The Intangible Value of Leadership

I'm pleased to present an article from Verit Advisors

Verit View

Verit Advisors’ view is that leadership is a major driver in creating value for an organization, whether the company is private or public. Many people identify a company’s success (or failure) with its leaders, but value creation for an organization should be considered more holistically. Good leaders understand the needs and values of all stakeholders. They structure incentives to meet needs and to achieve their company’s long-term, strategic goals.

What Makes One Leader Better Than Another

The value created by a company’s leader or leadership team is extremely difficult to quantify. One man synonymous with value creation is Jack Welch. During his tenure at GE from 1981–2001, the company’s value increased by 4,000%. Was this value created for shareholders completely attributable to Welch or also due to other factors?  Most would argue that the increase in value was due to a combination of factors and not Welch’s leadership alone. One place where we can quantify the impact of leadership on value creation or destruction is in the area of private family businesses. Almost 80% of the 18 million businesses in the U.S. are family-owned. Few survive to the second, third, or fourth generation.

According to the January-February 2012 Harvard Business Review,leadership challenges are the main reason why multigenerational businesses fail or have to be sold.

First-generation private businesses are built on the drive and ingenuity of an entrepreneur able to carve out a niche within a market.  For businesses that successfully transition to the second generation, a major stumbling block can be selecting a new leader. Business owners default to or are pressured into choosing a family member who is seen as a continuation of the family legacy. Even educated family members often lack leadership characteristics needed to strategically position the business, drive growth, adapt to market changes, and effectively lead coworkers.  Per Harvard’s research, these shortfalls in multigenerational leaders are the major cause of private businesses failing or needing to be sold.

The Institute for Executive Development’s 2012 research supports these observations citing: (1) a lack of coherent strategy for executive development, (2) a lack of a formal process for developing successful successor candidates, and (3) a lack of candidates ready to take the CEO job as significant contributing factors. 

Beyond the CEO for the Second Generation

So how does a private business owner position his or her business for a long-term sustainable future? One of the best tools any business owner can implement is a board of directors that can complement the CEO and management team. Successful boards draw from varied industries to leverage best practices and strategies. A well-seasoned board also can develop a succession plan where there is none and coach and mold upcoming leaders with tools and resources such as leadership development.   

As always, it is Verit’s vision to bring a fresh approach and customized solutions to advise private business owners on ownership transition.

Verit is an independent investment banking advisory firm that provides expert advice  to meet the goals of middle market companies. http://www.verit.com/