Want to develop leaders? Stop sending them to Leadership Development Programs.
Book Summary of the chapter “Leadership By Results” in The Global Handbook of Impact Investing: Solving Global Problems Via Smarter Capital Markets Towards A More Sustainable Society, (Wiley, Dec 2020)
Leadership development or leadership tourism?
“Why don’t you go to this leadership program? It will broaden your perspective. You might learn something new, and meet new people.” Whether you are a CEO, or a mid-level professional, chances are that a Board member, an investor, a boss or HR has told you this, at some point.
Now replace the words ‘leadership program’ with the name of a tourist destination. It fits in seamlessly, doesn’t it? Unfortunately, the way many leadership development programs’ effectiveness is measured, is by asking the same questions we ask about tourist destinations — “Did you like it?” or “Would you recommend it?”, rather than “What business & impact results did it produce?” These programs are not without their own merits. These facilitate sharing of knowledge, case studies and give exposure to a good peer group. But this approach also results in low outlays towards leadership development. As business and society, we leave enormous value on the table.
Unrealised value on the table
Consider this: Private equity and venture capital investments in India touched an all-time high of USD 48 billion in 2019, representing a growth of 28 percent in value, while deal volume increased 35 percent, according to an EY report.
The Global Impact Investing Network (GIIN) estimates that the global impact investing market grew to USD $502 billion in 2019, measured by Assets Under Management (AUM). Philanthropic fund flows too cumulated to nearly USD $287 billion in the US, over 1992 to 2011. This sums involved are significant in all forms of capital. What role do leaders play — in generate financial and impact return on these sums?
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.
Yet, investment into the leaders remains low. Data available for nonprofits in the US indicates a range of 0.7% of total grant dollars to 1.24%. This is 75% less than what the private sector invests, on a per employee basis. No clear benchmarks are available in the private sector, on how much should be invested. That’s not surprising. If we were measuring returns, we’d know if the investment is too much or too little. Thus, we’re left with an ironical situation — leadership matters; but faith in leadership development is low.
Unlock Value through a Results based approach
One fundamental change in the approach to leadership development can unlock this — bringing results focus and accountability towards outcomes, into the business model of the leadership development industry. I like to call it, “Leadership By Results”.
This is analogous to Results Based Financing in the impact sector. It changed the focus from inputs and activity based funding, to outcomes based funding. Elsewhere, the “Software as a Service” (SaaS) model shifted the structure from paying to own an asset, to paying for use for tangible outcomes in the business. Similarly, “Leadership By Results” can surge investments into leadership, and unlock a whole new set of results.
In my recent book chapter, I argue that this 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, unleash new strategies, innovation, and achieve efficiencies in important areas of environment, society, governance and business. This is not pie-in-the-sky. Leading impact investors like LeapFrog Investments are already preparing to institutionalize such efforts across portfolio companies.
The Leadership By Results approach
So what is the “Leadership By Results” approach and how can Investors and Boards implement it? It is based on one fundamental shift that is then operationalized through four key principles.
First, Bring in the BHAGs : Boards and investors with Big Hairy Audacious Goals (BHAGs) for the organization, must initiate leadership development programs that are anchored to enable the achievement of these. Real life examples include “Preparing the top team of a purpose-driven education business for IPO at 50% increased valuation in six quarters. From an impact perspective, the goal was to be the single largest institutional contributor to the national goal of increasing the Gross Enrollment Ratio (GER) of the country from 18% to 30%. For each of the top team members, this translated to BHAGs like expanding learner reach manifold, spawning new businesses in adjacent areas, and achieving breakthrough functional efficiencies. At another company, it was “Doubling insurance access to the under-served in three years in a certain country”.
With such BHAGs, investors, boards and executive teams encourage the use of consultants with expertise in strategic problem solving and project management. Technologists are brought in for digital transformation. Investment bankers help is sought in financial matters. Training and capacity building too is used to build skills and competencies, but usually for front line and mid levels. In all of this, leadership mindset as a lever, is neglected.
Second, enable mindset shifts: The second key recommendation for Boards, investors and decision makers is to focus on underlying leadership mindsets at senior and mid-senior level in investee and grantee organisations and provide relevant support to shift those. The first step is to systematically identify the mindsets that help and hinder the achievement of the BHAG, and identify a clear “target state” of mindset. Four pairs of mindsets have been identified in the research — (i) Growth and Fixed Mindsets; (ii) Learning and Performance Mindsets; (iii) Deliberative and Implemental Mindsets; and (iv) Promotion and Prevention Mindsets. Some boards and investors can intuitively discern such mindsets at play in the top team. However, there is skepticism if mindsets can shift; and that too sustainably. Mindsets are taken as a given. Fortunately research, and practice gives us hope.
The phenomenological-ontological process for shifting mindsets has been practiced and honed by practitioners like Werner Erhard. Research and legitimacy to the process was accorded by academics like Professor Michael Jensen at the Harvard University. Interestingly, Jensen’s focus has traditionally been the hard-nosed stuff: finance, economics and business. Clearly, he is convinced that something about this process works, and creates results.
What sets this process apart is that rather than “leadership” being the subject matter; the subject matter is the leader herself. The ontological model of leader and leadership “opens up and reveals the actual nature of being when one is being a leader; and reveals the source of one’s actions when exercising leadership”.
In simple words, it does not subject the participants to psychometric tools, leadership theories and template driven reflections. It lets them act as they do, and creates a safe space for them to start becoming self-aware of what is driving their behaviours. Ownership for a shift is created from within, by anchoring it to the results that the leader most cares about. Tangible behavior shifts are planned, implemented supported, reviewed over several months. Shifts are evidenced through actions and tangible results. These shifts and results are consciously anchored in the context of the organisational BHAG.
Third, ensure a collective, longer term journey not one time event: Since achievement of organizational BHAGs require top team members to work together, it is ideal that the leadership program be a custom program and a journey together over time, for the entire top team.
Fourth, ensure it’s holisitc: Since mindsets pervade across contexts, the support to the leader needs to be holistic. In other words, the mindset-shift may have to also be focused on areas of life that are outside the BHAG, but are being influenced by the same underlying mindset — the one which is in the way of the achievement of the BHAG.
For instance, to shift an alpha sales head from “individualistic and untrusting” to “trusting and collaborative”, the key may lie in having them look at their relationships outside work. A betrayal in the recent or distant past may have left imprints that pervade across relationships. The program must create a safe space and permission to go there, and enable healing and reconstruction. Yet another “inspiring” Steve Jobs anecdote, or “organisation collaboration through cross functional teams” case study from Google, may not cut it. (Read a more detailed real life account of the Sales Head’s transformation here).
Fifth, use Hurdle Rate of Return and measure: To infuse accountability and results orientation, the program truly needs to be run as an investment. There needs to be agreement upfront on a “hurdle rate of return” for the money being invested into the leadership development program, and how returns will be measured. This includes agreement on how BHAG achievement will be measured, and how it will be translated into financial and impact returns. The “Leadership by Results” approach advocates a rule of thumb: the incremental EBITDA potential over three to five years must be about six to eight times the total cost of the leadership program, in addition to 50% to 100% acceleration in the achievement of select impact metrics over a three to five year period.
The Attribution challenge: Admittedly, there are challenges of attribution in this approach. Impact and business results could indeed be driven by multiple factors, many of which may not be directly attributable to the leader’s actions or the leadership development program. However, similar challenges exist in results based financing as well. For instance, change of the local district collector, or an unfortunate case of violence in a school in a neighbouring district can alter the outcomes of a Development Impact Bond that seeks to improve enrolment and educational outcomes of girls. As the Process Evaluator of the Educate Girls Development Impact Bond in Rajasthan, the author observed apprehensions like these. Yet, great must not be allowed to become the enemy of good. With close co-ordination and communication between the leaders, the leadership program owners and the sponsor, goals can account for changes in the external environment and other factors.
A real life example can illustrate these principles. It has been duly masked to protect confidentiality.
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, CEO 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.
Then, an investor funded leadership intervention was launched with the “Leadership By Results” approach, to assist with the BHAG of doubling the reach. Presented below is the work done with Ms. X, a charismatic visionary, in the context of this BHAG.
Through observing her in action using ontological-phenomenological methods, 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 year, 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. The annual growth rates touched as high as 70% in both net income and lives reached. She founded a new organization herself. The world gained two leaders. The hurdle rate of six times EBITDA and acceleration of impact goals by 30–50% p.a. was far surpassed.
Innovative Investors are already at it. Hundreds of leaders and organisations have thus benefitted when the power of mindset shift, has been deployed with a hard-nosed anchoring in business and impact BHAGs. The USD 1.6 billion Impact Investor LeapFrog Investments is also institutionalizing such leadership support for its investee companies across Asia and Africa. They even secured the support of their partner Prudential Financial Inc. via a cornerstone investment of USD $1.5 million in a Talent Accelerator.
The call to action is clear: thoughtful investment into leaders of your portfolio, might be the key to unlocking the value of your financial support and strategic advice. Begin today! As a first step, write down the three biggest challenges or BHAGs for your organization or your investee. Drill down and arrive at the key leadership mindsets that need to shift. Determine the value of achieving it. Get a leadership coach or advisor, or someone that the leader respects. Foster self-awareness with respect to the leaders’ enabling and limiting mindsets, in a safe environment. Create ownership for visible shifts in behavior. These must be materially linked to the achievement of the BHAG. While the BHAG is one arena of practice, allow and encourage the discussion to unpack other areas of life — the ones that matter to the leader, and where the same limiting mindset is at play. Provide ongoing support in a safe space, and keep ploughing individually and collectively with the leaders towards the BHAGs. Measure results. Ensure that by design, not default, the return on investment into the initiative, is six to eight times in EBITDA terms of over 3 to 5 years. Learn from the failures, and celebrate success in business and impact.
Rajen Makhijani has written an extensive chapter about the “Leadership By Results” approach in The Global Handbook of Impact Investing: Solving Global Problems Via Smarter Capital Markets Towards A More Sustainable Society, (John Wiley & Sons, Dec 2020). Available on Amazon here, on Google Playstore here (with the first 100 pages of the overall book for free).