The Compelling Relationship Between Financial Performance and Return on Leadership
By Janeen Gelbart, CEO & co-founder of Indiggo, an AI-driven SaaS solution that brings immediate focused execution to enterprise strategy.
With the rise of Stakeholder Capitalism and focus on environmental, social, and governance (ESG), leaders are seeking standardized metrics to leverage for a shared understanding of how well they are doing in fulfilling these mandates.
A key common determinant of success or failure to meet ESG goals and fulfill the Stakeholder Capitalism requirements, is the ability of leaders and managers to execute with intentional alignment on the related strategies.
We say this all the time – the ability of leaders to execute with excellence makes or breaks any initiative.
Yet until now there has been no leadership execution related metric, and no easy solution to unlock and measure purposeful leadership.
Return On Leadership® (ROL) is that metric, and it is unique in that it measures and improves both the business and human side of Stakeholder Capitalism. This important metric is intrinsically tied to driving and measuring key components of leadership execution. It is also a conduit to successfully fulfilling the mandate of Stakeholder Capitalism. ROL provides a shared standard comprised of four fundamental aspects necessary for today’s leaders; Strategic Clarity, Connection to Purpose, Leadership Alignment, Focused Action. This takes previously very murky areas and makes them measurable and therefore manageable.
To demonstrate the power of Return On Leadership, in early June, Indiggo released the ROL100™. This is the first ranking of its kind, focused on public companies and was co-published in partnership with Fortune contemporaneously with the release of the 2021 Fortune 500 ranking.
The results were striking in many ways.
One might naively expect that investing in less tangible aspects of the enterprise, such as strategy execution, purpose and leadership alignment may not have an immediate financial benefit. But in fact, the ROL100 rankings shows quite the opposite: Financial success and high ROL metrics go hand-in-hand.
Our analysis shows that there is a statistically significant relationship between achieving a high ROL ranking and superior financial performance. Companies in the top 25 of the ROL100 ranking have three times the Total Shareholder Return (TSR), 5 times the EBITDA per employee and seven times the revenue growth as compared to the bottom 25.
On the human side, the findings were also striking – There is a statistically significant relationship between high ROL and positive ratings from employees.
Companies in the top 25 of the ROL100 are rated more positively on several dimensions, with happier employees who are more likely to recommend their employer to a friend.
The other interesting aspect of this ranking was that companies that might rank well on the Fortune 500 list (based solely on financial results), may not rank so well on the ROL100 and vice versa. Take Massachusetts Mutual Life as a case in point. Mass Mutual ranked 89th in the 2020 Fortune 500 list. In 2021, it dropped precipitously out of the top 100 to 123. The main reason? It divested its retirement plan business, valued at more than $3 Billion. From a Shareholder Capitalism viewpoint this was widely viewed as a savvy business move – the retirement plan business unit had low and shrinking profit margins, and its sale brought in far more than investors originally anticipated. But it precipitated a drop of 34 places and out of the prestigious top 100.
In contrast, in the ROL100, the company ranked in the top 25, #12 overall and #11 in Connection to Purpose. This was mainly due to its core purpose (“help people secure their future and protect the ones they love”), which is made clear and visible to stakeholders, and which is well reflected in company strategy. Mass Mutual also had a strong ranking for Leadership Alignment (#14), powered by favorable employee reviews of its management team and strong employee sentiment regarding agility.
For a prospective investor, this provides interesting context with which to evaluate the company’s prospects. A company that scores well on the ROL dimensions is set up to do better in the long term, as it demonstrates a leadership focus on key factors that have been empirically shown to correlate to successful performance.
Other interesting differences between these rankings were HP which was is ranked 58th on the Fortune 500, but 5th on the ROL100, and Cisco who ranked 63rd on the Fortune 500 and 9th on the ROL100. Alphabet interestingly ranked #11 on both lists.
This new metric will help executives and boards to steer their companies towards both purposeful engagement and financial achievement as stakeholder Capitalists.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.