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.

Enter the Leadership Capital Index 

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:   

1. Personal proficiency: To what extent does the leadership demonstrate the personal qualities required of an effective leader?

2. Strategist: To what extent does the leadership articulate a point of view about the future and strategic positioning?

3. Executor: To what extent does the leadership make things happen and deliver as promised?

4. People manager: To what extent does the leadership build competence, commitment, and contribution of their people today and tomorrow?

5. Leadership differentiator: To what extent does leadership behave consistent with customer expectations? 

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

1. Culture capability: To what extent has the leadership created a customer-focused cultural capability that is shared throughout the organization?

2. Talent: To what extent has the leadership invested in practices that manage the flow of talent into, through, and out of the organization?

3. Performance accountability: To what extent has the leadership created performance management practices (compensation, for example) that reinforce the right behaviors?

4. Information: To what extent has the leadership managed information flow to gain information asymmetries?

5. Work: To what extent has the leadership created organization and work practices that deal with the increasing pace of change in today’s business setting? 

Bottom Line 

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. 

Editor’s Note: This post is excerpted from the white paper, The Intersection of HR and Investors (Stephen M. Ross School of Business, University of Michigan).