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MEASURING EXECUTIVE PERFORMANCE

February 25, 2015 - In Articles, Featured, Leadership and Management articles - No comments yet

Last month Andrew Hill, the Financial Times management editor wrote an article for the Saturday supplement FT Money, about how investors can judge executive performance.  It addressed some difficult issues for anyone who thinks that the leadership effectiveness of executive managers is a major influence of success.

A recent study on a ranking of the world’s best performing chief executives for the Harvard Business Review* used growth in total shareholder value return and market capitalisation to measure performance.  These are typical scoreboard numbers that are publically available and relevant at a particular time.  However, they give little insight into how the CEO or indeed the top team (if it is a team) influence the long term performance of the organisation.

Hill refers to another study, the ‘World Management Survey’ developed by the London School of Economics, Mckinsey and professors from Stanford and Harvard which identified some management practices that lead to increased productivity.  However, the study only focused on the manufacturing sector and included medium sized companies, many of which were privately owned. How the findings can be applied to large complex companies in a variety of sectors is not clear.

Investment managers, noted for having better access to information and even company executives, were reported as saying that judging executives is more of an art than a science.   Hill comments that outside investors may want to follow Warren Buffet’s advice “to buy stock in businesses that are so wonderful that an idiot can run them.  Because sooner or later, one will”.

The ‘Sage’ may have the point here, focus on the business and its organisation first, then the CEO, the executive group and management.  Also, for anything other than a small business, it’s worth remembering that we are considering a business organisation of many people producing output, especially when total shareholder return and market capitalisation are being judged.

Our favourite study about measuring performance, the one that we felt would encourage people to take leadership and management seriously, is ‘Built To Last’ by James C. Collins and Jerry I. Porras.  This study looked at thirty six large companies and used the measure of cumulative stock returns to evaluate relative performance.  Their interest, inter alia, was to understand more about 18 visionary companies and the leadership that enabled their success in relation to 18 comparison companies in similar sectors.  To engage attention of a range of readers, including investors and ‘numbers’ men, the authors used the stock return measure.

The study period was 1926 to 1990.  If in 1926 $1 was invested in a general market fund, $1 in a comparison company fund and $1 in a visionary company fund and all dividends reinvested then in 1990 the general market fund would be worth $415, the comparison company fund $955 and the visionary fund $6,356.  These results speak for themselves!  The study covers a range of organisational topics that need to be addressed to deliver exceptional performance and it is clear that the comparison companies were by no means a poor lot to have beaten the market for over 60 years.

The major difference between the comparison companies and the visionary companies was that the overall interest of the people running the visionary companies was to build a great company or business organisation.  Their approach to leadership was described by Collins and Porras as ‘clock builders’ whereas the approach to leadership by people in the comparison companies was as ‘time-tellers’.

In the visionary companies, building the vision, developing the core values and goals were done in a way so that everyone in the organisation was aware of their significance and importance and were able to make a contribution.  The vision and values were part and parcel of company culture which was developed over the long term.

There was openness about what was intended to be achieved that enabled people, within the organisation, to know how the organisation was performing, hence the term ‘clock-builder’.  A framework was developed that linked vision, values and the strategic goal setting process into a coherent whole.  This provided clarity of direction and ways of doing things that were open for all members of the business and engaged peoples’ commitment and effort.  In the comparison companies, the leaders did not establish such robust clarity so people had to ask the leader what the time was, leading to delay and relatively less engagement with the consequential impact on results.

 

*Harvard Business Review study by Morten Hansen, Professor University of California Berkeley and Insead and Herminia Ibarra and Urs Peyer both of Insead.

 



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