Leadership development approaches can be said to have undergone three phases over the past 20 years or so. These are:
Each one of these approaches has brought a unique set of insights and approaches to the practice of leadership. These may be summarized as:
These approaches support corporate strategies for organization development which focus on building strong corporate cultures and individuals who operate well within them. However there has been a growing realization that these approaches do not have a direct link with financial outcome and do not directly build behaviors which link directly with profitability and corporate valuation.
In spite of this, the leadership development field has increasingly recognized that human resources are a key component of the building of corporate capital, hence the increasing focus on building human capital. Until now the emergence of approaches that link leadership development directly to financial outcomes has been limited by the absence of a coherent model which clearly shows the linkages between behavior and financial outcomes.
The real need is for leaders 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.
Recent research reveals that there is a distinct financial personality that is innate and leads to characteristic and predictable financial decisions by individuals. This entity, which we call the Financial Signature of an individual, is innate, and usually the individual is entirely unconscious of it. The Financial Signature serves as a proxy for the executive’s level of business acumen, or nose for profit.
Business acumen should not be confused with financial literacy or other formal knowledge, as in book learning, academic expertise or familiarity with formal methods or disciplines. For example, possession of an MBA is unrelated to the level of business acumen. In fact, having an MBA may, in certain circumstances, lead to worse-than-average performance, due to a level of over-confidence in one’s abilities which is not warranted by an executive’s behavior or demonstrated outcomes of his or her financial performance.
The Financial Signature actually reflects the propensity of an individual manager to create or to consume capital. We can measure this propensity and can link it to financial impacts at the individual, team, unit and company levels. There are characteristic linkages between Financial Signature and these financial impacts which will be reflected ultimately in the profitability and valuation outcomes of an enterprise.
If executives are made aware of their Financial Signature, they can modify their behavior and compensate, at least to some extent, for this tendency. The extent to which they can learn to compensate is a function of their leadership and learning agility; the higher these factors, the more they can change.
Executive coaching can be employed to accelerate a needed shift in an executive’s Financial Signature. In fact, the identification of an executive’s Financial Signature provides a model for executive coaching, one that integrates real business issues such as profitability, margin and growth metrics into the intervention. Traditional coaching has side-stepped financial, business and market factors and has instead focused on how the executive feels and how they interact with others. This is why many business people are skeptical about executive coaching. Their unspoken critique: Show me the money. Whereas business acumen-focused coaching assists the executive in proactively meeting the profitability and margin challenges of a new or existing position. This coaching centers on improving their business acumen and not just their interpersonal acumen, making them not just a better person, but a better business person.
Business acumen assessments should be used not only for individual development or executive coaching, but also into integrated into selection, succession planning and team effectiveness programs as well. Amongst many senior executives there is a pervasive feeling that many talent management programs such as these simply do not have a close enough connection with their financial and P&L responsibilities, and they focus overly on “soft issues” to the detriment of the hard issues of finance and profitability. Human resources and leadership development executives must align their programs more directly with business and financial concerns to make them more relevant to the needs of senior leaders and ultimately of shareholders.
Frequently HR is seen as having a transactional and administrative rather than a strategic role and often lacks the credibility to participate meaningfully in business decisions. This problem is widely known as getting “a seat at the table.” In order to make this breakthrough move, HR must become more oriented to the strictly financial and business needs of companies. Introducing business acumen into leadership development is a key touchstone in this process.
WJM Faculty Member, Dr. E. Ted Prince, is the founder of the Perth Leadership Institute and the author of The Three Financial Styles of Very Successful Leaders (McGraw-Hill, 2005). Dr. Prince will be hosting a WJM Roundtable discussion on the role of business acumen in leadership development on February 20th in New York (see below).