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A Glaring Gap In The Valuation Of Organisations: LEADERSHIP CAPITAL

  1. SETTING THE SCENE

It is accepted practice to assess organisations on a regular basis in terms of the value of its portfolio of assets available as competitive means to and within the organisation to create sustainable wealth for stakeholders. Expressed in the form of different Capitals, the organisation’s total value is defined as the summation of its available Physical, Financial and Intellectual Capitals.

 

In the Knowledge Economy, 85% plus of organisations’ assets are intangible in the form of Intellectual Capital. In other words, Intellectual Capital has become by far the most dominant form of Capital. The organisation’s assessed value of intellectual capital is the amount by which the enterprise value of the organisation is greater than the value of its tangible assets, namely its Physical and Financial Capitals. Operationally, Intellectual Capital is expressed typically as the difference between the current market capitalisation of the organisation and the total value of its shares at their original, issued price.

 

Generally Intellectual Capital is divided into:

  • Human: know-how, experience, expertise, creativity, ingenuity lodged in the people employed by the organisation, who by the way can leave at any time.
  • Relational (or Social): the range and quality of relationships with stakeholders
  • Structural, subdivided further into Organisation, Process and Innovation Capitals. These Capitals are made up of, e.g., the codification of the organisational processes, mode of working, methodologies, and practices in the form of SOPs; technology; systems; intellectual property like patents, trademarks, trade secrets; data, knowledge and intelligence; and reputation.

However, a glaring gap in the conventional portfolio of Capitals applied to place value on an organisation, in particularly Intellectual capital as intangible assets, is Leadership Capital. Sometimes Leadership Capital is ‘hidden’ as a sub-capital of Human Capital.

This missing piece of considering Leadership Capital as a dominant class of Intellectual Capital at least is mission-critical in placing a true, complete value on organisations, especially in the VICCAS (an extension of VUCA) world of increasing Variety, Interdependency, Complexity, Change, Ambiguity, and Seamlessness (i.e., boundarilisness). This world demands outstanding master at leadership as an imperative for sustainable, differentiating organisational success.

  1. WHY IS LEADERSHIP CAPITAL MISSION-CRITICAL?

The essence of leadership revolves the future where organisations and people will spend most of their time in going forward: imagining possible futures, and realising a chosen shared, desired future. Leadership taking charge proactively of the future through pursuing a shared, chosen, desired future becomes architect of the future of their own choosing, and not a victim of a future imposed upon them. Without any doubt, leadership does make a difference in the current and future of their teams, organisations, communities and society, in the present and going into the future, whether for the better or for the worse.

Masterful leader visualises and mobilises people around inspiring, shared future, a dream, by turning stakeholders into dedicated  followers; passionately and humbly aspires to leave behind worthy, lasting legacies for current and future generations, in this way creating purpose and meaning; pursues a shared agenda serving the common good; consistently acts ethically and with integrity; demonstrates genuine authentic care and compassion; enables and empowers people; is unconditionally committed to be the best possible leader; and serves as exemplary role model.

Leadership Capital represents a critical investment in the future of organisations, communities and societies on the ‘top line’, significantly impacting on the ‘bottom line’. The race for the future will be won by organisations that deliberately build future-fit leadership. In the final instance, Leadership Capital serves as the critical precondition for and catalyst of the other Capitals making up Intellectual Capital: Human, Relational and Structural, as well as Physical and Financial Capitals. It is not merely an enablers or barrier.

Not including Leadership Capital as a class of asset in its own right in the portfolio of Intellectual Capital is a critical oversight in placing a true, overall value on the organisation, resulting in the under-assessment of the true state of the available competitive means to the organisation to create sustainable wealth for stakeholders. It may even be argued that Leadership Capital must be placed at the same level as the other primary Capitals: Physical, Financial, and Intellectual Capitals, and not be subsumed under Intellectual Capital as a subcategory.

To the best of my knowledge, Leadership Capital does not feature in a significant way in the academic literature on Capitals in placing a total value on organisations. However, Leadership Capital is addressed in the people literature as a development investment (see below discussion on categories of Leadership Capital) but as an organisation’s valuation category.

In practice, Leadership Capital may be considered when an organisation is contemplating a possible merger or acquisition. Otherwise in the normal run of business, Leadership Capital is not taken in account when placing a total value on an organisation. This is a grave oversight with most severe consequences of undervaluing an organization in a significant, detrimental way.

WHAT IS AN APPROPRIATE PERSPECTIVE FROM WHICH TO VIEW LEADERSHIP CAPITAL?    

I would like to contend that the appropriate perspective – ‘a selected set of glasses’ – from which to explore and understand Leadership Capital in depth and in its totality is that of the Leadership Ecosystem. Leadership is embedded in the critical triangle of Context-Organisation-Others, forming the Leadership Ecosystem.

The triangle forms an integrated, organic and systemic, living whole consisting of four key relationships: Leadership to Self, Others (including Followers, Opponents, Stakeholders), Organisation, and Context. Figure 1 depicts the Leadership Ecosystem as critical triangle graphically.

Figure 1 Leadership Ecosystem

As an integrated whole the Leadership Ecosystem, carries a holographic quality: each element in Figure 1 is represented in the other three elements. I.e., one element cannot be understood without the others because elements reciprocally, interdependently interact, co-unfold and co-evolve. The elements demand furthermore real time, ongoing, dynamic, systemic alignment through time, in time.

Based on the above perspective, Leadership Capital is embedded within the Leadership Ecosystem, and built and nurtured in an integrated, systemic, and organic manner within the fourfold relationships making up the Ecosystem. One key implication of the ecosystemic perspective of Leadership Capital is that it is specific to a particular Ecosystem, and not directly transferable to another Ecosystem.

WHAT CATEGORIES AND CLASSES OF LEADERSHIP CAPITAL POPULATE THE LEADERSHIP ECOSYSTEM?

Two categories of Leadership Capital populate the Leadership Ecosystem:

  • Quantitative, Hard: Leadership Capacity – having at any given time the right leadership in the right numbers at the right time in the right place, able, willing, being allowed, and wanting to perform relative to the strategic time horizon of the organisation. I.e., the quality of the organisation’s Leadership Pipeline. It is getting the right people on the bus, and the wrong ones off (cf. J. Collins). Typically, this Capital falls within the ambit of strategic talent planning. This Leadership Capital Category is typically also not included in the valuation of the organisation.
  • Qualitative, Soft: Leadership Excellence – the quality with which leadership is enacted. This Leadership Capital category embraces the quality of leadership in action and the consequences of such action, in the present and going into the future.

Without any doubt Leadership Capacity is a key category of Leadership Capital. However, it is a necessary but not sufficient Capital. In the final instance, Leadership Excellence is the make-or-break Leadership Capital. The balance of the article focuses on unpacking this Leadership Capital.

Five interdependent, reciprocally influencing classes of Leadership Excellence Capital can be distinguished from the perspective of the Leadership Ecosystem: Virtuous, Followership, Execution, Energy, and Goodwill.

Although each class will be discussed individually, it must be at all times be kept in mind that the quality of the one Capital class may/ will affect – positively or negatively – the overall synergistic quality of Leadership Excellence Capital in its totality, with the lasting difference, positive or negative it makes.

 Virtuous Capital

This Leadership Excellence Capital – the ecosystemic relationship to Self – pertains to the impeccability of the Character of leadership. It is encompasses the level of Integrity with which a person enacts her leadership in terms of commonly, accepted core beliefs and values. Being true to oneself at all times. It is about consistently being good, doing good, and ensure the good, regardless of the persons and circumstances involved.

Virtuous Capital is doing the right things for the right reasons with the right people at the right time in the right way. It being guided by the right moral conscience and compass. It is walking the talk consistently. Virtuous Capital is manifested in leadership attributes such as a high presence of humaneness, courage, open-mindedness, creativity, curiosity, prudence in leadership (after Ungerer, Herholdt & Le Roux). In the end, Virtuous Capital is all about the reputation of leadership: ‘What is this leader known and stand for with respect his thinking, feeling, deciding, responding and doing, and does he deliver on this promise?’

Followership Capital

This Leadership Excellence Capital – the ecosystemic relationship to Others – relates to having followers. No followers, no leadership. But even more critical than having followers, the quality of this Leadership Excellence Capital is determined by having the right followers for the right reasons, passionately identifying and embracing the desired future as a shared quest with leadership. This Capital is manifested in genuine, dedicated followership of the right kind.

Three critical followership success variables are at play here, affecting the quality of this Leadership: Legitimacy, Expectations and Trust – represented by the acronym LET – creating a leadership relationship triangle. The more legitimacy leadership has with the right prospective followers; the better aligned reciprocal expectations are in terms of the underlying psycho-social contract; and the stronger trust is, the more prospective followers are willing to LET leadership leads them. In short, it is the degree of ’authority’ with which leadership can lead.

As legitimacy increases, expectations become better matched, and trust becomes stronger, the ‘bigger’ the relationship triangle becomes, followership blossoms, and consequently the ‘size’ of the leadership’s area of influence and action enlarges – his ‘authority to lead’ – because followership grows in quality and quality. More daring dreams and greater legacies can be idealised and pursued because of flourishing followership.

Execution Capital

This Leadership Excellence Capital – the ecosystemic relationship to the Organisation – refers to the proven ability of leadership to image and actualize daring futures, i.e., his track of success. It is all about effective and efficient delivery through the systemic configuration, attraction, organisation, deployment, and application of the appropriate resources and people in this way making a value-adding, lasting difference, in the present and future. It is proverbially, having a history of bringing the bacon home, every time for the right parties. Quality execution would cover systemically the content (‘what’), process (‘how’), context (‘Where’) and outcomes (‘Whereto’) of delivery.

Energy Capital

This Leadership Excellence Capital – the ecosystemic relationship to the Organisation and Context – embraces the type and level of energy leadership is invoking, nurturing, and sustaining in followers, as well as stakeholders within her Operating Arena, and sphere of influence. Without the right type and amount of Energy, little will be achieved in actualising the shared, desired future, identified with and embraced by followers. Execution will suffer. It about the engagement of followers’ and stakeholders’ body, mind, soul and spirit.

A high level of constructive Energy is reflected in high levels of positive, uplifting psycho-social capital amongst followers and stakeholders, such as hope, passion, caring, harmony, faith, confidence, efficacy, security, courage and perseverance (after Luthans, Youssef & Avolio). This is in contrast to negative, depressing psycho-social capital like despair, disbelief, cynicism, alienation, uncertainty, disillusionment, insecurity, doubt, and cowardice.

Goodwill Capital  

Value unlocking and wealth creation by the organisation, its leadership, and people are ultimately about meeting the diverse needs/ interests of its multiple stakeholders in a balanced, fair, and equitable manner, the legacy of leadership. This Leadership Excellence Capital – the ecosystemic relationship to Others, specifically to stakeholders – is about forging long term, genuine, deep relationships with all the stakeholders of the organization, founded in on high levels of goodwill. In many quarters it is argued that the goodwill of the organisation- which can also be called relationship (or social) capital — has become/ is the most important asset of an organisation.

By meeting the diverse needs/ interests of multiple stakeholders in a balanced, fair, and equitable manner, the organisation puts goodwill in the bank through the good reputation the organisation has built/ is building. High goodwill with stakeholders provides the organisation with continued access to opportunities, resources, expertise, and capacity because the organisation is seen as reputable, legitimate, credible, and trustworthy.

It gives leadership the space in which to pursue a longer term and/ or riskier vision. Leadership is trusted, mandate and/ or sanctioned to take greater calculated risks as they journey into the future in pursuit of even, bigger, daring dreams and legacies.

WHAT ARE THE NECESSARY INVESTMENT ENABLERS IN GROWING AND NURTURING LEADERSHIP?

Leadership Capital has to be grown and nurtured, deliberately and consciously, through invoking and managing certain Capital Investment Enablers, namely Leadership Abilities, Intelligence, Maturity, Ethics, and Authenticity. A high level (or ‘stock’) of Leadership Capital is the outcome of applying these Enablers in a multiplicative, complementary, and aligned fashion. Because leadership is future-directed, investment in these Enablers need also to be present- and future-orientated.

Leadership Capital does not spontaneously germinate and flourish. It has to be consciously focused on. Leadership Capital can also be wiped-out virtually instantaneous through a public scandal, a poor strategic decision, and dealing badly with an organisational crisis, internally or externally.

Leadership Abilities

This Investment Enabler relates to the hard and soft capabilities (or competencies) required by leadership to perform competently relative to the contextual demands and requirements of her Operating Arena relative to the pursuit of the shared, desired future. It is about the ‘Can do’ of leadership.

Leadership Intelligence

This Investment Enabler is about capacitating leadership with the ability to observe, think, judge, act, learn and reflect with a growing understanding and insight as she engages – conceptually, emotionally and practically – with her Operating Arena. She is able to transform Experiences into Information; Information into Knowledge; and Knowledge into Wisdom, and vice versa. She becomes increasingly more ‘intelligent’ through time because of gaining an ever deepening understanding and insight as events unfold and situations are addressed.

The total ‘Intelligence’ (or meta-intelligence) of a masterful leader consists of the five interdependent Intelligence Modes of Intra- and Interpersonal (including Emotional), Systemic (i.e., big picture thinking), Ideation (i.e., dreaming and actualising ‘big’ dreams), Action, and Contextual (including Cultural) Intelligence.

Leadership Maturity

This Excellence Enabler entails leadership’s capability to engage in a relevant, productive and edifying manner in relation to Self, Others, Organisation, and Context. ‘Relevant’, because he considers time, place and persons involved before and whilst acting. ‘Productive’, because she adds value and creates wealth in ongoing, significant ways. ‘Edifying’, because his relationships and interactions with Self, Others, Organisation, and Context are positive, healthy, enriching and fulfilling. In the final instance, mature leadership equates to being a wise person.

 

 

Leadership Ethics

This Excellence Enabler enables leadership to be growing in goodness: is good, acts good, and ensures good. She is directed, guided and infused by an deeply entrenched moral conscience, authority, compass and courage with the drive to do good for the common good though being a steward of and servant of Others. He has a relentless passion for the right; for promoting ethical standards; for setting the right example; and for recognizing/ rewarding ethical conduct.

Leadership Authenticity

This Excellence Enabler encompasses leader(ship) who is grounded in genuineness. He nurtures and affirms the dignity, worth and efficacy of the persons he interacts with. Persons become better people through interacting with her, and aspire to be like her. Concurrently leadership creates and maintains enabling, empowering and meaningful work experiences. He brings about an organisation that engenders and grows the physiological, psycho-social, socio-cultural, and spiritual well-being of followers, making and leaving them better persons than when they joined the organisation.

WHAT ARE THE OVERALL CONSIDERATIONS FOR MAKING WISE LEADERSHIP CAPITAL INVESTMENTS?

 

The overall consideration for making wise Leadership Capital Investments can be represented in a Leadership Capital Investment Cube which forms the basis of making strategic Leadership Capital Investment choices. Figure 2 depicts this Cube.

Figure 2 Leadership Capital Investment Cube

In terms of the Investment Cube given in Figure 2, three choices need to be made within the context of the Organisation’s Identity (i.e. its Purpose, Dream, Strategic Intent, Core Value, Legacy) as reference point:

    • who must we invest in at what organisational level and in which organisational area (Side 1)?;
    • in which category and classes of Leadership Capital must we invest in (Side 2)?;
  • using what mix of Leadership Capital Investment Enablers with what intensity over which timespan (Side 3)?  

 

 

HOW MUST THE RETURN ON LEADERSHIP CAPITAL INVESTMENT BE ASSESSED?

Given the premise that the return on the organisation’s Leadership Capital Investment as contained in the Leadership Capital Investment Cube must be assessed on a regular basis to determine the overall value of the organisation, what is the expected Outcome of this Investment? What must this investment add to the organisation’s value?

In short, the expected return on Leadership Capital Investment is the high probability of realising shared, desired futures of one’s choosing through the leadership for the organisation. I.e., the organisation through its leadership is the architect of the viable future it has chosen for itself.

CLOSE-OUT

The future of the oragnisation will be severely compromised if the organisation does not deliberately include Leadership Capital as a category of Intellectual Capital in placing a true, complete and comprehensive valuation of the organisation: Is our Leadership Capital suffice to secure a viable future for our organization? Is it growing appropriately through the right investments at the right time and in the right place in the right persons, producing a high return?

Or, is our Leadership Capital being depleted and eroded, and consequently compromising the competitive means to and within our organisation to create sustainable wealth for stakeholders, now and going into the future? Then we are bound to face a growing leadership crisis as is the case at present worldwide.

 

By: Theo H Veldsman

Work Psychologist

Visiting Professor at, and former HOD of Department of Industrial Psychology and People Management, School of Business and Economics, University of Johannesburg

Extra-ordinary Professor, University of Stellenbosch Business School

Strategic People Effectiveness Advisor, InavitIQ

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