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Market Research

New Study Finds Lack of Business Acumen Among Organizational Leaders

Agatha Gilmore
Talent Management Perspectives
March 2008

The Customer Connection: The Global Innovation 1000

Barry Jaruzelski
Kevin Dehoff
BoozAllen strategy+business
Winter 2007

Behavioral Finance- Benefiting from Irrational Investors

Julia Hanna
HBS Working Knowledge
June 2007

White Papers

 The Role of Business Acumen in Leadership Development (Updated) [June 2008]  

Executive Summary
This paper discusses the emerging role of business acumen in leadership development programs and how this differs from business or (financial) literacy programs.

Business acumen training highlights the need for managers to understand how their actions and their behavior impact their financial decision-making and how this in turn affects financial outcomes at the unit and the corporate level. This requires a behavioral model which can describe the linkages between behavior and financial outcome, and can show how developmental interventions can improve the outcome and business performance of a manager.

Many business acumen programs are actually really business literacy programs. While business (or financial) literacy programs give participants a basic overview of finance and business, business acumen programs are designed to show participants their behavior under different financial and business conditions. Business acumen is based primarily on behavioral and experiential issues, not on formal learning or education like financial literacy.

The paper further analyzes the impact of business acumen programs at certain company levels, including the individual, team, and corporate levels, as well as the impact on both financial metrics and business processes.

The paper concludes with a detailed discussion of a model program for business acumen development.
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 The Financial Psychology of the Presidential Frontrunners and its Impact on US Competitiveness [May 2008] 

 Executive Summary 

 Election Op Ed 

Executive Summary
This White Paper examines the financial psychology of the three Presidential front-runners with the aim of assessing what impact they will have on the US economy and US competitiveness.

The approach used in the paper is based on a new set of behavioral finance tools developed by the Perth Leadership Institute. These measure the propensity of a leader to create value and to utilize resources. Where a leader creates more value than the resources used to achieve this, they create capital and they have a positive impact on US competitiveness.

The White Paper assesses all three front-runners on these criteria to make an assessment of their impact on US competitiveness. It looks at their behavioral balance between value-creation and resource utilization as measured by their resource distributive impact, essentially the same criterion.

All three front-runners exhibit much greater behavioral focus on redistribution than on value creation. So the impact of all three is that they will have an adverse impact on US competitiveness over the longer-term.

Of the three Clinton will have the least adverse impact, and there is even a (small) chance this could turn positive later in her term of office. McCain's impact will be negative as he has intensive policies and behaviors which are directed to redistribution, in this case to the military and exacerbated by his tax policies. Obama will have the most adverse impact on US competitiveness in the short-term but there is a slight chance that this could turn slightly positive later in his term under certain circumstances.

Clinton: Clinton will have a somewhat negative impact on US competitiveness but she has repressed tendencies towards policy innovation which could appear later in her term if she was comfortable enough politically to let this hang out. In that case her impact could turn slightly positive.

McCain: McCain's impact is negative and is likely to be the most erratic of the three. The sharp conflict between his two main behavioral financial tendencies, one to reduce spending without adding any policy value, and the other to pursue high resource utilization initiatives in the area of defense and foreign policy, will probably lead to sharp oscillations in his financial policies and impact and could possibly lead to very adverse impacts on the US competitive position.

Obama: Behaviorally, Obama should have the least adverse impact but his determined strategy over his career to seek agreement at the expense of performance will overwhelm this behavioral tendency and lead to the most adverse impact. He may well have some behavioral tendencies to increase policy innovation but if so he has hidden them well and in any case he has less of them than Clinton (but not McCain). To the extent he does possess some of them, these could possibly reveal themselves later in his term when he feels confident enough that they will not weaken him politically, but in that case any positive impact would be minimal.

The White Paper recognizes that it raises complex behavioral issues that are unlikely to be resolved in a single paper. Its aim is to focus attention on an issue which has received little attention - the outcome of the election in terms of the future global leadership and competitive position of the US - and to relate the behavioral tendencies of the front-runners to show their possible impacts in this area. The Paper recognizes that, in practice, many scenarios are possible some of which could be responses to the issues raised in the Paper and some of which could be totally unrelated.
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 A Recession's Role in Transforming Leadership Development [Feb 2008] 

Executive Summary
Cost cutting in a recession usually includes strategic HR and leadership development initiatives and expenses. Recessions often also lead to negative perceptions of HR since they are made responsible for cutting people and programs in line with company directives. The CEO and board are usually so preoccupied with company survival and the need to significantly cut expenses that they often have no sympathy or time left for strategic leadership development initiatives.

However, unconscious financial behaviors of many CEOs and senior management result in more than just costs being cut. Margins are often unwittingly chopped in the race for aesthetically-pleasing expense line items. Falls in margins are usually the consequence of reducing value-adding expense items, which reduces the medium and long-term competitive edge of the company. Executives need to be aware of these behavioral biases so that they can reduce costs without threatening the long term sustainability of the company.

This White Paper shows that a recession is actually an opportunity for HR and leadership development to increase its credibility by promoting programs to modify financial behaviors that directly support the CEO and board's agenda to cut expenses while increasing margins. By adopting such approaches, HR can put in place programs and behaviors that not only rapidly improve short-term financial outcomes, but also put in place a framework for longer-term increases in profit quality and financial performance.

In order to do this, HR and leadership development need to take a number of initiatives:

    1. De-emphasize traditional personality and competency-based approaches - while useful in the right environment, these approaches do not build business credibility for HR in times of hardship.

    2. Focus on programs that will have fast behavioral impact on costs and margins - the CEO and senior management will only have an ear for fast impact programs.

    3. Introduce into all programs the concepts of an ownership culture - focus the minds of employees and management on their responsibility for the financial outcomes of their actions and decisions.

    4. Implement programs to develop business acumen - show employees and management the linkages between their behavior and financial outcomes so that they can modify their behaviors appropriately.

    5. Integrate business acumen programs with traditional programs - build business acumen components into current curriculums to support and enhance existing methodologies.

    6. Map business acumen to traditional personality and competency approaches - use current employee data from traditional approaches to identify the existing business acumen potential of your human capital.

    7. Emphasize the financial and hard side of programs in internal public relations - set up fast, hard-hitting practical programs to build the business credibility of HR, and overcome stereotypes of leadership development being 'soft'.

    8. Train HR and leadership development professionals in business acumen approaches - empower HR and leadership development professionals to build their credibility and confidence as recession change agents in the organization.

    9. Position HR and leadership development as being business-focused innovators in their own area - show the rest of the organization that HR and leadership development are no exceptions when it comes to financial behavior-based change.

    10. Introduce programs to develop high leverage innovation approaches - as studies have shown, breakthrough innovation is not correlated to high R&D spend; and given the right environment, low budgets and times of need can stimulate highly creative thinking.

    11. Stress approaches to increase leadership agility and organizational learning - enable those with less natural business acumen to contribute to profitability by improving their financial behavior through leadership agility.

    12. Integrate business acumen approaches into talent management and succession planning - move beyond development initiatives and assist HR to choose the right people who need to leave and the right people to stay, and identify potential future leaders.

    13. View the recession as an unparalleled opportunity, not as a problem - leverage a recession to force a reassessment of internal priorities, and throw up opportunities for HR to innovative and show its value from a business perspective.
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 How Leadership Development Can Address Financial and Credit Crises [Dec 2007] 

Executive Summary
The current credit market crisis reveals a basic problem in leadership development, that is, the lack of programs to develop business acumen, particularly for the executives who are charged with the responsibility for risk, and especially the quants. It is highlighting the vulnerabilities of executives in both financial services companies, and companies generally in assessing and predicting levels of market and systemic risk. This White Paper from Perth Leadership Institute shows the link between behavior and financial risk and how leadership development programs can incorporate mechanisms to address it.

The vast majority of leadership development programs are based on either or both personality and competency assessments and approaches. However in neither case does the approach have any direct link with financial and market risk and market outcome. Research shows conclusively that personality assessments are not correlated with leadership outcomes. This is why most financial services companies tend to hold these approaches in low esteem, since they do not address the central issues of financial risk assessment and prediction.

Traditional approaches do not attempt to assess or develop business acumen. They tend to equate technical expertise and academic intelligence with business acumen, a very basic error. They tend to focus on a high level of learned and book knowledge as against the intangibles of business acumen and real-world outcomes. As a result, leadership development programs, particularly but not only, in financial services companies have led to a divorce between market risk and executive behavior, as distinct from executive learning and credentials.

This paper draws together two strands which many leadership development professionals and business leaders might not have seen to be connected, namely market risk assessment/prediction and leadership development programs. The link is indeed a tight one. Modern scholarship and recent developments in behavioral finance are opening up new ways to think about this connection and how we can use this knowledge to actually alleviate the potential for future problems.

In order to address this problem, companies need to partly decentralize the organizational structure for managing risk and move from the current Boffin model of risk, in which a centralized, technical approach is adopted, to a partly decentralized model, which the White Paper terms the Rug Merchant Model, in which business acumen rather than business education or mathematical skills becomes the key qualification for being a member of this broader group that manages risk.
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 The Role of Business Acumen in Leadership Development [Sept 2007] - See Updated and Reissued Version [June 2008] 

Executive Summary
This paper discusses the emerging role of business acumen in leadership development programs and how this differs from business or (financial) literacy programs.

Business acumen training highlights the need for managers to understand how their actions and their behavior impact their financial decision-making and how this in turn affects financial outcomes at the unit and the corporate level. This requires a behavioral model which can describe the linkages between behavior and financial outcome, and can show how developmental interventions can improve the outcome and business performance of a manager.
Top of page


 Innovator Financial Styles and Financial Performance [Jan 2007] 

Executive Summary
Innovation is a vital task for companies and countries. The current focus for improving innovation is to find and implement better organizational processes. The current approach assumes that if the processes are correct and effective, then essentially any manager can be put into an innovation task or role. However this ignores the issue of the differences between individuals in their innovative financial styles. By taking this into account we believe we can make the innovation process more effective and more predictable.

Based on our research, this White Paper argues that there are significant differences in psychological endowments between individuals in their innovation impact. Most managers do not have such an impact. Even those who do differ significantly in their impact on financial performance and capital generation. By taking these issues into account, companies can improve their innovation programs, improve the individual contributions of innovators, better match the styles to the market goals of the organization, and make them more relevant to the psychological assets they have amongst their innovation managers.

Our research gains powerful support from other independent research on innovation, notably the annual Booz Allen studies on R&D spending by companies, which we refer to in this White Paper.
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 The Role of the CFO in Organizational Transformation [June 2007]

Executive Summary
Organizational transformation can only occur through changing behavior. CFOs need to become key drivers and shapers of the financial culture of the organization to make it more profitable. To achieve this they should aim to become key influencers of talent management and development programs that aim to increase business acumen at all levels. This will also transform their own role so that it becomes more strategic. In the process they themselves need to experience these programs so that they can improve the linkage between their own behavior and its financial and valuation impact.
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 Succession Planning and Business Acumen [Apr 2007]

Executive Summary
Succession planning has become a key competitive weapon in its own right through its impact in building a strong culture where new leaders are constantly identified and developed. But succession planning programs as currently practiced focus on competencies that are mainly social, professional and personal in nature and focus too little on business acumen. In order for succession planning programs to achieve their full potential they must integrate the development of business acumen so that they are directly linked with the building of shareholder value. This is the case both for SPPs conducted at the C-level, and for those that, increasingly, are focused on executives below it, including high potential managers.
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 Towards a Financial Outcome-Based Leadership Model [Aug 2006]

Executive Summary
This White Paper shows that current leadership assessment approaches have not kept pace with modern theories of the firm and modern financial approaches. It argues that any leadership assessment approach that does not directly show how an executive's or manager's behavior is linked to the creation and enhancement of shareholder value is largely unrelated to the needs of practicing executives and managers.

The paper argues that any leadership theory must be based on a model of financial outcome for it to be successful and relevant. The theory must link leader manager financial impact and company outcome with standard company financial metrics. In particular the theory must link directly with valuation outcomes for the company. Only by so doing can it be relevant to a company which has as its aim the creation and enhancement of shareholder value.

The Perth Leadership Outcome Model is a financial outcome-based leadership model that integrates all of the elements outlined above. It is capable of predicting company financial outcomes and valuation trajectories from an understanding of the innate financial traits of managers and management teams. The model shows the strategies that managers need to implement to improve their own financial performance and valuation impact. It shows how managers and leaders need to change so as to improve shareholder value. It thus provides guidance that is of practical relevance to a manager or senior executive in running an organization.
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Other publications

 

 

Recent Updates


The Three Financial Styles of Very Successful Leaders

by E. Ted Prince
Published by McGraw Hill

 

Now available as a Chinese language web site
(佩斯领导力研究院 ) and book in both Traditional Chinese and Simplifed Chinese from McGraw Hill Singapore/Taiwan

Integrity Research

"Research - The Radical Fringe"

Business Finance Article

"Six Degrees: Analyzing Your Financial Traits"

Chief Learning Officer Articles

"A Crisis in Leadership"

"How Corporate Culture Impacts the Bottom Line"

"The Valuation Approach to ROI"

Business Book Review™

"...a new tool for analyzing the effect leaders and teams have on the market value of the organizations they lead."

Harvard Business School

"Working Knowledge" does review of The 3 Financial Styles of Very Successful Leaders

 

Notes from the Field

Engagements: Ongoing engagements in several industries including telephone, restaurants, real estate, insurance, technology and others involving C-level and other executive teams and individual programs with senior executives.

Partnerships: Sequent in Columbus, WJM Associates in New York, Shi Bissett Consulting and KBC Seminars in Shanghai, Ewin Publishing and BMR Magazine in Beijing, Work with Peking University's China Center for Economic Research.

Marketing: Ongoing program with HR and leadership development conferences. Continuing development of partnerships and clients in China. Initial marketing in Brazil and India.

Research: Active areas include links between executive's behaviors and financial outcomes, psychological drives of financial outcome, cultural differences in financial style and long-term financial impact of intervention programs.

Published Articles: Articles published by Perth and forthcoming in several industry and academic journals. Strong publishing program in China including in Business Management Review journal in Beijing. Publications in India with Indian Chartered Financial Analysts Institute.

White Papers: Several white papers including the impact of a recession of leadership development and the financial psychology of the three Presidential front-runners.

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