CHAPTER 1 When Leadership Matters to Investors, It Matters More

“How much is that doggie in the window?” asked Patti Page in a 1952 novelty song. Investment analysts and others have asked essentially that same question since companies have been publicly traded: "How much is this company?” (With a strong subtext of "How much is this company worth to me?”)

A dog’s value comes from its recognizable traits (breed, age, health, temperament), but also from its personal value to the owner (relationship, history, companionship). Similarly, a company’s value comes from its tangible assets like products, receivables, technology, and facilities—the assets that show up on the balance sheet and are as easy to see as the surface of a dog. Company value also includes intangibles such as strategy, brand, intellectual property, and reputation, which are more subjective and less likely to show up on the balance sheet but have been recognized as being just as essential to determining a company’s desirability as an investment.

Underlying the intangibles, each organization has a level of leadership capital—an established pattern of both individual leader characteristics and organization and human capital processes—that can and should be included in determining firm value. Investors often have a strong feeling about the importance of a particular leadership trait, but their opinions tend to be superficial because they don’t recognize or have ways to fully evaluate all the elements that underlie effective leadership. They make judgments with only one or two pieces of a leadership puzzle, not the entire puzzle.

The leadership capital index in this book will help investors and others improve their approach to firm valuation. When leadership capital becomes a factor in investor judgments, it will naturally receive more emphasis in day-to-day corporate life, to the benefit of many.