PEO Valuation: Leadership and Financials

Netprofitgrowth.com is releasing a five part series which will cover helpful topics regarding contributing factors to the valuation of a PEO. A new section will be released weekly until the series is complete. This five part series will include: 

  • Gross Profit: Sales and Scale
  • Efficiency: Operations and Technology
  • Liability: Legality and Loss Ratios
  • Execution: Talent and Value Proposition
  • Results: Leadership and Financials
Leadership and Financials: Part 5 of a 5 part series on factors that determine a PEO’s valuation.

Results: Leadership and Financials

Leadership and financials may seem like a natural coupling. After all, it is leadership that is ultimately responsible for the PEO’s financial performance. Depending on how we look at each, it may also appear to be an odd pairing. For example, leadership is responsible for the future of the company and financials are the scorecard for past company performance. With leadership focused on tomorrow and financials conveying past performance, each may appear as bookends to the business. Ultimately, leadership and financials belong together for one simple reason. What leaders sew today, the company will reap in financial performance tomorrow. It also seems fitting that we end this series with proverbial bookends. Everything we’ve covered previously in this five part series is executed between the vision of the future and the results of the past.

Leadership

The tone of an organization is set by the company’s leadership. Leadership is responsible for creating an appropriate vision and ensuring the company has the right talent and model to execute the vision. It is leadership’s responsibility to promote a healthy company culture commensurate with achieving company initiatives. Superior leadership can set the tone to galvanize the workforce towards a common aim. Leadership creates the strategy for the organization and ensures appropriate execution. Ultimately, it is leadership that is responsible for all facets of the organization.

 

Leadership does not run the company. The workforce runs the day to day operations of the company. Leadership is a shepherd that guides the organization in a common direction. It is leadership that ensures the flock (company) is heading toward green pastures (abundant client segmentation). Leadership designs a strategy to keep the wolves (competition) from hurting the flock (company). Leadership must ensure that the flock (company) is healthy so that it can reap the benefits of the seasonal sheering of the wool (profit). Without a shepherd, the flock would run aimlessly, be susceptible to attack and would not have long term viability.

 

A PEO’s leadership must look to the future while being mindful of the past. It must consider internal capabilities and external drivers when formulating the company’s strategic intent. It is responsible for creating the right model, value proposition and internal mechanics to achieve the strategic intent and sound operational controls. Finally, it is leadership that must ensure it has the right team, workforce and alignment to execute its vision. Leadership sets the tone and standard for ethics and integrity within an organization. Leadership is also responsible for managing through chaos. Meaning, any unforeseen issues that may arise or turmoil within the organization or marketplace must be navigated successfully by the PEO’s leadership team. When a PEO’s executive team and varying layers of management are successful, the result is desirable financial performance.

 

Strong leadership drives a higher valuation. It creates a level of confidence in the buyer that the company has the appropriate team in place to achieve future performance goals. Superior leadership comes with a track-record of success which is evident in the company’s financial performance and finely tuned operations.

Financials

Financials are performance results. A PEO should be mindful of financial performance but it is ill-advised to solely make financial performance the company’s aim. Too often, when a company only focuses on financial performance, decisions are made that could negatively impact the future viability of the company. Publicly traded PEO’s have increased pressure to perform due to external stakeholders and quarterly results which impact the stock value held by investors. However, when a PEO focuses on the areas previously covered in this five part series, superior financials should be the result.

 

There are plenty of areas to review as it pertains to a PEO’s financials and the subsequent impact on valuation. A handful will be covered in this section as it relates to the valuation of a PEO, though more exist. The areas covered in this section will include:

 

  • Audited Financials
  • EBITDA Add Backs
  • Pro Forma
  • Working Capital

 

Starting with audited financials, a company that has its financials audited by a third party is in a better position than those that don’t when it comes time to sell. The formal due diligence of any acquisition is the process of thoroughly reviewing the validity of what has been presented to the buyer. When a PEO has audited financials, it creates an additional layer of confidence in the buyer’s mind that the financials presented are an accurate depiction of the company’s performance. Companies that do not have audited financials can expect increased scrutiny when a potential buyer is reviewing historic financial performance.

 

EBITDA add backs are common in M&A though surprisingly not well known by many potential sellers. An EBITDA add back would constitute an expense that could be eliminated once the company was purchased. Please see the below example for more insight.

 

EBITDA  $  3,000,000.00
EBITDA Add Backs
Season sporting tickets  $        75,000.00
Country Club Membership  $        50,000.00
COO Reduction  $      250,000.00
Company Cars  $        50,000.00
 $      425,000.00
Revised EBITDA  $  3,425,000.00

 

The above simple example illustrates the elimination of sporting tickets, a country club membership and company cars once the deal is made. Also, it shows the reduction of a COO, assuming redundancy in this position by the purchasing entity. The point of this exercise is to determine what is necessary to run the company on a go forward basis and what has been excess expenses the company doesn’t need to carry. In the above example, the company identified $425,000 in excess. Be mindful that the revised EBITDA, if validated by the buyer, is where the purchase multiples will be applied. Assuming this company was purchased at seven times EBITDA, the $425,000 would equate to roughly an additional $3MM in purchase price. This would take the purchase price from $21MM to $24MM representing an increase of roughly fourteen percent on the purchase price (valuation).

 

A pro forma is common when a company is looking to illustrate its expected growth. A pro forma will generally illustrate past performance along with current and future year projections. PEOs should avoid a hockey stick scenario where projected future performance drastically out performs past financials. If a PEO creates a hockey stick pro forma, it must validate the future projections for a buyer to accept the projections. A pro forma is a good tool to create projections based on recent developments within a PEO. For instance, if a PEO has recently gained a competitive advantage but doesn’t have enough historic time to illustrate its value, a pro forma can help convey the importance of the development and projected financial impact.

 

After a strategic or investor purchases a PEO, the last thing they want to do is reinfuse funds to cover the PEO’s working capital needs. Whether a PEO keeps working capital in the company at the time of purchase or whether the investor infuses working capital at the time of purchase is dependent on the deal points. However, no investor wants to have to reinfuse working capital into the organization at a later date. Working capital is the money required to run the company. An investor often doesn’t mind reinvesting for tuck in acquisitions or for growth initiatives. What an investor absolutely does not want to do is keep pouring money into an investment solely to keep it afloat. Therefore, a PEO that shows a historic trend of positive working capital that isn’t consistently relying on LOC’s to fund working capital is in a better position to drive a higher valuation.

 

Financials are the baseline for a PEO’s valuation. The other variables covered in this series influence the valuation’s upward mobility in a buyer’s mind. Ultimately, if a PEO is successful in all of the areas covered in this five part series, it will result in higher financials. A buyer that reviews a potential acquisition that has achieved the following…

 

  • Successful sales and revenue growth
  • Scaled efficiency
  • Tight, well-run operations
  • Superior and scalable Technology
  • Low loss ratios
  • Tight controls and reduced liability
  • Superior talent
  • Value proposition that creates a competitive advantage
  • Excellent leadership
  • Superior financials

 

…will be more inclined to offer a higher purchase price (valuation). There are other factors that may influence a PEO’s valuation such as comps, market trends, supply and demand, etc. These other aspects are uncontrollable variables. This five part series covers what a PEO can control to drive a higher valuation and ultimately, a better run organization. Achieving success in these areas requires focus and insight but is well worth the effort.

 

 

This concludes our five part series on factors which determine a PEO’s valuation. To review any of the previous entries, please select from the following choices.

Questions or comments? Feel free to use the comment section below and we’ll make an effort to respond promptly.

 

Author: Rob Comeau is the CEO of Business Resource Center, Inc., a management consulting and M&A advisory firm to the PEO industry. You may find more information on Business Resource Center, Inc. by visiting their website at www.biz-rc.com.

 

PEO Industry Statistics – Updated

PEO Industry Statistics through 2016, with five year projections

PEO Industry Statistics

Updated, 2017

A recent industry report was released on the PEO industry with updated statistics through 2016.  This article is a snapshot of the highlights contained within that report followed by author commentary.

Fast Facts

The PEO industry gross revenue for 2016 was $168.3bn, of which $145.4bn represented work site employee (WSE) wages.  This equates to an average PEO client markup of 15.75%. Profit for the PEO industry in 2016 was $1.5bn. The annual growth rate for 2012 through 2017 in the industry was listed at 8.7% and is projected to grow by 2.6% annually from 2017 through 2022. [1]

 

Industry Structure

According to the report, it states that the industry life cycle stage is growth with revenue volatility being medium. Regulation is medium within the industry and barriers to entry are also considered medium. Competition levels are considered high and industry globalization is low. [2]

 

Historic Industry Growth

Figure 1 illustrates the PEO industry growth from 2005 through 2016.  As noted, 2009 was the only negative growth year. [3]  This represents a compound annual growth rate (CAGR) of 5.65% from 2005 through 2016. Figure 2 illustrates the industry’s growth by gross revenue with a year over year growth percentage overlay.

Figure 1

 

Figure 2

 

 

Projected Growth Rate

The report projects that the industry gross revenue will grow over the next five years by an annualized rate of 2.6% to $191.0bn in 2022. [4]

 Market Segmentation

The market segmentation in the report shows the industry is roughly 2/3 white collar focused as illustrated in figure 3.

Figure 3

 

Industry Leaders

The industry report states that the PEO market is currently dominated by three major players; ADP Totalsource, TriNet and Insperity which which it projects for 2017 will have gross revenue market share percentages of 20.8%, 20.2% and 11.3% respectively as noted in figure 4.  [5]

 

Figure 4

 

Opinion/Commentary 

The data in this article was pulled from the IBISWorld Industry Report 56133, Professional Employer Organizations in the United States. The below commentary is solely the opinion of the blog author; Rob Comeau, with respect to the aforementioned data in the above article.

Market Leaders: The IBISWorld report market share is based on gross revenue projections for 2017 which shows ADP and TriNet as much larger than Insperity.  However, on a net revenue basis (gross revenue less WSE payroll) as in accordance with GAAP, you’ll note that the three are much more similar in size.  These three having more similar net revenues and largely different gross revenues is likely achieved via Insperity commanding higher pricing than the others.

Major Players: According to IBISWorld, over half the market’s gross revenue is controlled by the top 3 players; ADP Totalsource, TriNet and Insperity with the remaining 47.7% controlled by the rest of the field.

I believe this metric is more drastic than illustrated in the IBISWorld report. Oasis (private) is a massive player in the PEO space and one of the market leaders along with ADP, TriNet and Insperity.  Other PEOs of size that weren’t mentioned in their report were BBSI (public), CoAdvantage (private), PEMCO (private), Paychex (public) and G&A Partners (private) to name a few.  These additional PEOs coupled with a few others would likely further skew the market share imbalance toward larger players controlling the vast majority of the market in 2017.

Industry Growth Projections: IBISWorld projects the industry to grow at an annualized rate of 2.6% from 2017 through 2022.  I believe, barring any major economic downshifts over the next five years, that the industry will grow at a slightly higher clip.

The basis for my position is outlined below:

  1. A current robust economy (time will tell if the economy continues to flourish)
  2. Increased growth in the higher wage white collar segment (assuming sales trajectories remain the same, an increased emphasis on higher avg WSE wage business will likely help increase gross revenues)
  3. Expected increases in minimum wage (19 States increased minimum wage in 2017, including CA, MA, NY, NJ, FL & MI).
  4. Increased industry recognition resulting from the SBEA and CPEO
  5. Increased market penetration from major and emerging players
  6. The potential for regulatory compliance changes if a new government healthcare mandate is enacted. (historically there was a spike in revenue within the PEO industry when ACA compliance was mandated, this could potentially happen again)
  7. Low unemployment which protects against existing client base WSE headcount reductions (during the great recession, PEOs experienced a reduction in same store sales due to client WSE layoffs, hours reduced and wage reductions.  When unemployment is low, the existing client base headcount should be more predictable than in a volatile economy which helps protect the existing revenue base).

Segmentation: IBISWorld believes that more growth will occur in the white collar client segment than the blue collar segment.  They attribute this to manufacturing being outsourced abroad. Larger PEOs have seemed to increase their focus on white collar business in recent years.  Historically, the three main components of a white collar PEO offering are HR, Tech and Health Benefits. If this trend continues, the reform of healthcare from the US Government could further affect the industry revenue depending on the regulatory impact and compliance requirements for small and medium sized businesses (SMBs).

 

[1]IBISWorld Industry Report 56133, Professional Employer Organizations in the United States

[2] IBISWorld Industry Report 56133, Professional Employer Organizations in the United States

[3] IBISWorld Industry Report 56133, Professional Employer Organizations in the United States

[4] IBISWorld Industry Report 56133, Professional Employer Organizations in the United States

[5] IBISWorld Industry Report 56133, Professional Employer Organizations in the United States

Author: Rob Comeau is the CEO of Business Resource Center, Inc., a management consulting and M&A advisory firm to the PEO industry. 

Executives that embrace leadership development promote corporate sustainability.

Leadership Development
Executives that embrace leadership development promote corporate sustainability.

 

Senior Leadership Must Equip Future Leaders

 

Leadership Development

Organizational structure is dependent on appropriate leadership permeating throughout the company.  Leaders of all levels must be equipped with the appropriate tools for successfully leading their respective workforce.  As leaders advance, they must adapt to increased responsibilities in order to ethically achieve superior results.  If an executive doesn’t guide and mentor subordinate leaders, s/he runs the risk of creating leadership stagnation within the company.  When an executive invests time in cultivating budding leadership, it sets the tone for future leaders to do the same.  This creates a positive cycle that positions the company for sustainable leadership excellence.

 

Company Culture Impacts Leadership Style

Depending on a company’s culture, leadership styles may differ.  Understanding the company culture is important to developing leadership.  For example, a hierarchy culture may require a leader that is more structured and methodical in their approach.  Whereas a company with an adhocracy culture would require a leader that fosters an environment of innovation and free flow of ideas. The style of leadership that will be mentored to future leaders of the organization should align with a company’s current or preferred culture.

 

Creating a Balance of Consistency and Adaptation

A workforce expects a certain level of consistency.  Without it,  superior results are unpredictable and often unobtainable. Imagine a worker that is receiving conflicting messages from various leaders.  It creates a framework that is virtually impossible to drive sustainable success.  A level of consistency allows the workforce to understand the framework for conducting business. Consistency should not equate to a lack of innovation.  Senior leadership should guide subordinate leaders but allow room for innovation and even mistakes.  Leadership development isn’t a cloning process.  The marketplace adapts and so should an organization.  Adaptation is best achieved with diversity of thought.

 

Consistent Vision, Diverse Leaders

The macro vision of the company must be clear. The framework of conducting business should be consistent with the vision but also allow latitude for innovation.  Restrictive leadership can extinguish innovation.  Leaders are like snowflakes in that no two are exactly alike.  Each leader has different life experiences that they inherently bring with them.  These experiences influence their decision making and how they view situations.

This is a good thing.  If every leader had the same life experiences, the company would be limited to one person’s perspective.  This type of single vantage point would leave blind spots within the organization and ultimately inhibit the company’s ability to view situations from varying perspectives.  It is the diversity of perspectives coming together to formulate an amalgam which will help mature an organization.

 

Create Communication

Senior leadership sets the example for safe communication.  What is safe communication?  It is an environment fostered where it is safe to share information, opinions and feedback with your superior.  This is especially important when the news is unfavorable. A leader is paid, to an extent, to make decisions.  Decision making is inhibited when known variables in the equation are not brought to light. An experienced leader will know that having every possible variable when making a decision is virtually impossible.  However, when key information is withheld due to fear of leadership, quality decision making diminishes.

A senior leader that creates a safe environment to share and who listens to their subordinate leaders will perpetuate healthy communication expectations for future leaders. It is estimated that two thirds of businesses in the United States are that of service not of production.  Service based organizations require superior communication to meet the market’s needs. Since the technology revolution, innovation is moving at rapid speeds.  Production based organizations must have superior communication to develop products in order to remain relevant.

 

Leadership Development

Many companies have leadership training programs.  Leadership training programs will often offer a lot of beneficial information. However, training programs are not enough.  Guidance and teachable moments are key to developing better leaders.  Leaders are paid to lead, not to follow.  In many ways, a senior leader’s responsibility is to teach future leaders how to teach themselves and provide guidance and feedback along the way.  As a leader elevates in the organization, the balance of influence shifts.  A lower level leader will have many leaders senior to them in the organization and few leaders under them, if any.  As their career progresses through promotions, this balance will shift with fewer leaders above them and more leaders beneath them.  Leaders are required to become more self-sufficient and resourceful as they elevate up the ranks.  A leader that is not guided to continuously self-educate may fall into the trap of company training regurgitation.

 

Closing

There are many ways to develop leadership.  Each rising leader may require slightly different methods to help them grow. Identifying these nuances will help an executive cultivate better results. When an executive demonstrates the importance of developing future leadership, it establishes a culture that perpetuates this philosophy. Ultimately, leadership development helps create sustainability within an organization.

 

Author: Rob Comeau is the CEO of Business Resource Center, Inc., a management consulting firm that works with industry and the investment community.  For more information on the company, please visit their website at www.biz-rc.com.

Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) and Marketing

Corporate Social Responsibility (CSR) and Marketing

Companies today have an increased focus on corporate social responsibility (CSR) as part of their business practices.  Profit at any cost is giving way to more socially responsible profit. The result is activity aimed at improving our society through corporate initiatives, self-regulation and giving.  Many companies are focusing marketing efforts to bring awareness to their CSR activities.

CSR is a good way for companies to remain ethical and also a vehicle to give back, improve business practices, reduce governmental interference and focus on sustainability. Before we go any further, let’s explore what CSR is by definition.

According to Wikipedia, CSR is:

Corporate social responsibility (CSR, also called corporate conscience, corporate citizenship or responsible business) is a form of corporate self-regulation integrated into a business model. CSR policy functions as a self-regulatory mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards and national or international norms. With some models, a firm’s implementation of CSR goes beyond compliance and statutory requirements, which engages in “actions that appear to further some social good, beyond the interests of the firm and that which is required by law.”

Are companies conducting benevolent activity under the radar?  In some cases, yes.  In many cases, a company is capitalizing on CSR through marketing efforts.  Let’s take a look at a few examples to see how a company can give back and potentially increase sales.

SoCal Honda Dealers

The Southern California Honda Dealers put a spin on advertising during the Super bowl by electing not to run a commercial during the game but play off those that did.  The marketers for SoCal Honda designed a game where each time a commercial used a cliché, they would donate a fixed amount to the Boys and Girls Club of America.  In addition, they encouraged their viewers to visit their website to drive the company to donate more.  Through this marketing effort, the SoCal Honda Dealers resonated with viewers by making a game out of super bowl commercials with the prize of helping a nonprofit which focuses on children.   This approach was fun, it benefited children and it fit with their macro marketing vision of being the helpful Honda dealers with their “random acts of helpfulness” campaign.  The commercial may be viewed here: http://adland.tv/commercials/socal-honda-dealers-helpful-bowl-2017-30-usa

Walmart

Walmart aligned with Feeding America Member Food Banks to conduct a CSR initiative of donating food to hungry families.  The company tied this initiative into their marketing efforts in two ways.  First, though an awareness commercial. Secondly, Walmart will donate based on their shopper’s purchases.  Certain items within Walmart are qualifiers for the organization to donate to the food banks.  Through this program, Walmart is able to give back to families by addressing the hunger issues within the United States.  Additionally, it ideally will bolster sales on items of its choice by earmarking those products that qualify for the donation program. Through marketing efforts, Walmart positions itself as a responsible and caring organization while bringing awareness to the hunger issue in the US.  It also may likely see an uptick in sales on the products that it has chosen as the items that trigger a donation.  The commercial may be seen here: https://www.ispot.tv/ad/A5Cr/walmart-hunger-is-closer-than-you-think

Pepsi

Sometimes CSR initiatives come solely in the form of bringing awareness to social issues.  As we noted in the Pepsi commercial, a CSR marketing effort can backfire on a company.  Pepsi, with an aim to shine the light on unity, released a commercial on the anniversary of the death of Dr. Martin Luther King Jr. This commercial was immediately met with opposition. Some pointed to the celebrity lacking relevance in this topic. Others had issue with the fact that a Pepsi was used to fix the issues with police and citizens. This angered viewers in light of the issues that the United States has faced with police and citizens in recent times. Still others were upset that Pepsi chose to release the commercial on the death anniversary of Dr. King, who was such a prominent figure in our country’s history. While Pepsi may have truly set out to champion unity, the execution backfired on the company.   The commercial may be viewed here: https://www.youtube.com/watch?v=dA5Yq1DLSmQ

On a macro level, organizations having an increased focus on improving social issues is a good thing.  It brings increased social awareness and solutions to areas of need by partners that are generally well funded.  While giving in secret is is the truest sense of philanthropy, I understand that large corporations have to answer to shareholders. Therefore, if a company can help improve society while bolstering brand awareness and sales, it can be positioned as a win-win. However, if companies are going to tie their marketing efforts into CSR, they better take the necessary steps for appropriate execution.

 

Author: Rob Comeau is the CEO of Business Resource Center, Inc., a management consulting firm that works with industry and the investment community.  For more information on BRC, visit their website at www.biz-rc.com.

 

 

 

Essentials of Leadership

A CEO is responsible for the alignment of a team of leaders.

Essentials of Leadership

Leadership should exist on a number of levels throughout an organization.  While this article will cover executive leadership, many of its principals will pervade throughout the differing levels of leadership.  The forthcoming information will review leadership principals and approaches necessary for superior results.

 

Is It Lonely At The Top?

It can be if the company culture does not permit adverse opinions.  A CEO cannot run a company by him/herself.  A leader’s job is to guide progress forward through the art of making decisions.  To make the best decision for the direction of a company, a leader must consider all important variables which impact the decision.  A culture must be fostered where it is safe for an executive team to share essential information, regardless of how it may be perceived.  Without fluid communication, important information may not be shared which inhibits the leader’s ability to appropriately guide the organization. For insight into how to foster this type of environment, please see our article on Improving Executive Communication.

 

Traveling Is Part Of The Journey

The larger the organization the greater the travel responsibilities. When speaking with a number of CEOs for large organizations, travel was an essential part of their responsibilities.  Once a strategy for a company is developed, the direction of the organization must be communicated and consistently reiterated.  While technology advancements provide a platform in which communication can be handled remotely, physical travel is also advised.  When a CEO travels to different organizational locations, they are able to accomplish more than simply communicating direction.  The CEO is able to get an intimate feel for how the divisions are progressing.  S/he is able to coordinate with local leadership and reinforce a positive culture with the workforce.  Many CEOs of very large organizations have spent time in leadership roles throughout the world prior to becoming CEO.  This journey has given the future CEO the opportunity to showcase their ability through achieving results at multiple levels while also providing an essential look into the different facets of the organization.  This preparation will pave the way for the leader to become CEO and provide valuable insight to better serve the organization as its top leader.

 

Culture Is Driven From The Top

The CEO sets the tone for the organization’s culture.  A CEO with a dysfunctional executive team dynamic cannot expect a positive culture to permeate throughout the organization.   Therefore, start with driving a successful culture in the boardroom.   Culture at an organization is a collective evolving set of espoused beliefs, values and attitudes.  Often culture is tacit which is why it can be difficult to change.  It can be felt or described as “the way we do things around here.”  In smaller organizations, culture is often a result of the owner’s values, beliefs and attitude.  Within larger companies, it gets more complicated.   To understand an organizational culture, an anonymity feedback tool is important.  People inherently want a better culture, though they may not be willing to take a backlash risk for providing valuable insight that is contrary to current culture.  Alignment with the executive team and appropriate feedback from all ranks is the starting point for positive cultural change.  For more information on company culture change, please view our article on corporate culture.

 

Part Time Ethics Are Not Acceptable

Leaders are under a great deal of pressure to perform, especially in publicly traded companies.  The pressure of positive quarterly returns is often the precursor to an unsuccessful leader’s downfall.  Business growth is not a 45 degree angle.  Analysts can sometimes get ahead of themselves with forecasts which can lessen the value of quarterly growth if it doesn’t meet analyst projections.  While it is a tough position to be in, it is what you signed up for.  Part time ethics are not an option.  Not only will unethical behavior ultimately destroy an organization’s worth, it will send a clear message to internal and external stakeholders.  Internally, company culture will erode from the inside out.  Externally, branding will suffer and the stock will eventually take a hit.  There are plenty of examples of this happening so we won’t belabor the point aside from saying; there will be fluctuations in quarterly earnings, there should never be fluctuations in ethical values.

 

Feedback Is Actionable

Feedback, good, bad or indifferent is important for leadership.  When a message is sent throughout the organization that feedback is welcomed, this is generally positively received.  People want to be heard.  They want to help improve the business.  An organization that historically hasn’t requested feedback creates an environment where people felt unheard.  An organization that requests feedback but does nothing with the information received is worse off.  In this scenario, while the people have been heard, without action, they feel ignored.  This will create dissension within the company and may cause a host of other problems throughout the organization.  Action on feedback does not mean that the feedback must be implemented.  It does mean that at the very least it should be acknowledged and the organization should be thankful for the feedback.  With fluid communication of feedback, many items will be actionable to implement into the organization.   For example, according to the book Marketing Management[1], Toyota reports that its employees submit 2 million ideas annually which equates to roughly 35 suggestions per employee.  Remarkably, more than 85% of these suggestions are implemented.  A company has valuable resources in its workforce to improve production, products and services.  It simply needs to tap into those resources and the CEO can drive this process forward for the betterment of the organization.

 

Business Acumen Over Industry Expertise

Ideally, the leader possess both.  However, if a choice is between the two, business acumen is often more applicable.  A CEO’s job is to lead an executive team.  The executive team’s job is to lead their respective divisions and so on.  A strong business acumen provides the foundation for creating a successful organization.  This is why successful leaders have been able to change industries and remain successful in creating positive returns and improving organizational attributes.

 

Empathy And Humility Are Not Weaknesses

I’m not suggesting that the organization sit in a giant drum circle and sing kumbaya songs.  For a CEO, when the entire company is looking to you for leadership, humility can be scary.  However, having empathy for others and humility for oneself are human elements in which the organization will positively respond.  Each of us are human.  Each of us occasionally make mistakes.  Owning a poor decision and taking the necessary measures to rectify the mistake sends a strong message to the organization. It allows the company to know that a leader is committed to the necessary action for improving the organization, even if it means having egg on his/her face.  People respond to sincere and genuine leadership.  In the book, Return on Character[2], it was found that CEO’s with appropriate humility and character had a 5X greater return on assets than those whom did not possess the attribute.

 

Final Thoughts

There is a lot more we could cover but we wanted to tackle some of the points that aren’t commonly written about regarding leadership.  Also, in the interest of writing a blog post and not a book, I wanted to keep this relatively short and to the point.  Ultimately, a leader has the ability to influence “the bed they will sleep in.”  A successful leader will drive positive financial returns and a positive work environment.  Leadership development and succession planning should be a functional aspect of the organization’s mission.  Guiding future leaders is a responsibility of today’s leaders if a business is to have long-term success.  Only 61 of the Fortune 500 have remained in the top 500 since 1955, none of which have the same CEO as in 1955.  Organizational excellence requires leadership excellence.  The sustainability of excellence requires equipping future leaders to carry the torch through tomorrow.

 

Author: Rob Comeau is the CEO of Business Resource Center, Inc., a management consulting firm that works with industry and the investment community.  For more information on Business Resource Center, please visit www.biz-rc.com.

 

 

 

 

 

[1] Marketing Management, 15e – Kotler & Keller

[2] Return on Character – Kiel