The evaluation of leaders has historically been heavily biased toward results: the leaders of well-performing institutions are assumed to be good and the leaders of poorly performing institutions are assumed to be bad. But are results alone the best measure of leadership performance? On many occasions, leaders play little role in a company’s success and other occasions save poorly performing companies from far worse economic fates. This article argues that the results bias should be questioned and that a broader framework is needed to assess leadership performance and judge whether a leader should remain at the helm of a company going forward, in good as well as bad times.

The Results Bias in Leadership Evaluation

Evaluating the performance of leaders is one of the most challenging, and crucial, parts of corporate analysis and strategic planning. Retaining an executive in or removing an executive from a leadership position has a major impact on a company’s value-creation ability.

Further, the perception of a leader’s performance often affects the resources that are allocated to support an executive’s vision. The better a leader is perceived to be, the more likely it is that the firm will take risks to carry out the leader’s agenda. These hard and soft resource allocation decisions set in motion a far-reaching chain of consequences regarding company direction.

The results bias is the belief that leaders of well-performing institutions are necessarily good and the leaders of poorly performing institutions are necessarily bad.

Evaluating leaders is even more challenging in highly volatile situations. When internal company or external market events cause a company to be pulled off course and suddenly find itself in unfamiliar waters, it can be difficult to find a frame of reference for determining how skillful the actions taken by a leader were under the circumstances.

There are many ways to analyze the strength of leaders. Here are some ways to measure leadership. Historically, there has been a very strong tendency to assume that leaders of companies, institutions or even governments that are doing well are good and leaders of those institutions who are not doing well are poor. This assumption is often inaccurate. A general may win a war not because of any particular military expertise or personal valor but rather because of the military expertise of his team members, errors made by the enemy or natural disasters. The attempted Mongol invasions of Japan were not averted by brilliant Japanese military defense tactics but by stormy conditions that destroyed large portions of the Mongol ships at sea.

This same evaluation bias phenomenon occurs very frequently with companies. Companies may perform well, not because of the leader’s vision or leadership, but because the company happens to be in the right place in an industry or in the market at the right time. This could be the case, for example, if a sudden market shift favors the company’s products, wipes out a competitor or gives a company greater access to scarce resources. Many generals are carried to victory by the hand of chance.

The same thing is true on the other of the side of the performance spectrum. A company may post poor results, but the results may be much better than they would have been if it were not for excellent reaction by a company leader. These steps could include:

• Pivoting under pressure from a bad situation to a better one
• Repositioning products or assets to salvage their value
• Sacrificing profits to save customer relationships or market image
• Creatively cutting costs to allow the company to limit losses or remain in business
• Taking steps that, while resulting in losses in the short term, position the company for success in the future

Economic Consequences of Evaluation Biases

The economic consequences of evaluation bias are significant. To take the bad leader/good results case first, the issue is that results often lag behind executive actions, sometimes for years. If a poor leader causes a company to veer off course and simply benefits from favorable events the leader had nothing to do with, once market conditions change the company may find itself in a poor competitive position that may be very difficult to recover from.

The consequences of results bias can have a far-reaching impact on the company’s valuation creation ability and the cost of that ability.

Getting off track under poor management has direct economic consequences. One way to determine the value of a company is to discount the value of the company’s future cash flows by a discount factor reflecting how risky those cash flows are. Getting off track means that the company’s cash flows will likely fall and the risk to those cash flows will increase, creating negative value pressure. Further, a poor leader can create a negative work environment or set in motion a chain of actions that alienates employees or clients, which will show up in results sooner or later. When it does, and results fall to reflect the leader’s actual ability, it may be very difficult to steer the boat back on course and very costly to do so.

Looking at the good leader/bad results case, the reverse reasoning applies. Even if a company’s results are not positive, the fact that a leader prevented value from being lost due to quick thinking, quick action or simply staying the course when there is pressure to change in the face of volatile seas has future value. Further, if a leader was able, despite negative circumstances, to maneuver the company into a good position relative to the company’s competitors, once market conditions stabilize the company may be in a position to gain significant amounts of market share. Removing the CEO just because of poor results may cause this value not to be realized.

A Framework for Evaluating Leadership Performance

There are several steps that can be taken to help remove the results bias from leadership performance evaluation.

Have a Flexible Business Plan. The first step to remove the results bias is to have a business plan which contemplates upside as well as downside market scenarios. While the future cannot be predicted, it is possible for shareholders and the Board of Directors to maintain a continuing a dialogue with leaders regarding what steps should be taken under different market situations. With this agreed in advance, it is easier to see whether the leader’s actions were reasonable or not if those market situations materialize.

Have an Appropriate Analysis Time Frame. The second step is to make sure that the time frame for analyzing the leader’s actions is long enough to make a fair analysis of the leader’s performance. Particularly for new leaders, it is important to give them a sufficient period of time to get familiar with the company, analyze market conditions and form relationships with people so that they can be mobilized effectively.

More importantly, a longer analysis time frame tends to remove fluke and force majeure successes and failures and increases the likelihood that observed performance will more closely reflect true leadership strengths and weaknesses. While in a single instance it is possible for a very poor leader to be saved by extraordinarily favorable circumstances and vice versa but over time as multiple internal and external situations are faced this becomes less likely.

A longer analysis time frame tends to remove fluke and force majeure successes and failures and increases the likelihood that observed performance outcomes will more closely reflect true leadership strengths and weaknesses.

Consider Outcome-Independent Leader Attributes. There are many leadership attributes that can be analyzed that are completely independent from company performance. These include

• leadership presence
• the speed and quality of a leader’s analysis of a situation, including gathering facts, review of the facts with appropriate persons and outlining and considering the advantages and disadvantages of different courses of action
• the leader’s ability to mobilize internal and external team members to carry out a course of action
• keeping stakeholders informed of actions that are taken.

Fairly Consider the Leader’s Point of View. It is often easy in hindsight to praise or condemn a leader’s actions and see a path that could have led to a better outcome, but to accurately judge a leader’s competence it is important to consider the information that the leader had access to or reasonably could have had access to when making decisions. Giving a leader the opportunity to discuss what they did and why they did it can provide a fuller picture of leader strengths and weaknesses.

Discuss the Path Forward. Finally, an important part of the leadership analysis process should be to review the company’s current situation, on its own as well as compared to competitors, and discuss the leader’s proposed steps to take the company forward to build value and reduce risk.

Conclusion

The decision to retain or remove a leader has a crucial impact on a company’s valuation-creation ability. This analysis is often affected by results bias. By utilizing a more flexible leadership evaluation framework, it is possible to more accurately gauge leader strengths and weaknesses and make better decisions regarding who should be at the helm of a company.

Thanks to Tucker Monticelli for the photo of Alexander the Great on Unsplash. Beautiful Free Images & Pictures | Unsplash