Ulrich's Leadership Capital Index (Management, Leadership & Coaching No. 19)

The Leadership Capital Index measures the market value of your organization's leadership.

Your organization's market value depends on many things, not least measurable and attention-grabbing factors such as profitability, assets and earnings.

But many investors are increasingly looking beyond your bottom line. They are putting your leadership under the microscope, because they recognize that effective leadership produces financial results. In other words, they are trying to put a market value on leadership.

So, is it possible to put a tangible value on intangible elements such as personal leadership qualities, organizational culture, and talent management? The Leadership Capital Index is a tool that aims to give investors and organizations a rigorous framework for doing just that.

Dave Ulrich, a professor of business administration at the University of Michigan's Ross School of Business, wanted to create a tool that he said would "evaluate leadership through the eyes of investors to more fully determine a firm's value."

HR drives positive employee outcomes, helps execute business strategies, and enhances customer share. But HR’s value may be further enhanced when it demonstrates the impact on a firm’s financial performance, focused on market value.

My forthcoming book, Leadership Capital Index, draws on a useful metaphor for how to include, conceive, and audit leadership in the assessment of firm value. A leadership capital index is like a financial confidence index—Moody’s or Standard & Poor’s. It offers a more thorough way to assess leadership. Most acknowledge that leaders affect an organization’s value, but they use simplistic and intuitive approaches to apply that insight.

A leadership ratings index would have two dimensions—individual and organizational. Individual refers to the personal qualities (competencies, traits, characteristics) of the key leaders in the organization. Organization refers to the systems (often called human capital) these leaders create to manage leadership throughout the organization and the application of organization systems to specific business conditions.

Five leadership factors define the individual domain of a leadership ratings index:

To build future leaders, leaders create organization cultures and invest in human resource practices (often called human capital) in five domains:

The intersection of HR and investor fields benefits both. HR becomes even more central to the business, and investors have more comprehensive data to determine firm value. A leadership capital index is a wonderful beginning of this journey.

Stay tuned.