Developing leaders makes intuitive sense for many reasons. Societal demographic characteristics are shifting, meaning countless baby boomers will retire from executive positions in the coming years.
These individuals will need replacing, and organizations will require pools of trained high potentials with the leadership skills to fill these jobs. In addition, replacing derailed leaders is expensive. These costs can stem from paying severance, absorbing losses in productivity, and hiring an executive search firm to refill the position. To minimize turnover-related costs, it is critical to select entrants to senior positions who have participated in leadership training and development, and who possess the maturity and experience needed to succeed.
Rhyming off good reasons for why we should develop leaders is easy. The problem is that to justify the investment needed to create a high-quality leadership development program, decision-makers often require convincing evidence of sound return on investment, just as they would demand when making other capital expenditures. However, measuring the true impact of leadership development programs can be elusive and therefore hard to communicate to senior executives.
In this article, we discuss evidence suggesting these programs do in fact produce significant ROI for organizations, based on research by leading thinkers in the field. We also bolster this research-based evidence by drawing on our own experience working with a leading plastics industry company, Husky Injection Molding Systems Ltd.
A recent study published in the academic journal The Leadership Quarterly tackles the issue of measuring the financial ROI of leadership development programs. In an article titled “Estimating return on leadership development investment,” prominent management scholar Bruce Avolio and his colleagues applied rigorous calculations in order to estimate the effect of leadership development.
Avolio and his colleagues found that the ROI of leadership development programs is almost always positive, and sometimes substantial in magnitude. Let's look first at upper-level — or executive —trainees.
For a group of 30 executives, in a three-day leadership training session, the average total return using conservative estimates is $69,000-$81,000. If you assume that this training has any positive effect on those reporting to these executive-level leaders (and this is a logical assumption), add an additional $233,000 of benefit. This executive-level training program would yield a total ROI (including effects on both leaders and their reports) of 50-64 percent.
What about middle-level leaders? For a group of 100 middle managers, in a three-day training lesson, the average total return using conservative estimates is $165,000-$226,000. Like above, if we assume that this training has any positive effect on the direct reports of the middle-level trainees, add another $1.6 million of benefit. You read that right! Remember these are conservative estimates published in a peer-reviewed academic journal. This middle-level training program would yield a total ROI of 52-87 percent.
Some in the plastics industry already understand the value created by leadership development. Since 2005 our firm has delivered an executive leadership development program at Husky Injection Molding Systems. Despite the Great Recession and management's commitment to establishing a globally competitive cost base, Husky has maintained its investments in executive leadership development.
Why? President and CEO John Galt, believes that leadership talent is one of the most critical resources at Husky. He believes that selecting and developing the highest-quality leaders, and placing them in the most mission-critical positions is one of his most important tasks as CEO. He also believes that leadership development drives retention, because it signals to high potentials and high performers that they are valued by the organization. When high potentials feel appreciated and are given opportunities to grow, they are more likely to stay, which keeps Husky's high-performance culture intact.
While the effects of leadership development on a company can be difficult to measure, mounting research evidence, as well as anecdotal support based on our own work with Husky, suggests that it is one of the most value-producing investments an organization can make.
Jackson specializes in leadership assessment at Jackson Leadership Systems Inc., a consultant group in Sharon, Ontario.