The development of leadership competencies index: the Economic Value Added (EVA) approach

Abstract

Researchers posit that the primary objective of a business enterprise is to create shareholder value, and Economic Value Added (EVA) has been found to be the best available financial metric for measuring value. It is argued that EVA differs from other metrics in the sense that it incorporates both the enterprise profits and the capital costs for such profits. The study intended to establish attributes and competencies that are relevant, key and can bear the relationship with the EVA. In order to achieve this, the following questions were posed, namely; what key attributes and competencies an executive needs to possess for the purpose of organisational value creation?; and what is the measure to be utilised that includes these competencies to ensure organisational value creation and leadership development? The study aim was to propose and develop a diagnostic Value Creating Competencies Index, which is based on the components of or influenced by EVA. The success of the study was based on three pillars, firstly, EVA as a superior financial measure. To support this, literature that supported that EVA is adopted as a superior financial measure compared to other accounting based measures was reviewed and critiqued. The second element of the study was the focus on CEOs as critical and important drivers of value in organisations. However, the available literature was not able to provide a convincing argument to focus ‘all’ the attention on CEOs at the expense of other executives and the organisation at large. To determine whether CEOs can be given this attention and prominence, we conducted an additional study that assessed the share price movement on the public announcement of CEOs on companies listed on JSE. The findings of this study showed significant movement of share price and volume traded, and on the strength of this observation we concluded that CEOs can be used in this study as drivers of value. The third element was to look at competencies and competency modelling as a conduit that links value creation (EVA) and creators of value (CEOs). The literature on competencies was consulted and that of modelling, looking at the advantages and disadvantages of competency modelling. The study adopted a pragmatic paradigm and mixed methods approach. A qualitative dominant approach was followed. The study population consisted of Chief Executive Officers of the companies listed on the JSE top 40, who have had same position for a minimum of five years. Two CEOs could successfully be reached and interviewed. Data were collected through interviews, observations and documents analysis of the selected CEOs and their respective companies. Data were analysed qualitatively using the Atlas-ti software package, and then followed by a quantitative approach that was conducted using a Delphi approach. Two samples were utilised for this purpose. The first sample was a census of top 50 companies on Executive Search Review (United States headquartered companies that deals with CEO recruitments), the second sample was a random sample taken from JSE listed companies. Qualitative results were presented and discussed and the competencies were identified and linked to actual performance in respective organisations. In addition, identified competencies were confirmed by linking to the relevant quotations from the interviews and or analysed documents. Based on the qualitative results a competency model, Octastellatus CEO Competency model was developed and presented. From the competency model, the competency index Sustainable Economic Value Competency Index (SEVCI) was constructed and presented. The index has four clusters, namely; the core competencies, enabling competencies, differentiating competencies and competitive competencies. The index measure is presented as the sum of weighted averages of the four clusters. It is believed that this research work have made a significant and unique contribution by providing a quantitatively validated CEO competency model and corresponding competency index for assessing potential ability to create economic value. In an area that previously had a disconnection between ability to create value and actual value creation is now a known area and it is represented by SEVCI.