Perth leadership outcome model

Traditional approaches

The traditional leadership models are based on either a personality or a behavioral/competency approach (Bass, 1990). The personality approach is rooted in the "Great Man" theories popular in the early 20th century. Research in this tradition sought to identify the personal qualities that distinguished leaders from followers or effective leaders from ineffective leaders. This tradition is operationalized in the modern era by the plethora of personality tools used in leadership research and practice. Popular examples include the Myers Briggs Type Indicator (MBTI),the Fundamental Interpersonal Relations Orientations-Behavior(FIRO-B), and assessment tools based on the Five-Factor Model of personality like the NEO PI-R or Hogan Personality Inventory (HPI). These personality measures are based on a standard psychological paradigm and were designed to show the level of interpersonal and social functioning of an individual. These instruments were designed by psychologists and were not primarily designed to be business leadership assessments—the business application only gained traction in later years. (An exception is the Hogan Leadership Forecast tools, which were designed to predict psychological functioning in the workplace).

The behavioral/competency approaches, by contrast, were designed specifically for use in business. They are focused on individual managerial competencies such as vision, execution, and perseverance. They usually measure from 60 to over 100 individual competencies. Their intellectual heritage is the intersection of vocational guidance—which aims to show how individuals will perform in a particular job function—and a political backlash to intelligence/ability testing—following former Harvard president and entrepreneur, David McClelland's classic article, "Testing for competence rather than intelligence." Neither of these arenas—guidance counseling, downplaying IQ—were intended for application with senior leaders, although the use of competency models has been extended to this area. Examples include the competency models offered by Lominger[1], Hay-McBehr, Personnel Decisions International [2], and so on, etc.

Financial outcome

The Perth Leadership Outcome Model differs from these in that it focuses on what types of business outcome are associated with particular types of individuals and leaders. The model defines “outcome” in strictly financial terms. It links an individual’s inclinations with the type of financial objectives they are likely to pursue and in particular, the type of financial value and valuation outcome most will to occur as a result of their leadership.

This model therefore differs significantly from the traditional models in that it focuses specifically on the financial outcomes of individuals and organizations. The traditional personality and competency models do not have a specific goal of explaining a leader or organization's financial performance, as does the Perth leadership outcome model.

Financial Signature

The Perth leadership outcome model (PLOM) identifies the concept of the financial traits of an individual, which it calls their “financial signature”. The financial signature describes an innate calculus, possessed by all individuals, that drives their behavior when they make judgments about situations involving risk and reward, cost and benefit. Each individual has a characteristic way of handling such situations. This particular way imposes a systematic but unconscious bias on all decisions which have financial impacts and ramifications. Knowing this the model predicts the types of financial decisions they make and therefore the financial impacts of their decision-making. From this it can predict their impact on financial performance, profitability and ultimately the financial value and market valuation of organizations they run. This analysis can be extended to the team and the organizational levels.

Financial mission

The PLOM states that individuals cannot change their financial signature because it is innate, or at the very least fixed for long periods of time. However they can change their financial mission, that is how they express their financial traits in their actual behavior. The extent to which an individual can change their financial mission compared with their financial signature varies significantly between individuals. Most will be able to change somewhat, while only a few will be able to make dramatic change. However if a critical mass of leaders in an organization change their financial mission even by a small amount, the organization may also change its financial performance and its market value.

Outcome assessments

The financial signature of an individual can be identified and measured using assessment instruments designed by the Perth Leadership Institute including the financial outcome assessment. Other instruments show how a person can improve their financial mission and their leadership outcome (the executive outcome assessment) and the financial signature and mission of an organization (the corporate financial outcome assessment).

Behavioral finance

PLOM represents a new approach in the areas of behavioral finance and behavioral economics. These two fields and their foundational assumption of economic irrationality are focused mainly on consumers, although the more recent approaches have extended this assumption to a limited class of executives involved in making investment decisions for their corporations. However the PLOM approach is focused mainly on the extension of this assumption of irrationality to all corporate executives and managers, even those who do not have corporate responsibility for financial decision-making.

Historical development

The PLOM model is unique in many ways. However, it is related to two intellectual precursors. The work by the great German sociologist, Max Weber, linked social and economic variables. This is reflected particularly in his seminal work “The Protestant Ethic and the Spirit of Capitalism”. However Weber did not go further to link behavior with economic outcomes at the corporate, as distinct from the social, level.

The other precursor is, again, the Harvard psychologist David McClelland. His work in the 1950s linked entrepreneurial behavior with the emergence of capitalist society. His work, “The Achieving Society,” identifies these links in societies from the Greek era to the present. However, although prescient, his work still did not model the structure of entrepreneurial and financial behavior at the level of the individual and does not show its relevance to corporate financial outcomes, again analyzing at the social, not the corporate, level. Although influential in its day, McClelland’s approach has not been extended and it has only been with the emergence of behavioral finance and economics that interest in this area has been revived. The PLOM research reflects this interest.