the monetization of leadership strength - april 2013 seattle cho group presentation

1 © 2012 MERCER LEADERSHIP DEVELOPMENT. ALL RIGHTS RESERVED.

Agenda: Examine How Views of “Top” Leadership Affects the Valuation of Firms

•  Discuss how analysts’ & investors’ view the value of leadership in estimating a firm’s worth.

•  Discuss the implications for HR Strategic Leadership


An eye opener–The strength of management plays a significant role as analysts develop stock recommendations.


Different research methods arrive at the same conclusion– analysts and investors are swayed by leadership quality.


A major challenge for HR and Talent Management is convincing others of the need to invest in leadership development.

No relationship ever mentioned between HR and Investor Relations. Typically, not invited to Investors Day.

Competencies for 360s mostly based on internal requirements–not on analysts view. Ironically, prior Finance and Organizational Research show connections between ____ and firm value:

ü  Optimism and positivity in voice ü  Transparency conveyed ü  Behavioral integrity/Informational justice ü  Taking ownership


We decided to conduct some field research.

How do you go about assessing the strength or quality of leadership associated with a firm using the following questions: •  What data do you consider? •  How do you gather this data? •  How do you weigh it against

other data?

Walk us through a specific recommendation you issued by having them describe: •  How management strength

was factored in •  What impact it had on their

recommendation

Initially interviewed 35 equity analysts


The initial 35 analysts we talked to were from various geographies.

North America 28%

Latin America 29%

Europe 20%

Asia Pacific 23%

Responses by region


Responses by sector

They followed a mix of industry sectors.


.

Number of years as an analyst

Some of the analysts were inexperienced and others had 20+ years of experience.


Analyst Logic

“Second – I adjust year 1. This depends on the capability and engagement of the front line. The CEO can’t change these much in the next quarter or two”.

“Third – I adjust all years two through 20. This depends on the front line’s ability to transform and capitalize on the changes in technology, consumers and regulations. This transformation depends on the CEOs and the shots they call.”

“First - I develop a numbers driven forecast of 20 years of cash flow”.

Source: COO Comments & Thomson One Ranking

Source: Organization supplied date, Economic data

Source: Qualitative data, informally gathered, & intuitive judgment


To validate our findings we conducted an on-line survey in partnership with Forbes Insights.

•  On-line survey

•  Completed by 305 analysts

•  Analyst group broadened to include

money managers and venture

capitalists

•  Conducted in August 2011


How they assess the quality of leadership.

We asked the analysts to explain how they assess the quality of a CEO of an organization they follow and how they use this assessment to estimate the value of the firm. Analysts typically referred to the same three criteria for judging the CEO’s leadership:

•  Track record – Previous roles and challenges and the results achieved.

•  Reputation – Experiences, stories, books and articles that

describe the CEOs approach, character, and confidence. •  Presence – Effectiveness in articulating the way forward,

addressing opportunities, questions, concerns, crises, and disruptions in plans.


What is the greatest percentage change you have made in your valuation of a company in response to a change you’ve perceived in the strength of its leadership?

0% 5% 10% 15% 20% 25%

Less than 5%

6-10%

11-15%

16-20%

21-25%

Greater than 25%

Do not consider leadership strength

Leadership quality is material. 95% of analysts surveyed made changes >5% based on strength of leadership. 50% made significant changes (>15%)

Sample size 305


Three quarters of respondents see the assessment of leadership growing in importance over the next three years.

0% 10% 20% 30% 40% 50% 60%

Strongly agree

Agree

Disagree

Strongly disagree

Don't know

Sample size 305

Over the next three years, more emphasis will be placed on determining the best ways to judge the strength of leadership in a firm.


Sample size 305

80% said they could be more accurate with better data


Next Stage of Research

1. Financial analysts in training… §  Randomly assigned to company that exceeded or missed expectations to

review books and conference call information. §  Accounts: Internal, External vs. None §  Ratings: Projected Stock Price, EPS and Buy, Sell or Hold

Results: §  Accounts significantly and positively impacted all 3 ratings. §  Trust in the leader impacted ratings explaining how accounts are

interpreted. §  Internal accounts by leaders led to higher buy ratings.


2. Interpreting market data and analyst comments… §  Gathering data from analyst data feed and social media. §  Back out leadership implications with IR, CMO and CHRO. §  Develop plans to manage leadership quality §  Identify requirements and gaps §  Influence market perception

Next Stage of Research (Continued)

the monetization of leadership strength - april 2013 seattle cho group presentation

Business

line survey

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sample size

leadership

analysts

research

data

leadership