The Impact of High Quality Executive Leadership

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WAYNE RIVERS: Hi everyone. This is Wayne Rivers, Performance Construction Advisors, where We Build Better Contractors.

This week, I want to talk about the impact of high quality executive leadership. Last week we talked about productivity and construction. And Kent Pilcher's from Estes Construction, Kent's email, he had a throwaway line in there that maybe he didn't even think was all that important. And what I read to you last week had to do with productivity, but listen to this. He talked about working on the business, systematically developing leaders in the business. It's hard, requires major investments of time and money. Both are somewhat scarce resources in our industry. One might consider it's the number one criteria for sustainable long-term value. Leadership development. The number one criteria for sustainable long-term value. I've never thought of that before. I'm embarrassed to tell you. I'd never considered that in quite that way before.

We talk about it. We have the Contractor Business Boot Camp. We obviously believe in it. Is it the number one criteria for sustainable long-term value? It might be. It might be. So that got me thinking, now what about this is important to you? Well, golly, in our peer groups, gosh, the folks talk about business succession and leadership development all the time. Why? Because your human capital is your most valuable resource. If you're not developing that, you're not developing people, you're not as productive as you can be, you're not as profitable, you're not as fun as you could be, et cetera, et cetera, et cetera. So I found a Wall Street Journal article from their CIO journal, which was authored by Deloitte. And they studied, Deloitte studied public companies. Now, why aren't there studies about contractors and other private small businesses?

Because the information's not available. If the Wall Street Journal calls you at your company and says, "Hey, disclose your earnings for the last three years," what are you going to tell them? You're going to tell them it's none of your business, right? Public companies, on the other hand, have to give that information out. They have no choice. In fact, they want to, especially if they're successful, because that attracts more investment dollars to them. So it's easy, relatively speaking, to study public companies because they have to produce lots and lots and lots of information, which can then be reviewed from a historical perspective. Okay. So Deloitte studied people, systems, and processes in public companies. And they said that effective senior leadership can add 15% to the valuation of a company. But wait, I sound like a TV pitch man here, but wait, there's more. There is more.

I was like, 15%? I thought it would be higher than that. It is. We'll come to that in a minute. Okay. The analysts that study public companies, their number one criteria for valuing a company is, guess what? It's financial performance. Okay? It's the bottom line. The number two criteria though, this surprised me. Senior leadership team effectiveness. Now, I know for a fact, if you go out and get evaluation, you say you hire a specialist and you say, "I want evaluation of my company." That person is going to look at your financials. He's going to do comps, he's going to do all kinds of things. He is not going to factor in senior leadership competence at all in that valuation. And yet public company analysts do so. Why? It's that important. Number one, private company analysts who do valuations don't have the capacity. They're usually small.

Sometimes one person shops. They don't have the capacity to do an effective evaluation of senior leaders, do they? But in public company, the analysts do have incredible resources to be able to do that. 80% of analysts said an effective senior leadership team adds a premium to their pricing model. Now 15%, I'm scoffing at that. It's got to be bigger than that, isn't it? Yes. What did they not say in the top of the article? I had to read down, find it. Weak senior leadership teams produce a discount in that valuation number up to a 20% discount. So the effective leadership gap isn't 15%, it's 35%. That's a big number. It's 35%. So the discount for a poor team versus the premium for a strong team, huge difference. Okay?

Senior leadership, this is from the article quote, senior leadership exerts a far stronger influence, both positively and negatively on small companies. They're not writing about small companies, but by gosh, it was important enough to mention, wasn't it? Small companies, what is it with small companies and leadership? Okay. If you're the CEO of a public company, certainly you have an amazing amount of influence over the future of that company.

What if you're the CEO of a $50 million enterprise or $100 million enterprise? Is your impact as a leader going to be bigger or smaller than in a public company? So forget about the 35% difference. It could be 100% difference, two or 300% difference because of the ability to impact the smaller organization in a more profound way. It's a big deal. So that's the point I'm making. It's a big deal. All right. "It's notoriously difficult to measure the impact of successful leadership development," says Canwell, one of the Deloitte authors. "We hope this research will help companies understand the material impact that leadership can have on their performance, including the risks of a talent deficit." Very important.

What do you think? Let me hear from you, [email protected]. This is Wayne Rivers at PCA where We Build Better Contractors.

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