Academic Article – “An Outcome-Based Perspective Of
Leadership: Investigating The Direct Effects Of Corporate Leaders On The Firm’s
Financial Outcome.”
In the article “An Outcome-Based Perspective Of
Leadership: Investigating The Direct
Effects Of Corporate Leaders On The Financial Outcome” authors Thierry
Rakotobe-Joel and Murray Sabrin set out to research the effects of the CEO
position on the financial performance of a firm and how this can be measured
and used as a guide for the future indication of performance. Additionally, the authors segment the CEOs
into different types of leaders based on specific measurable metrics of
performance identifying different leadership styles.
The research for the article employed a basic model for
identifying two key indicators for financial performance using historical
data. First, gross margin is used and is
measured as revenues minus the direct expenses incurred to achieve those
revenues, which is an indication of the potential revenue earning power and was
often referred to as value adding propensity.
Second, resource utilization is used and formulated by the expense to
revenue ratio (higher the expenses the more resources that are utilized). These two measurements were then taking for
a random selection of Fortune 500 CEOs (57 total) and plotted against each
other where resource utilization is on the x-axis and value adding propensity
sits on the y-axis. The outcome of this
would provide the CEO’s financial signature with which to compare to other CEOs
and determine how they have historically effected companies’ financial
position. Rakotobe-Joel and Sabrin
theorized that by using these measurements and identifying the financial
signature of a CEO one could predict future performance more accurately as well
as hold CEO’s accountable for their current performance based on the outcome of
their financial performance instead of the many subjective means used today.
Key findings include identifying nine typologies for CEO
financial signatures including Mercantilist, Conglomerator, Venture Capitalist,
Profiteer, Consolidator, Trader, Discounter, Arbitrageur and Bucanneer. Discounters have a low resource utilization
(RU) and low value adding propensity (VA), Arbitrageurs have a low RU and
midlevel VA while Bucanneer’ have a low RU and high VA. Traders have a midlevel RU and low VA,
Consolidators have a midlevel RU and midlevel VA while Profiteers have a
midlevel RU and high VA. Finally, Mercantilists
have a high RU and low VA, Conglomerators have a high RU and midlevel VA and
Venture Capitalists have a high RU and high VA.
Once the CEO’s financial signatures were plotted the majority fell into
the Consolidator, Conglomerator, Trader and Mercantilist. The next most fulfilled types were Profiteer
and Venture Capitalist. The least amount
were Discounters short of no one being a Arbitrageur or Buccaneer. The data points to a link between mid to
high level RU for CEOs since only two were on the low end of the RU.
The key finding through the author’s research is the ability
to add an additional depth of understanding of CEO performance based on this measure
the financial signatures that not only provides a good insight to the CEO’s
performance for board members, but for all stakeholders in general. Practicing CEOs should use a similar strategy
to identify their performance and take use available data to ascertain other
same-industry CEO’s performance to ensure they are in line and hopefully above
their peers. Since the downturn, the
likelihood of closer scrutiny is virtually inevitable and being ahead of the
curve will greatly reduce the stress of implementing under pressure while
providing and helpful metric to prove out performance and deserving
compensation.
Works Cited:
Rakotobe-Joel, Thierry; Sabrin, Murray. Journal of Business & Economics
Research. Nov2010, Vol. 8 Issue 11, p113-123. 11p.
Subjects: LEADERSHIP; FINANCE;
BUSINESS enterprises; ECONOMICS; MISCONDUCT in office; PROFIT
Database: Business Source Complete
Luke Phillippi
It’s a hard article to understand but if the company is doing well then the CEO is doing a good job. More than likely their peers are studying his/her ways to see if they can improve. That’s human nature to improve oneself.
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