The Value of a Good Leader
Does leadership make a difference to the bottom line? How much of an impact does leadership have? Is leadership important for the long-term? Does a bad leader have an impact on the performance of a business? The short answer is yes! Albert Einstein once said “You have to learn the rules of the game, and then you have to play better than anyone else.” Any business person would have a gut feeling that leadership is important to the bottom line of most organisations. There have been several studies conducted that have found a strong connection between leadership, culture and profitability.
Does leadership make a difference to the bottom line?
What is the difference between leadership and management? Management is about using systems and processes to effectively run a business and leadership is about guiding people within the organisation. The charismatic leader is one with vision, determination, and high performance expectation and works best when the business environment is uncertain. Transactional leadership involves trying to satisfy the needs of subordinates and correct them when things go wrong. Many studies have found that the net profit margin was higher in organisations run by charismatic leaders.
How much of an impact does leadership have?
Leadership drives the bottom line. A study by Dr. Rob Cook from Human Synergistics International found that constructive culture, profit margins and profit stability over time were all highly correlated. Constructive culture is defined as an organisation that focuses on achievement, challenges, growth and humanistic relationships. Charismatic leaders were able to create constructive cultures that resulted in happy employees. The same study found that aggressive cultures based on numbers and tasks resulted in erratic profitability. He observed the reason for this to be that aggressive behaviours yield short term results as people usually burn out or leave the organisation.
Is leadership important for the long-term?
Successful leaders create wellness and profitability through communication and inspiration. In practical terms they do this by developing a strong and cohesive team, create a compelling vision and communicate this with their team. They provide excellent customer service and their customers promote their firm through word-of-mouth advertising, they plan to ensure their business has high levels of profitability and they coach their team to help them to achieve the organisation’s goals. Strong leadership and culture within a firm is able to create long-term competitive advantages in the marketplace. In addition to this, researchers have found that leaders were more likely to have stronger profitability if they were managing directors of their own firm.
Does a bad leader have an impact on the performance of a business?
A study that rated CEOs based on employees opinions found that leaders with good character ratings received an average 9.35% return on assets over 2 years. Low character ratings achieved a return on assets of 1.93% over the same period. From the study employees defined good character traits as standing up for what is right, focusing on the common good, showing compassion and empathy, letting go of mistake (their own and others). Bad character traits included caring only about themselves, their own financial security, focused on personal gain, not always telling the truth and not worried about the cost of their actions to others. Good leaders out performed self-focused leaders on financial results, strategy, accountability, focus and vision.
When asked to rate themselves bad leaders were found to be delusional and usually gave themselves very high scores. On the other hand good leaders usually marked themselves lower than their employees; showing further evidence of humility.
In conclusion, effective leadership, culture and performance are all linked. Bad leaders need constructive and objective feedback from those that they live and work with. This however, can only be provided if they are receptive to it. Good mentors and advisors can help to improve leadership a great deal.
Michael is a highly experienced certified practising accountant (CPA), he sits on the board of several companies and is the president of the Parramatta Chamber of Commerce. Michael, Jim and Paul are the directors of the Parramatta based accounting firm ATB Partners, which was founded over 20 years ago. The successful firm is well known for its highly sought after tax consultants, financial advisors and business mentors. ATB Partners specialises in providing advice to clients in retail, wholesale, manufacturing, professional services, franchise and construction. Please visit www.atb.net.au for more information.