How the Leadership Challenge is Not About NumbersPublished: February 20, 2012 in Knowledge@Australian School of Business
Economic shifts have created new emphases on what drives organisational performance in the 21st century. With service industries now employing the vast majority of working Australians, a raft of less-tangible factors have assumed a far greater importance. Researchers from the University of New South Wales, Australian National University, Macquarie University and the Copenhagen Business School collaborated with 78 Australian companies and more than 5600 employees in the services sector to compile the recently released report, Leadership, Culture and Management Practices of High Performing Workplaces: The High Performing Workplace Index. The team found the not-so-easy-to-measure attributes – such as leadership, innovation and fairness in the workplace – make a tangible difference to profitability and productivity. The high-performing workplaces were revealed to be 12% more productive, and three times more profitable than their peers. Lead researcher Christina Boedker from the Australian School of Business, and Kieron Meagher, a professor at the Australian National University, discuss the significance of their research with Julian Lorkin of Knowledge@Australian School of Business.
An edited transcript of the interview follows.
Knowledge@Australian School of Business: What were the motivations behind this study?
Christina Boedker: One of the key motivations for the study was the changing nature of the economy, including the changing nature of businesses and the resources that they draw on to create economic value. Another motivation was the federal government's increasing interest in productivity. We believe that productivity is achieved at the heart of the workplace by every individual worker, and we needed to break that down and look more closely at the workplace environment.
Knowledge@Australian School of Business: You chose to focus the study on workplaces specifically in the services industry, why was that?
Christina Boedker: Kieron did some great work in terms of looking at the contributions to the GDP (gross domestic product) of the services sector, and it's something like 76% of industry value-add.
Kieron Meagher: It's interesting that so much research looks at manufacturing firms, which are such a small part of the economies of most developed countries now – and Australia is very typical in that regard – whereas services are around 76% of the industry contribution to GDP.
Christina Boedker: And 85% of Australian employees are working in the services sector.
Kieron Meagher: If we want to make Australia better, we really have to look to the services sector.
Christina Boedker: The aim of the study was to work with a larger group of organisations with a view to understanding the performance of their intangible assets: the human capital, the relationships they have with their customers and also the leadership skills, their internal management systems and processes. So we've ended up working with law firms, consulting firms, advertising agencies, employment agencies and others.
Knowledge@Australian School of Business: How did you find out what was happening inside these firms?
Christina Boedker: We put together a team of researchers from different disciplinary areas, and that's not easy because accountants speak a different language to HR people, IT people and economists, but what we've learned is that there's quite a bit of overlap.
Kieron Meagher: There were a lot of synergies between the different areas: human resource management, accounting, information systems, economics … The government asked us to look at productivity, and traditionally that's something we think of in economics as being driven a lot by the capital component, but one of the surprising things that came out of the study for me was when we did the calculations, we found out that capital was not significant for these (high-performing) firms. It was all about the labour and the intangible aspects of the firms: leadership, the employee experience, innovation, those kinds of things.
Christina Boedker: We approached the study from an accounting angle, and also drew on economics literature. But we were not able to account very well for these intangible assets that inform value creation and economic production in the services industry. On our balance sheets, we're very good at capturing the tangible assets, such as machinery and equipment, but capturing the value of these intangibles is a lot harder.
We started off by creating a high-performing workplace index that used 18 performance measures from across six categories which combined the financial and productivity element that Kieron mentioned before with employee experiences, customer orientation, fairness, leadership and innovation.
Knowledge@Australian School of Business: And what were the results?
Christina Boedker: Each organisation got a score on the index. It gave us the position of that individual organisation. We sent out reports to those organisations. It's a good example of a study that interacts with industry. It gave us a great database of information about leadership and management practices and productivity effects in Australian workplaces, but at the same time we gave something back to the organisations that we had been working with. So they actually got more than 100 pages of benchmarking information.
By aggregating the data, we were able to do an analysis to identify companies that seemed to achieve superior performance compared to the rest - and that was only about 15% of the sample. Similarly we charted the performance of another cluster, which was one standard deviation below the mean, and that gave us what we called the lower-performing organisations. We were then able to chart the performance differences. We saw, for example, that the high-performing workplaces were up to three times more profitable – and up to 12% more productive – than some of their peers. There was also a superior performance on the intangible aspects – for example, employee experiences and innovation.
Kieron Meagher: It was interesting the ideas in the literature and in business actually did show up in the data as well – these things were all very highly correlated. I think it suggests the importance of complementarities (complementary situations) in business. You have to get the right array of practices. The good-performing firms do all of those things.
Christina Boedker: It's not just about innovating or being good at your financials; it's about giving consideration to a diverse range of elements: the customer, of course, the employee experience and even fairness. Fairness we found to be quite significant.
Kieron Meagher: And that makes a lot more sense when you think about it. Initially fairness sounds like it's kind of disconnected, but fairness is about the way in which you're treated in the processes of work and whether you're rewarded for your effort. People perform less well in firms where they are treated in a somewhat arbitrary way by bosses.
Christina Boedker: We found that leadership and innovation had the highest correlation with profitability and profit.
The leadership skills that seemed to come through with the data were around the ability of leaders to involve people in decision-making processes. This was a very significant characteristic, being receptive and even welcoming criticism and feedback, practising – not just preaching – the values and living the values. Having a clear vision for the team, the work group or department that you're leading came out as quite significant attributes of leaders.
Kieron Meagher: These kinds of things were much more highly correlated than things like the amount of money spent on information technology or how much training was provided to employees. Those things were important, but they needed to be matched in with these other aspects of the firm.
Christina Boedker: The flexibility of the organisation to respond to changes in its environment also emerged as quite significant – it had one of the highest correlations with the index. For instance, being able to detect and adapt to changes in technology to meet customer needs. The last thing I suppose we could mention was that in the higher-performing organisations positive emotions seemed to be more prevalent – feeling enthusiastic, cheerful, proud and feeling valued – whereas negative emotions, higher levels of anxiety and depression were higher in the lower-performing workplaces.
Kieron Meagher: And those levels of negative emotion were very high frequency in the poor-performing firms, one in four people reported feeling depressed.
Christina Boedker: That's compared to one in seven in the higher-performing category. It's almost twice as many people feeling depressed. But one in four! If you sit with your work team and look around you're almost sure to be sitting next to a colleague who feels depressed about the workplace.
Knowledge@Australian School of Business: So what's the next step with this research?
Kieron Meagher: Obviously we'd like to see how we could change the poorer-performing firms, and those associations – from our recent study – tell us the levers to try and pull. But the big open question out there for government policy, researchers or for business leaders is: which levers actually can you make a difference with? How much can you change something and how much impact does that have? Is leadership something that's stuck in a person's personality and that's it? And then, how much does having a good leader or a bad leader impact immediately?
Christina Boedker: In the second phase of the project, we're following a smaller group of organisations as they work with consultants who are there to help the organisations lift their performance by intervening in the areas of leadership, culture and management practices. And we will look at the performance differences that these interventions potentially have.
Knowledge@Australian School of Business: What has been the reaction to the study?
Christina Boedker: At a policy level, the study has been very well received. It was launched at the Future Jobs Forum in Canberra last October and the Prime Minister mentioned it in her opening and closing speeches. We've had good traction in terms of feeding back and working together with the federal government and policymakers to get the message out there.
Kieron Meagher: Australia's moving to the forefront in the world in terms of policy in this area. Traditionally, you either believed all firms were efficient and markets worked perfectly or you thought that maybe the government had to pick winners and put up trade barriers and give subsidies. And this is an alternative view in which firms vary in how well they perform, but instead of giving them subsidies we try and lift their performance [rather than] just protecting them. And I think that's got to be the future for Australia.