There is any number of critically important things leaders should learn in order to be successful in the corporate enterprise. These vary by industry and position, though universal characteristics such as relationship and team building, the ability to give and receive feedback, and a knack for motivating the workforce are all worthwhile competencies. Financial acumen, however, is probably one of the most important skills a leader and a CLO can have. Without financial knowledge, Dr. Ted Prince, founder and CEO of the Perth Leadership Institute, said that even the most dynamic leader can fail miserably in the enterprise.
During his career Prince, who was a CEO for 20 years for various technology companies and a member of multiple boards, has noted success and failure patterns among the senior executives with whom he worked. Those experiences and observations, coupled with research and senior-level executive validation, led to creation of the Perth Leadership Assessment for Financial Acumen. “The financial traits that we all have, they really constitute an innate calculus, and that innate calculus kicks in whenever we have to make a decision that involves the concepts of risk and reward, costs and benefit,” Prince said. “We all have these. They’re pretty primeval. We’d all recognize them at a fairly intuitive level. We know that some people are spenders, and some people are pretty lean and mean, and so on. The model I developed puts a structure on top of that innate calculus, and we have come up with a concept called a financial signature and a distinct financial style.”
If a leader understands his or her financial signature, which is characterized by a systematic bias in decision making, the information can be used to predict with a fairly high degree of confidence what the financial impact of his or her decisions will be. In other words, the financial signature and style can dictate, over the long term, whether that leader will consume resources or create them. “It’s a fairly granular sort of model, but it’s that model that underlies our financial outcome assessments,” Prince said. “We did a lot of research in the field once we developed the model. We went through the issues of questionnaire design and the like and did a lot of field work with senior executives who both developed the model, tested it out and validated it. When we give you the assessment the result will be what your financial style is and what your financial signature is. What the systematic bias of your decision making will be and whether or not that financial decision making will lead to fundamentally the creation or the consumption of capital. In other words, whether or not over the long haul, particularly if you’re in a senior position, you’ll create a deficit or a surplus.”
Prince suggested that the value of increasing financial acumen is that by showing managers and learning executives the implications of their unconscious financial style, they might be more willing to engage in the learning and development necessary to improve not only their financial performance but the financial performance of their company as well. “It will also give them a new set of metrics to measure the impact of learning programs,” Prince explained. “Right now ROI is a very vexed issue. I believe that the measures used in ROI are usually wrong. They focus on the wrong things. What you need to do is focus on the valuation improvement of an organization as a result of changes in financial behavior. This gives the HR and learning and development people a set of metrics and a set of tools that can link behavior directly with profitability and financial outcome. And it shows them how they can apply this in training programs and executive development programs, hi-po (high potential) programs, succession planning, so that they can really improve the financial impact of their people.”
No matter how effective the leader, without a P&L background, leaders are often simply not aware of the financial impact their actions, Prince said. “Training programs focus very much on personalities and competencies, but they don’t always recognize the concept of pure financial competency. They’ll tell you about everything else, and I’m not saying that those things are not useful or important, but in the companies I was in, in the end if I didn’t make a profit, it didn’t matter how good I was as a leader. I was going to be history. I think CLOs need to inject more of that into their programs. It’s a counterweight to the other material. It’s not that the other material is not important, but if you teach someone how to be a good leader but not to improve their financial impact, they may well fail anyway, and very often do.”