What is the cost of poor leadership?

What is the cost of poor leadership?

We all feel the cost of poor leadership. We’re living it right now. The mismanagement of a pandemic, prejudicial police tactics, inaction on climate change – the cost is severe.

Leadership in business can be just as catastrophic, pensions decimated, discriminatory hiring practices, devastating job losses. I was reminded recently of the cautionary tale of Blockbuster. The stalwart of every high street across North America and the UK was at one stage a very credible threat to Netflix. This may be a surprise, thanks to the collective narrative fallacy we’ve placed upon it as one of failed innovation. A more accurate take includes the detrimental leadership intervention of Viacom executives who saddled them with insurmountable debt and activist investor, Carl Icahn, who pulled the plug on an online strategy that had Netflix quaking in its boots. The podcast is here, but the net effect of these series of bad decisions is all too familiar – the loss of thousands of jobs on either side of the Atlantic.

Ask the investors at Wirecard how the leadership of Markus Braun worked out for them. Or Adam Neumann’s employees at WeWork. The legacy of failed leadership is not so much a long and winding road, but a seven-lane highway car wreck. Even in small businesses leaders fair no better – 75% of start-ups fail in their first 12 months. The odds aren’t stacked in your favour.

Evaluating leadership, like leadership itself, is rarely simple. As Daniel Kahneman states in his ground-breaking Thinking, Fast and Slow: “Because luck plays a large role, the quality of leadership and management practices cannot be inferred reliably from observations of success. And even if you had perfect knowledge that a CEO has brilliant vision and extraordinary competence, you still would be unable to predict how the company will perform with much better accuracy than the flip of a coin.”

HBR and other reports show 50% of leadership transitions fail within the first 18 months of being promoted or hired. And yet, the executive search industry in 2019 was valued at over $20.5 billion! Something is clearly afoot. At the senior level six-figure search fees are not uncommon – I can only assume there is no money back guarantee.

Generally, executives are appointed by experienced and well-intentioned search companies who are incredibly good at sourcing candidates but less effective at selecting them. Look at their commercial model and ask, is it optimised for selecting the right candidate or for finding a candidate the client will offer a job to?

Chemistry has spent 17 years challenging dismal leadership stats. The results of our research and field experience point to a very obvious answer: Organisations may be measuring a whole bunch of metrics about the executives they aim to hire, but the problem is the metrics they’re measuring are largely irrelevant to the outcome they’re trying to engineer. It is a classic case of false equivalence.

On top of this, we have found the more senior the appointment, the less the assessment variable predicted the outcome variable. That is, organisations spend less time defining what they need (the assessment variable) and use a lower quality of assessment for this variable. Another total disconnect.

Compare the punishing regime of time, energy and data collection that goes into a lowly graduate hire – an individual that has very little impact on the business performance (unless you’re Jack Welch) – versus the subjective, relationship-based, lunch-dinner assessment of most senior executives. And I’m continuously confused by the dissonance in which organisations will scrupulously interrogate a $1million spend on a piece of IT equipment but not the hire of a $1million executive.

Three steps to avoid a poor leadership hire

1. Clearly define the talent you need beyond a job description for the current context

We call this defining What Great Looks Like (WGLL™), hiring for where you want to go, using data and behavioural observation to establish what makes your very best executives successful. And then, to avoid cloning, we ask what would we add to make this team/organisation more successful? Chemistry has some incredible proprietary tools to help you do this.

2. Don’t leave the final selection to a search company

Remember, they have no skin in that game. They’re brilliant at sourcing candidates so use them for this. Then, consult a third-party specialist, like Chemistry, to ensure you’re picking the right leader from your pool of candidates. We work globally on behalf of our clients with the foremost global Executive Firms to do this. Think of it like this – if you are going to spend six figures on a search fee, we’re your insurance policy.

3. Onboard effectively

Up to 70% of executives report not being ready for the transition to their new leadership role. Use the data (which you’ve already paid for) gathered at the point of hire/promotion to successfully onboard the candidate.

Executive hiring or promotion should be data-led and objective. How do we know the majority of it isn’t? Well, as of right now 47% of FTSE 100 companies have no people of colour sitting on their boards. Only 3.3% of FTSE 100 Chairs, CEOs & CFOs have a BAME background and, although there has been a greater focus on promoting gender parity today, only 5 FTSE 100 CEO roles are held by women and in the S&P 500 just 5.8% of leaders are women.

There’s work to be done, and we’re doing that work.

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