A Tale of Two Leaders
Extract from “The Global Handbook of Impact Investing: Solving Global Problems Via Smarter Capital Markets Towards A More Sustainable Society”, John Wiley & Sons, December 2020, from the 48 page chapter, “Leadership By Results for Impact Investors and Investees”, written by the author of this blog, Rajen Makhijani
Leadership Matters
A study from Harvard Business School estimates that as much as 14% of the performance of a company is attributable to the CEO . In a study of nonprofits in India, 97% of the 203 nonprofit respondents said that leadership development is vital to their organizations’ success.
Clearly, leadership matters. But check the budget allocations to leadership development, and you’ll see — faith in leadership development is low. This is perhaps because much of leadership development is crafted in a way where the focus is on skills, knowledge and networks, not on the underlying mindset. The accountability for results and return on investment is negligible to low. Learning and the world of results, operate in separate worlds. Let’s illustrate with a couple of real life examples, duly masked to protect confidentiality.
Case 1: The Charismatic Visionary Founder-CEO — Part 1
A rags-to-riches successful Entrepreneur-CEO, Ms. X, went onto build a business that touched 4.4 million lives, creating access to a vital service for the under-served. To fulfil the ambition to double this number, the need for a professional CEO was clear. However, none of the three such professional hires worked out. The reasons cited were foreign versus local, from within the sector versus outside the sector, too young or too old, and other such factors. The conclusion drawn was that Ms. X needed to get better at judging people. Supportive investors sponsored her for courses on talent assessment and provided consultancy assistance for the recruitment process. Despite an engaging program with great feedback scores and networking opportunities, the result did not change.
Case 2: The Dynamic but Edgy CXO — Part 1
EduCo was focused on providing access to Higher Education to under-served youth. The top team was brought together to further accelerate growth, leading to a 50% increase in valuation in 18 months, and an IPO. In terms of impact, it sought to be a single dominant figure in increasing the country’s Gross Enrollment Ratio from 18% to 30%.
The ‘alpha’ sales professional, Mr. Y, headed student enrollments. He clearly had an important role to play. However, apart from lack of collaboration, he occasionally demonstrated streaks of “impact-washing” (particularly prominent during month and quarter endings, when chasing aggressive targets). On-ground reports from operations teams about students having been sold courses without due counseling were over-looked. Thus, enrollment numbers looked better, but were not necessarily in line with the mission.
The CEO insisted on both mission and profit to sustain the pursuit of the mission, whereas the sales director saw some trade-offs being inevitable.
Trainings laden with concepts, tools and real life case studies on “Shared Value” had not yielded desired results, even though feedback and net promoter scores were high. Unless Mr. Y collaborates more, synergies with other business units won’t be realized and the valuation won’t accelerate. Unless he shifts attitude towards impact, the mission itself is at risk. The CEO and Chair looked at the HR head, who could only offer a shrug — what more can one do?
We can do — but not more of the same, but rather do things differently. The “Leadership By Results” approach is one such attempt.
What if we were to fundamentally re-imagine leadership development? What if it’s trigger, conception, design, execution, measurement and accountability is geared to enable the delivery of a Top 3 Big Hairy Audacious business and impact goal of the organization?
What if the initiative was to shift mindsets, not just skills, knowledge and competencies?
What if it brings the entire top team, and key actors from other layers of the organization together — to align and energize them towards the Top 3 goal, and put them on an unstoppable journey with the right people on the bus, in the right seats, creating an atmosphere in the bus that fosters collaboration towards the BHAG, and each vested in each other’s success?
Finally, what if we apply the rigors of investment process — an upfront hurdle rate of return that demands a return of six to eight times the EBITDA to be retuned, for every dollar invested in the leadership development initiative; apart from accelerating impact metrics? I call this the “Leadership By Results” approach. (Summary of book chapter “Leadership By Results” here)
Case 1: The Charismatic Visionary Founder-CEO — Part 2
In the case of Ms. X, an investor funded leadership intervention with the “Leadership By Results” approach was launched to assist with the larger goal of doubling the reach. The deeper mindset focused intervention recognised that he was a “Charismatic Visionary” leadership archetype. Through observing her in action using ontological-phenomenological methods popularized by Werner Erhard and Professor Michael Jensen at Harvard University, it emerged that her own mindset, behavior, and approach was a key driver in creating failure for her CEO appointees.
Her identity as a ‘self-made entrepreneur’ and belief that “no one can match the passion of an entrepreneur” was so strong that she was unconsciously sabotaging professional managers; even while consciously, she wanted to hire the best, and see them succeed.
Over the next two years, the leadership intervention helped her to shift her mindset, cultivate new habits and behaviors, and hand over reins to a successor. She became a non-executive chairperson instead. The annual growth rates touched as high as 70% in both net income and lives reached. She founded a new organization himself. The world gained two leaders.
Case 2: The Dynamic but Edgy CXO — Part 2
In the case of Mr. Y, a collective leadership initiative with the goal of 50% value acceleration and impact goals was launched. A safe space was skillfully created for open and honest dialogue. It operated at the level of mindsets — the ‘mental lenses’ — that drive what leaders do and why. Mindsets pervade multiple areas of life, across the professional and personal. Hence the safe space and skillful facilitation allows for discussions that transcend spaces as well. In the case of Mr. Y, that’s where the key lay.
Having undergone a ‘betrayal’ in personal relationship, he had turned cynical about high ideals. This was unconsciously influencing his thinking, action, behavior, and hence results, in business too. But what could be done about it?
Over the next nine months, the program provided a coach to give support on all the goals, including the relationship goal. to assist a shift in the underlying mindset.
A few months later, in one of the later modules of the program, the enrollments director revealed in the check-in that he had transformed his relationship with someone he had hitherto been seeing, but not trusting. A spontaneous applause ensued from all participants. But the bigger surprise was yet to be revealed. He had pushed out the “engagement ceremony” in order to participate in the leadership module.
The enrollments director saw the leadership development program as instrumental in unlocking his impact, business success, and personal satisfaction. From the investor’s perspective, one of the key to accelerating valuation and impact goals, lay in an unexpected place!
All of this requires expertise at two levels — firstly, a toolkit and frameworks that enable investors, boards and CEOs to analyse business outcomes with a leadership lens — just as ratio analysis of a Balance Sheet allows reviews, insights and hypotheses about the underlying drivers of business health. Second, it needs a cadre of skilled and experienced facilitators and coaches who can work with the technology of the human mind.
If we are to thus invest in leadership, it can accelerate impact by 10% to 30% per annum, along with increasing sales of impactful products and services sales worth — in the US alone — USD $18 billion to USD $31 billion. We’ll improve a multitude of lives unleashing new strategies, innovation, and achieving efficiencies in important areas of environment, society, governance and business. Leading impact investors like LeapFrog Investments are already preparing to institutionalize such efforts across portfolio companies.
Just like Results Based Financing, the “Leadership By Results” approach seeks to bring the greater accountability to all involved. Just as the former is already demonstrating the promise to expand the flow of financial capital towards the impact sector, and the latter seeks to to bolster investment into one of the most under-invested asset classes — leadership and human capital.
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When can boards / investors / HR trigger such “Leadership By Results” interventions?
If we take an investor’s perspective and map this to the Investment Lifecycle, then here are some trigger points:
§ Pre-deal due diligence. At this stage investors can carry out “leadership due diligence” with two objectives:
§ Explicitly test the “fit” of the founder, CEO, and top team to deliver on the investment thesis with regard to the impact and financial goals.
§ Ascertain and design the leadership development support that will be needed post-investment.
§ Immediately post-investment, alongside the initial 100-day plan
§ First six months (180 days) of the deal execution
§ At the two-year mark (730 days): Typically because the investment thesis has not played out in practice, and it is now recognized that the leadership needs support.
§ Six quarters prior to a targeted exit (e.g. if an Initial Public Offering is planned).
Apart from this, a CEO change, founder succession, enterprise technology implementations, and external shocks and opportunities like significant regulatory changes, new technologies, shifts in customer preferences, or supply chain changes, and significant partnership opportunities are also relevant to trigger change.
End of Excerpt
