I'm fortunate. Several times a month I have an opportunity to meet fellow CEOs and executives for lunch to discuss their experiences and challenges, and gain their insight and counsel on my own challenges and opportunities. The group is a diverse set of individuals (at times you might say eclectic) from different industries, functional backgrounds and walks-of-life although we all share the same passion: Building great companies. We'll often meet one-on-one depending on schedules, although we work to get together as a group once a quarter. Not too surprisingly, the most significant issues we find ourselves discussing have less to do with "mechanics" of a company or industry, and more to do with the "dynamics" of people and culture.
This particular meeting was no different. I'd been asked to lunch by another CEO that was struggling with performance and execution issues in his company. He was co-founder and primary owner of the company. The business had experienced healthy growth since its inception in the late 90's and was now close to $10 million in revenue. His company was profitable, but its growth curve was flattening out and competitors were making significant inroads into its core market. His business enjoyed a good reputation in their market, but he had struggled over the last eighteen months with turnover in his management team and staff and the resulting impact to client commitments. He was certainly working hard at the business but it seemed the harder he worked at managing the worse things became.
The CEO apologized for being late as he sat down at the lunch table. He sat back in his chair, hung his head for a moment and then let out a sigh as he began to relax. He chuckled, looked up and asked the question that had been bothering him: Does leadership matter?
It was a good question. We spent some time talking about his company, strategy and team, the recent turnover and causes, and the focus of his recent efforts. We reached the conclusion together that he was managing more than he was leading, but that his team was looking for him to lead. We also agreed that it's much more difficult to "manage" rather than "lead" a team to greatness. The points seemed to hit home and I could see that he was struggling with an inner dialog. After a quiet minute or so, he asked whether the impact of leadership could be measured. That, was a much better question. In his case, having the answer would help him measure how well he was doing in his quest to become a better leader and build a great company.
With time running out on our lunch we decided that we'd try to find an answer to that question. One of the dilemmas we discussed before we left was how to hold all the variables constant to separate out the leadership impact. We agreed that we'd give thought to our new-found challenge and reconnect later in the week. Fortunately, for me, it was Monday and the Vikings were playing Green Bay that night and I was about to have an epiphany.
The game that night didn't disappoint. At about the point in the third quarter that Favre hit Berrian with a TD pass for the go-ahead score it occurred to me that the NFL could actually provide the ideal proving ground for our question. Where else do you have a managed industry where all the major variables are held constant, and where you can isolate the impact of leadership?
- All teams generally have access to the same talent pool so information asymmetry shouldn't exist.
- The draft and salary caps are in place to level the field on talent, although the talent pool is filled with high-performance "A" players to begin with.
- The plays are known.
- The rules are consistently applied (most of the time).
- There's ample competitive intelligence.
Arguably, success in the NFL comes down to which coach can get the most from the talent they have. In short, leadership and execution.
A quick tour through Google for the winning-est NFL coaches, ESPN.com for team rankings and Forbes.com for team valuations provided the background needed to validate the theory. It wasn't surprising to find that team owners and ESPN sportswriters regularly place Bill Belichick at the top of the list of modern era coaches. Belichick is regularly lauded by the writers as "the best coach" for his "innate feel for putting players in position to succeed", his talent as "a master for getting the most from his personnel" and the primary reason that "free-agent veterans want to play for New England so badly". It's been said that there's "no coach in the game who can get more out of the talent that he's given". By any definition, that sounds a lot like leadership. It's hard to argue with three Super Bowl Championships, three Conference Titles and five Division Crowns.
What's as interesting to our beleaguered local CEO is the resulting financial impact. According to Forbes' 2009 listing of NFL team valuations, the New England Patriots, acquired for $172 million in 1994, are now the third highest-valued team in the NFL at a cool $1.4 billion with the second highest NFL team revenue and operating income. The Patriot's valuation is 30% higher than the league average. The case could be made that leadership accounts for upwards of $400 million of the team's $1.4 billion value. Even under the most conservative approaches, you would have to assign at least half of the 30% incremental value, or close to $200 million of the value, to Belichick's leadership.
Apparently, leadership does matter, and in a very tangible way. Fortunately for our fellow CEO, there's much more freedom to operate in the free market, and less evidence of great leadership at work. The "variables" aren't constrained in the same way that they are in an NFL-like structure. The potential leverage that leadership can provide to business results and business valuation may be harder to isolate, but it can generate far greater value.
The question I posed back to the CEO was: How much would you invest in leadership and talent development if you knew that it would generate 15% to 30% greater business results and company value?