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By Simon Holland - June 06, 2012

Simon Holland, Global Head of Strategic Change & Organizational Transformation, looks at how perceptions of leadership influence stock market analysts

Want a premium rating from financial analysts? Don’t just focus on the bottom line. Think about sustainable leadership

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  • “A company should not only seek short-term profit, but should always have long-term vision and seek to contribute to society.”
  • "I look for senior managers who work collectively well—teams rather than superheroes.”
  • "There are many different types of leader, and I wouldn’t ascribe any one trait over another … If I had to name just one, I would say the ability to recognize their own weaknesses and supplement those with other people … Building up the senior leadership team’s confidence allows the strategy to be implemented effectively, and improves the execution.”
  • “I don’t view financial performance as that important because I think it is only a result.”

If you had to guess the sources of the above four quotes who would you pick? Business school professors, management writers, human resources/human capital directors, corporate governance experts? All good guesses—but all wrong. The correct answer is “none of the above.” All four feature in a recent Deloitte research paper, "The Leadership Premium: How companies win the confidence of investors"—and all four are attributed to stock market analysts.

Based on surveys and interviews in the UK, the US, China, Japan, India, and Brazil, "The Leadership Premium" reveals that quality of leadership can have a powerful influence on the valuations of financial analysts, investment bankers, and private equity companies—and that the financial community defines a “good” leader in more than narrow financial terms.

More than half—52 percent—of participants in our survey told us they routinely factor leadership strength into their valuations—and a large majority (80 percent) said they’d award a premium for a particularly effective team.

Even more startling is the size of the potential gap between a company with good leaders and a company with bad. On average, we discovered a premium for effective leadership of nearly 16 percent and a discount of nearly 20 percent for its opposite—36 percent, that’s some difference.

So can a company close the equity value gap?

"The Leadership Premium" aims to do more than place a quantitative metric on the value of leadership. It also looks at the qualitative differences between good and bad leaders in the eyes of analysts.

Here the results are, perhaps, less surprising. They return us to what might be termed the fundamentals of leadership. To achieve a leadership premium, a company, our interviewees suggest, needs a clear and inspiring vision of where it wants to be, and the infrastructure, ability and drive to get there. It also needs a culture of innovation—an environment for enterprise and new ideas—and a strong sense of purpose and commitment. These findings are consistent with the findings of Deloitte As One research into effective leadership, carried out between 2008 and 2010—and with our own and others’ experience. Put very simply, successful leaders build teams of people who are willing and able to deliver strategic goals.

"The Leadership Premium," again unsurprisingly, given the emphasis on corporate governance over the past 20 or so years, also emphasizes the need for independent thinking on the board, for honesty and integrity in the leadership team and for humility rather than hubris. (As will be clear from the second quote above, analysts tend to reject the idea of the “star” CEO.) Transparency is a common theme—with one American analyst describing poor communication with the investment community as a “major destroyer of trust in the leadership team.”

There is, though, a modern twist on these old truths. With the campaign for sustainable business, which has gathered momentum over the past couple of decades or so, comes a demand for sustainable leadership. It’s explicit in the first quote above—and implicit in the last. Effective leaders safeguard the future of their businesses—in the long-term interests of new generations of stakeholders and shareholders.

Research by Deloitte showcased at the World Economic Forum summit in Davos in January as Business:Society, has highlighted differences in the way the next generation of leaders sees the role of companies. In a Deloitte survey in conjunction with the Economist Intelligence Unit, the vast majority (92 percent) of Millennials (those born after 1981) reject profit as the sole measure of success and more than half think that, in the future, business will “achieve the greatest impact on solving society’s biggest challenges.”

Deloitte Touche Tohmatsu Limited CEO Barry Salzberg has predicted that, within a decade, leadership models will change. As we move further into the 21st century and business gets more complicated, the challenges tougher, it’s good to know that analysts and leaders might be of the same mind about what those models should be.

Action points
"The Leadership Premium" identifies six core capabilities that please stock market analysts—and build the conditions in which organizations succeed:

  • Driving innovation and competitiveness.
  • Providing direction and purpose.
  • Making effective decisions.
  • Inspiring others to act.
  • Developing people.
  • Building high-performing teams.

Dttl_simonholland_56x56Simon Holland, Global Head of Strategic Change and Organizational Transformation for Deloitte Touche Tohmatsu Limited, specializes in people performance and leadership and has guided the design, development, and delivery of many change programs, helping organizations lead people in new ways of thinking and working—for the long-term benefit of shareholders and stakeholders.

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