Leadership Character & the Bottom Line: A comment on SMD-HR Research

We have always believed that leaders of integrity were not just admirable but good for the bottom line. Our company, Turknett Leadership Group, founded in 1987, has assessed and coached senior leaders since the dark ages – at least long before the term “executive coaching” became common parlance. We have seen the power of character in leadership anecdotally for years. And we’ve followed the research linking character and trust in leadership to the bottom line.

We were thrilled in 2002 to see “The High Cost of Lost Trust” in the Harvard Business Review. In that excellent research Tony Simons, an academic at Cornell, compared Holiday Inn hotels and found that the more positively employees answered such questions as, “My manager delivers on promises,” and, “My manager practices what he preaches,” the more profitable the hotel. [i] Hotels with high trust were not just more profitable – they also had higher revenue, lower turnover, higher occupancy rates, and higher customer service scores.

We have not been that excited again until last week, when we saw the new research from SMD (www.smdhr.com). SMD is the leader in assessments that link directly to the bottom line. They have presented what may be the best evidence to date that character in leadership doesn’t just correlate with high profits – it drives them.

We have, of course, followed research linking leadership trust to the bottom line over the years. Another 2002 study by Watson Wyatt, based on a survey of 12,750 workers across multiple industries, showed that high trust organizations outperformed low trust organizations in total return to shareholders by 286 percent.[ii]

We have kept an eye on Fortune’s “100 Best Companies to Work For” since its inception. Trust comprises 60 percent of the criteria for the ranking, and a 2005 study by Russell Investment Group showed that the 100 best companies earned four times the returns of the broader market.[iii]

Our focus has always been on character in leadership. We developed a model of Leadership Character in 1995 that envisions character as a scale with Integrity as the strong, solid base with a balance of Respect and Responsibility.

It’s not surprising, then, that we were happy when Fred Kiel’s book, Return on Character[iv], was published in 2014. In a seven year study of 121 CEOs Kiel found that CEOs he calls Virtuoso CEOs (CEOs who were highly principled as measured by those around them) achieved nearly five times the return on assets of leaders whose character scores were very low – the Self-focused CEOs.

We have known SMD since its founding in 2008, and have followed their work and their research. Their work linking people measures to the bottom line is second to none. Their approach to employee surveys is unique.  We all know that Engagement is the hot HR topic right now. SMD co-founder Scott Mondore has long argued that a singular focus on engagement is misguided. SMD’s approach always links survey categories to bottom line measures like turnover, financial performance, employee performance, or HCAHPS and customer service, not simply to an Engagement score.

SMD just completed a study looking at employee surveys in their database for which they had solid outcome measures – nearly 30 companies and over half a million employees.  The results were astounding. The Engagement scale (category) on the surveys was a key driver of only one outcome in over four organizations – that outcome was Voluntary Turnover. Engagement drove outcomes only 28% of the time – other drivers were much more powerful.

And here’s the highlight for us – the two survey categories that drove financial performance in the most organizations were two that are near and dear to us – Management and Senior Management.  Adding to the good news (and this is news we fully expected) were the most predictive questions in each of the categories.

For Senior Management the most powerful questions – those most predictive of bottom line results – were: “Senior management’s actions support this organization’s mission and values” and “I have confidence in senior management’s leadership.” Integrity can be defined as the match between values and behavior. People in organizations are watching senior leaders and looking for that match.  There may not simply be a “return on character” – it’s likely essential for sustained success.

In the Management category the most predictive and powerful items on the scale were “The person I report to creates an environment of trust” and “I receive useful feedback from the person to whom I report.” Trust in leadership is essential at all levels.

The other category that most consistently drove outcomes was Job Fit, and one of the most predictive questions was “My job makes good use of my skills and abilities.” Selfishly that’s good news for us since we do leadership assessment and selection work, but it just makes sense that getting the right people in the right jobs is essential.

Engagement may be a good measure to track – along with financial performance, quality, customer sat, and turnover – but it may be more of an outcome measure than a driver of outcomes. We heard someone say years ago – we’ve attributed it to Ken Blanchard – that you wouldn’t play tennis looking at the scoreboard – you have to watch the ball.  SMD would advise you that Engagement may be, like financial performance, a good scoreboard, but it’s not the ball.

SMD helps you find the “balls” – the real levers that drive performance – in your organization. But this research tells us that those levers are much more likely to be senior management, management at all levels, and job fit.

Watch the levers – the character and competence of your senior management, the competence of leadership at all levels and the trust they engender, and job fit. We believe that people simply deserve to be led by people of character, but it’s darn good to know that character is also good for the bottom line.

 

[i] Tony Simons, “The High Cost of Lost Trust,” Harvard Business Review (September 2002), 18-19.
[ii] A 2002 study by Watson Wyatt surveying 12,750 workers across all industries showed that high-trust organizations had a total return to shareholders (stock price plus dividends) that was 286 percent higher than low-trust organizations.
[iii] A 2005 study by Russell Investment Group showed that Fortune magazine’s “100 Best Companies to Work For” (in which trust comprises 60 percent of the criteria and is the “primary defining characteristic”) earned over four times the returns of the broader market over the prior seven years
[iv] Fred Kiel, Return on Character, Harvard Business Review Press, 2015.
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