Want to improve your ROI? Improve your ROT. Study reveals leadership styles impact profit margins

As we approach June 30 and the usual end-of-financial-year celebratory frolics, many executives will reflect on their performance using metrics that are part of the language of business: return on equity, return on assets, return on capital and return on investment.

But there is another rate of return that encompasses all the above metrics, and if implemented appropriately and measured correctly will vastly improve the bottom line. That metric is return on talent.

What do I mean by return on talent? I am talking about the direct relationship between the leadership style of executives and the profit margins of the companies they lead. In other words, how executives’ cognitive tendencies – aka their headspace – impact the bottom line.

In this slow-growth but fast-changing chapter of the business cycle, executives who are flexible and agile are producing outstanding profit margins in the businesses they lead. They listen to diverse points of view, are self-aware, empathic, patient and good at influencing. They are curious, creative and resourceful and, at a time when ability to work with ambiguity is the number-one trait sought in our leaders, they (and the people they lead) are the executives who contribute the highest return on talent.

This focus on the psychology of companies’ senior management and how it affects organisational performance is connected to the change in markets, enterprise and workforce characteristics. Steady and predictable growth has been replaced by speed, volatility and uncertainty.

Organisational cultures are moving away from traditional hierarchies to flatter and decentralised decision-making. Leaders who motivate are more likely to get better results than those who demand. Socially flexible executives influence and motivate others, and agile leaders who thrive in ambiguous situations inspire colleagues to embrace change and achieve results.

Increasing profit margins is arguably the quickest way for executives to attract positive attention from boards and shareholders, and to argue the case for investigating ‘return on talent’ metrics. Recent research by Korn/Ferry International covering 1733 C-Suite executives at 36 multinational companies examined executives’ scores on the key leadership traits of learning agility – which is the ability to operate effectively in disruptive and volatile times – and, high social flexibility – those whose experiences, emotional makeup, interpersonal skills and social behaviour encourage success.

Korn/Ferry compared these scores with the revenues and profit margins of the companies the executives worked for. By examining the 36 companies’ performance from 2008-11, the researchers found the leaders with the highest scores on agility and social flexibility produce 25% greater profit margins than their lower-scoring peers.

The end of a financial year is a time when we focus on companies’ returns to shareholders delivered by the top team. The start of a new financial year is an appropriate time for boards and executives to examine the metrics of return on talent as a means to improve overall business performance.