Analysts and investors place significant importance on leadership quality when evaluating companies and making recommendations. They consider factors like a leader's track record, reputation, and presence to assess leadership strength. Survey results found that 95% of analysts make changes greater than 5% to their company valuations based on perceived leadership strength, with 50% making changes over 15%. Three-quarters of analysts believe assessing leadership will become even more important in the next three years. Most analysts said they could provide more accurate valuations with better data on leadership attributes.

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Agenda: Examine How Views of “Top” Leadership Affects the
Valuation of Firms
• Discuss how analysts’ & investors’ view the value of leadership in
estimating a firm’s worth.
• Discuss the implications for HR Strategic Leadership

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An eye opener–The strength of management plays a significant
role as analysts develop stock recommendations.

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Different research methods arrive at the same conclusion–
analysts and investors are swayed by leadership quality.

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A major challenge for HR and Talent Management is convincing others of the
need to invest in leadership development.
No relationship ever mentioned between HR and Investor Relations. Typically,
not invited to Investors Day.
Competencies for 360s mostly based on internal requirements–not on
analysts view.
Ironically, prior Finance and Organizational Research show connections
between ____ and firm value:
ü Optimism and positivity in voice
ü Transparency conveyed
ü Behavioral integrity/Informational justice
ü Taking ownership

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We decided to conduct some field research.
How do you go about assessing
the strength or quality of
leadership associated with a firm
using the following questions:
• What data do you consider?
• How do you gather this data?
• How do you weigh it against
other data?
Walk us through a specific
recommendation you issued by
having them describe:
• How management strength
was factored in
• What impact it had on their
recommendation
Initially interviewed
35 equity analysts

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The initial 35 analysts we talked to were from various geographies.
North America
28%
Latin America
29%
Europe
20%
Asia Pacific
23%
Responses by region

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Responses by sector
They followed a mix of industry sectors.

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.
Number of years as an analyst
Some of the analysts were inexperienced and others had
20+ years of experience.

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Analyst Logic
“Second – I adjust year 1. This
depends on the capability and
engagement of the front line. The
CEO can’t change these much in the
next quarter or two”.
“Third – I adjust all years two through 20. This
depends on the front line’s ability to transform and
capitalize on the changes in technology, consumers
and regulations. This transformation depends on the
CEOs and the shots they call.”
“First - I develop a numbers driven
forecast of 20 years of cash flow”.
Source: COO Comments & Thomson
One Ranking
Source: Organization
supplied date,
Economic data
Source: Qualitative data, informally gathered,
& intuitive judgment

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To validate our findings we conducted an on-line survey in
partnership with Forbes Insights.
• On-line survey
• Completed by 305 analysts
• Analyst group broadened to include
money managers and venture
capitalists
• Conducted in August 2011

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How they assess the quality of leadership.
We asked the analysts to explain how they assess the quality of a
CEO of an organization they follow and how they use this assessment
to estimate the value of the firm. Analysts typically referred to the
same three criteria for judging the CEO’s leadership:
• Track record – Previous roles and challenges and the results
achieved.
• Reputation – Experiences, stories, books and articles that
describe the CEOs approach, character, and confidence.
• Presence – Effectiveness in articulating the way forward,
addressing opportunities, questions, concerns, crises, and
disruptions in plans.

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What is the greatest percentage change you have made in your valuation of a company
in response to a change you’ve perceived in the strength of its leadership?
0% 5% 10% 15% 20% 25%
Less than 5%
6-10%
11-15%
16-20%
21-25%
Greater than 25%
Do not consider leadership strength
Leadership quality is material. 95% of analysts surveyed made changes
>5% based on strength of leadership. 50% made significant changes
(>15%)
Sample size 305

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Three quarters of respondents see the assessment of leadership
growing in importance over the next three years.
0% 10% 20% 30% 40% 50% 60%
Strongly agree
Agree
Disagree
Strongly disagree
Don't know
Sample size 305
Over the next three years, more emphasis will be placed on determining the best ways to
judge the strength of leadership in a firm.

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Sample size 305
80% said they could be more accurate with better data

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Next Stage of Research
1. Financial analysts in training…
§ Randomly assigned to company that exceeded or missed expectations to
review books and conference call information.
§ Accounts: Internal, External vs. None
§ Ratings: Projected Stock Price, EPS and Buy, Sell or Hold
Results:
§ Accounts significantly and positively impacted all 3 ratings.
§ Trust in the leader impacted ratings explaining how accounts are
interpreted.
§ Internal accounts by leaders led to higher buy ratings.

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2. Interpreting market data and analyst comments…
§ Gathering data from analyst data feed and social media.
§ Back out leadership implications with IR, CMO and CHRO.
§ Develop plans to manage leadership quality
§ Identify requirements and gaps
§ Influence market perception
Next Stage of Research (Continued)