Special Report on Training and Development The Leadership Formula

By Patrick Kiger

May. 4, 2010

General Electric, one of the most iconic names in American business, has managed to become not only the 12th biggest company in the 2009 Fortune Global 500, but also one of the most resilient and agile. Even in the depths of the global downturn in 2009, the company earned $30 billion while simultaneously positioning itself to grow in emerging markets such as Latin America and going after opportunities in “ecoimagination” technologies such as smart grids, offshore wind installations and cutting-edge batteries. At a time when much of corporate America was too scared about survival to contemplate the future, GE not only kept its focus on innovation, but also increased its spending on research and development by 7 percent. 

While the giant manufacturer has plenty of successful wares, in a 2009 Harvard Business Review interview, GE chairman and chief executive Jeffrey R. Immelt gave much of the credit for GE’s success to one thing that the company is particularly good at producing: highly capable, forward-thinking leaders who can execute his growth and innovation strategy. In addition to using 360-degree reviews, bottom-line data and other tools to assess how well its leadership candidates are progressing, GE has its Leadership, Innovation and Growth management development program (LIG for short). The Harvard Business Review article, which is posted on GE’s website, described one such LIG session in which scores of senior managers spent days analyzing case histories of GE projects in an attempt to discern the impediments to innovation and growth in their departments and find ways to overcome them.

Immelt explained: “When somebody asks me, ‘At your level of the company, what does a leader do?’ I always say, ‘Drive change and develop other leaders.’ LIG gave me a chance to do both at the same time.”

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To be sure, there are numerous factors that combine to create high-performance corporate cultures like GE’s, according to the Institute for Corporate Productivity, a business think tank of which GE is a member. The institute, which goes by the acronym i4cp, has spent several decades trying to figure out what sets high performers apart from the pack. Its researchers have identified five key attributes, or “domains,” that distinguish companies: strategy, leadership, talent, culture and market. But i4cp has found that while doing well in all of these areas is critical, the domain that seems to most greatly influence the others and promote overall excellence is leadership.

“We’ve been surveying companies about critical issues since 1986, and leadership is something that they’re always concerned about,” says Jay Jamrog, i4cp’s senior vice president for research. “Not only do they see it as important, but they’ve always worried that they’re not doing a very good job at it.” The recently published 2010 i4cp Major Issues Survey of more than 600 companies in various industries, for example, found that 75 percent of them were concerned to a high or very high extent about leadership development, but only 24 percent thought they were effective in developing leaders.

Jamrog says that the trauma of the recent economic downturn has intensified that concern. 

“The recession was a real wake-up call on leadership for companies,” he says. “They’re looking at the changed environment and asking themselves whether they’re training leaders with the right competencies. And because they had to stop hiring for a long time, they’re concerned about having enough talent in the pipeline. They’re thinking, ‘How can we put leadership development in the microwave and produce the leaders we need faster?’ ”

But while the importance of good leaders is apparent to most companies, many aren’t clear on how to produce them. To that end, companies have spent princely sums to seek wisdom from management gurus and experimented with a wide range of philosophies. They’ve even turned for guidance to political, historical and religious figures such as Colin Powell, Attila the Hun and Jesus. At i4cp, however, researchers have taken a more systematic, data-driven approach to discerning what makes for an effective leader, and how to develop one. By surveying management at successful, average and underperforming companies in a variety of industries and crunching the numbers, they’ve been able to develop a data-driven template for what constitutes good leadership and how to develop it. 

How important is leadership? 
Traditionally, high-profile corporate leaders—from Chrysler’s Lee Iacocca to Apple’s Steve Jobs—often have been celebrated in the media as the keys to companies’ successes. But business researchers have struggled for decades to determine the extent to which leadership actually contributes to corporate performance. A study of 48 Fortune 500 companies published in the Academy of Management Journal in 2001, for example, found that top executives’ charisma—that is, their ability to influence and persuade employees to follow strategy—had only a small effect on profitability, though that effect rose when business conditions were more uncertain. 

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At i4cp, researchers also have attempted to correlate leadership with bottom-line performance, but from a different angle: by surveying hundreds of companies and zeroing in on both the actual and perceived differences between high, midrange and low performers. “We’re asking people not just what they’re doing, but what they think they should be doing,” Jamrog explains.

The 2009 i4cp Leadership Competencies Pulse Survey, for example, found significant differences between how high-performing and low-performing companies develop and evaluate their leaders. High performers are nearly 40 percent more likely to have a process that enables them to identify development gaps in their next generation of leaders. They are more likely to use tools and training to develop leadership competencies, and to gather data to gauge the programs’ effectiveness afterward. They also are more likely to measure leadership success through a variety of performance indicators—ranging from the obvious, such as profits and revenues, to deeper metrics such as customer satisfaction and time needed to make critical hires.

The survey also found that low performers had more difficulty overcoming barriers to leadership development. The most glaring gaps: Low performers were 50 percent more likely to complain that their companies didn’t have a supportive culture for leadership development, and by a similar margin were more likely to struggle with identifying which staffers they should try to develop as leaders.

Leadership components
When i4cp researchers asked companies to rate the importance of 56 leadership competencies and then compared them with the companies’ rankings on both leadership and market performance, their finding was startling. Only two competencies—being an effective role model for organizational values and hiring talent—had a significant correlation to both types of performance. Statistically, both turn out to be roughly equal in importance.

“The example you set, in terms of values, has as much impact as who you hire,” Jamrog explains.

“What we’re seeing with leadership is that it’s more important than anything else to have the right attitudinal and behavior fit with the organization,” Jamrog says. “It’s all about walking the walk, being a coach, a teacher and a mentor. Leaders who do those things are the ones who get employees to do what’s needed to help make the organization successful.”

Jamrog says that most companies understand the importance of such charismatic leadership, at least in theory. But when it comes to valuing it day in and day out, many have different priorities. He explains: “Companies will tell me, ‘Jay, I know that building relationships is important. But how do I measure that stuff and reward it?’ It’s easier to measure the effectiveness of a leader on how many widgets he gets out the door each week. And we tend to model the behavior that’s rewarded.” 

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A recently published i4cp paper, based on multiple studies over the years, identified the top five elements of leadership in terms of correlation with market performance. The top element was the ability to clearly communicate the organization’s goals. This quality not only scored a top-ranking correlation to performance, but it also was the item on which high performers had the highest average score and, perhaps most significantly, had the biggest gap between them and lower performers. Other key elements included being an excellent decision maker, empowering employees, making sure that programs support the desired culture and continually adopting innovative approaches to increase employee effectiveness. 

What leaders need to learn
Even successful companies have doubts about the effectiveness of their leadership-building efforts. The institute has found that only 50 percent think their officer-level leaders surpass most of their industry. About 45 percent of them think that their organizations emphasize continuing development of current leaders’ skills, and about 30 percent think that they’re strong at developing future leadership talent. Even so, they’re twice as confident of their leadership development as low-performing companies. 

When asked what elements help them to develop leaders, high-performing companies tend to rate commitment from executive row, a positive corporate culture and a basic leadership development strategy as more important than the actual processes used to develop leaders. 

Almost half saw CEO support as an important factor, while roughly 40 percent viewed the top executive’s personal involvement in development, a transparent and high-trust culture and a leadership development strategy as important.

By comparison, only 28 percent put their faith in processes for identifying employees with leadership potential and 23 percent valued developmental assignments—a popular technique for seasoning leadership candidates. Just 15 percent thought fast-track development programs were critical.

When it comes to educating leaders in specific business competencies, there are significant gaps between what high-performing companies and low performers do, according to i4cp’s data. The most glaring differential: 66 percent of high-performing companies say that they emphasize teaching leaders about operations, while only 44 percent of low performers make that a priority. 

Another big gap is in understanding the bottom line, which is emphasized by 65 percent of high performers, compared with 47 percent of low performers. Perhaps the most basic knowledge set of all—knowing the company’s business—is another area that distinguishes high and low performers. Eighty-two percent of top-performing companies believe that they emphasize this in training, while only 62 percent of low performers make sure that leaders understand what the company actually produces and markets. 

Training for high performance
One surprising i4cp finding is that leadership courses from training outsourcers—both the off-the-shelf and custom-designed ones—have little correlation to companies’ market performance. Instead, according to Jamrog, research shows that the leadership-cultivating tools with the most bottom-line impact are performance management and development plans, mentoring and internal coaching. 

“I know that’s going to make vendors cringe,” he says with a laugh. “The problem is that it doesn’t take much thought for companies to just buy an off-the-shelf course. It takes more time and energy to train leaders in a more hands-on way, though it doesn’t necessarily cost more money.”

Oddly, only 5 to 7 percent of all companies use what i4cp has determined to be the most effective training methods—role-playing simulations and business case studies. 

“With case studies, the key seems to be to have leaders look at issues in their own company,” Jamrog says. “It’s all internal, as opposed to the way you might do it at Harvard. A lot of times, they’ll work on an actual business problem at the company and try to learn from solving it. They may end up writing up the exercise and actually producing something as they do it.”

Jamrog says that simulations and role-playing are more costly and time-consuming to stage, but that research shows they are even more effective. “You can use technology to create a simulation where you have to make a decision, and then see how it plays out,” Jamrog explains. “Or it can be more of a staged scenario where you play parts like actors and improvise. The key thing is that you learn how to handle different situations and get a sense of what behaviors you need and how to make decisions.”

How leaders translate what they learn into behavior is crucial. According to Jamrog, effective executives combine transactional and charismatic leadership techniques—using gestures of appreciation, for example, to reward employees for good performance and to model.

“I know one CEO who walks around with dollar bills in his pocket,” Jamrog explains. “When someone does something positive, he gives the person a dollar bill in front of everyone. Another CEO sends anonymous bouquets that will suddenly show up one someone’s desk when they accomplish something. It takes time and energy and focus to build these things into the culture, so that it begins to reward the right kind of behaviors.”  

Workforce Management, May 2010, p. 25-26, 28-31Subscribe Now!

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