When leadership creates less than 10% of company value, it’s time to challenge conventional thinking
The success of companies can depend on the leadership philosophy which is then manifested in how the company is organised and how decisions are made. The conventional approach to leadership is based on a hierarchical model where the leader sets the direction, and the team follows, based on common goals which hopefully represent the consensus.
This conventional model of leadership is favoured by investors, who like the simple clarity of decision-making and responsibility combined with their ability to affect decision-making in a very direct manner, without having the engage more deeply in company issues. This accountability is usually perceived as a strength and also held up by leaders as a justification for much higher remuneration for the leaders relative to other employees of the company.
However, this perception has been called into question over the last decade when the remuneration packages of leaders can be 1,000 (or even 10,000) times the average pay of employees - this is especially so because detailed analysis of the value contribution to the strategic success of a company suggests that the leadership contribution is around 10% at best. Our research suggested an even lower figure of 5%, which is at variance with the popular perception of the critical importance of leadership.
None of this should detract from the critical importance of leadership, but it does call into question the content of some leadership programmes, which laud the ‘leadership’ qualities of important historical figures but mainly focus on hierarchical models of leadership based on respecting the primacy of financial capital.
Fortunately, there are alternatives to this thinking which are more collaborative and emphasize peer-based interaction. In particular, Drath(1) advocates a new leadership ontology, usually referred to as DAC, in which the essential elements are three different leadership outcomes:
Direction, which is based on widespread agreement in a ‘collective’ or group sense about the overall goals, aims and mission of the company
Alignment, which enables the organisation and coordination of knowledge, and hence the team working collectively
Commitment, which describes the willingness of members of the collective to subsume their own interests, and benefit within the direction and alignment agreed by the collective.
In practice, as we saw in our research, many companies are combining the conventional model with the DAC approach to create hybrid leadership styles better suited to their specific market conditions and constraints.
Our research has very clearly shown that most companies start with DAC-type models where the early founding teams work very collaboratively. As companies mature and get bigger, they start to adopt more conventional leadership styles, sometimes under pressure from investors, which can represent moments of danger for the companies if they get this wrong. Given what we now know about the length and complexity of the commercialisation journey, our firm advice would be to look at hybrid leadership structures as you grow; the DAC elements are critical to maintaining your innovative and entrepreneurial edge.
Drath et al (2008), Direction, Alignment, Commitment: Towards a more integrative ontology of leadership, The Leadership Quarterly, 19, pp 635-653