Analysts seek strategic vision, commitment to innovation from company leaders, report says

When market analysts offer opinions on whether a company is successful or, more importantly, will be successful in the future, they usually make their case with recent financial results.

But the second most important factor, according to a new Deloitte survey, is something a little less black or red: leadership quality. About 80% of professionals who analyse companies for investors – including investment bankers and executives at private equity companies and hedge funds – say they would place a valuation premium on a company with a particularly effective senior leadership team. And the same percentage said they would discount a valuation if they thought a company’s leadership was ineffective.

That means the quality of a company’s leadership is more important than the quality of the company’s product or service, according to the report, “The Leadership Premium: How TMT Companies Win the Confidence of Investors”, which focuses on companies in the technology, media and telecom industries.

Analysts and investment professionals placed an average premium of 15.7% on particularly effective leadership, and an average 19.8% discount on companies with leadership that was deemed ineffective.

The authors of the report sought an unambiguous metric for the effectiveness of leadership, and conducted interviews and online surveys with analysts, investors, hedge fund executives and portfolio managers in the US, UK, China, India, Japan and Brazil.

They discovered that survey participants are looking for three core components from leaders:

• A clear strategic vision of what the company needs to achieve.

• Proven ability to meet objectives.

• Commitment to enterprise and innovation in an environment that encourages ideas.

Asked to name the criteria they use to judge company success, 45% cited senior leadership team effectiveness as a factor. Only the current or most recent set of financial results, cited by 60% of respondents, was cited by more survey participants as a factor for determining the success of a company. Thirty-nine per cent cited ratio analysis; quality of product or service and forecast performance of the company were cited by 37% each.

The report cited six core capabilities of leadership that include: driving competitiveness and innovation; providing direction and purpose; making effective decisions; inspiring others to act; developing people; and building high-performing teams.

Survey participants value personal qualities such as integrity, probity and humility, as well as the ability to recognise personal weaknesses and not feeling threatened by others’ ideas, according to the survey. Respondents said they lose confidence in leaders who are poor communicators, dishonest or autocratic, the report said.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.