales commissions by more than $460,000 per manager.(Huselid, 2013)
- Organizations whose leadership development is at a strategic level (exemplary senior management support, senior leaders view leadership development as an integral part of the overall talent management system, development content aligns with strategic priorities, use of a broad learning format) exhibited 20x greater employee retention, 12x business growth and 8x better bench strength, among other impacts, than organizations with inconsistent leadership development (O’Leonard and Loew 2012)
- As little as a “10% change in leadership bench strength leads to a 0.5% year-over year change in revenue and profit”(CEB 2014)