PART ONE Why and How Leadership Matters to Investors

Sometimes, new ideas completely disrupt traditional thinking. More often, new ideas emerge from synthesizing previous thinking, then evolving to fresh insights. This present work builds on outstanding work in the study of market value and leadership. Each of these separate disciplines has vast reservoirs of ideas, studies, and tools. In Chapter 1, I want to acknowledge this previous work but then show that by connecting market valuation and leadership, each discipline moves forward. Market valuation with leadership insights becomes more complete and accurate. Leadership through the lens of market valuation brings more discipline to the study of what effective leaders know and do. In Chapter 1, I also report on how the most prominent investor of our day (Warren Buffett) continually reflects on management as part of his decision making, and I report our research from investors about the importance of leadership in their decision making. Leadership matters to investors, but they can be comprehensive in their assessment.

In Chapter 2, I show that now is the time to propose a leadership capital index that offers investors a much more comprehensive way of assessing leadership as part of their firm valuation process. While investors recognize the importance of leadership, they often lack rigor in assessing it. The proposed leadership capital index identifies two domains of leadership (individual behavior and organization capabilities) and five elements in each domain that investors can access to move beyond superficial and casual leadership observations. This leadership capital index will also inform those interested in understanding governance, risk, social responsibility, and other organization processes. The domains and elements of this leadership capital index synthesize and extend multiple strands of excellent work into the next step of realizing the market value of leadership.