Leadership Compound Effect: How to Harness It For Good

Every leader creates a compounding effect in their organization – positive or negative. Choose wisely. The Compound Effect is the phenomenon whereby everyday choices compound over time leading to either exponential success or exponential disaster. It’s powerful because of its cumulative nature. Leadership choices are no different. Each leader you hire creates a leadership compound […]
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Every leader creates a compounding effect in their organization – positive or negative. Choose wisely.

The Compound Effect is the phenomenon whereby everyday choices compound over time leading to either exponential success or exponential disaster. It’s powerful because of its cumulative nature. Leadership choices are no different. Each leader you hire creates a leadership compound effect for better or for worse.

The compound effect concept is simple – each good decision compounds on top of the last one, amplifying the positive results. And each bad decision compounds on top of the last one, amplifying the negative results.

According to Darren Hardy, author of The Compound Effect, “every choice matters.” And in business, every leadership choice matters.

Here’s why. The most important element of any decision is how it sets the course for future decisions. Leadership selection is at the top of the chain setting in motion compounding effects throughout an organization. For instance, if an organization makes good leadership choices, and the chosen leaders in turn, consistently make good leadership selection decisions it creates an ever-increasing momentum of positive results. But when the wrong leader is selected at the top, a cascade of other wrong leaders are selected and the strength of the leadership chain weakens over time – resulting in increasing momentum of negative results.

That’s how the leadership compound effect works.

Ripple Effects

Good Leadership Decisions Create Good Ripples – Bad Decisions… Bad Ripples
Wise Leadership Choices Create Good Ripple Effects – Poor Choices… Negative Ripple Effects

While it’s impossible to predict every consequence of a decision, all potential outcomes warrant consideration before making a choice. And the leadership compound effect is a mindset that every leader in every organization should adopt.

Good Leadership Ripple Effects

A good leadership decision sets off a chain reaction of good events. Why? Because a strong leader tends to hire more strong leaders adding to positive momentum for future hiring. And so on and so forth.

Selecting the right leader leads to a downstream rush of good results including an increasingly strong leadership chain throughout the organization. And the right chain of leaders will in turn create a myriad of good effects in mission execution and organizational advancement. A strong leadership chain increases organizational engagement, elevates morale, strengthens followership, and increases productivity – building positive momentum which leads to positive outcomes.

Good choices create ripples throughout the company’s external environment as well. Customers and external business partners also notice positive momentum and are likely to regard the company favorably, leading to stronger relationships and continuing business with the organization.

Leaders who make good choices create a virtuous cycle in which good begets more good.

Poor Leadership Ripple Effects

On the other hand, one wrong leadership hire can quickly reverse momentum, undoing all of the progress that has been made, creating a compounding effect of negative momentum. Unfortunately, this happens too often – and not usually because the leader is a ‘bad’ leader. Rather, it’s mostly because the leader isn’t properly positioned to the situation, whether it be the role, mission, organization, or broader environment and business ecosystem.

Hiring a leader who is not well-positioned for success within a specific situation, can be one of the costliest mistakes an organization can make. The wrong leader will in turn hire more leaders who are misaligned to the situation, leading to compounding negative momentum and hurting organizational success. In this case: bad begets worse.

Every leadership choice matters—starting with the CEO and down through every level of the organization.

Each leader selected is both a reflection of the leader making the choice and a foretelling of the compound effect that will follow.

Today’s Choice Impacts Tomorrow’s Future

Decisions are never just about the present; they always have implications for the future. The decisions we make today create the consequences we face tomorrow and beyond. This is especially true for leadership decisions.

The most senior leadership choices chart the course for either positive or negative momentum. Based on the direction the new leader takes with their team selection, we begin to see the compounding effect in motion. Then, the leadership team makes their leadership choices, and the organization starts to experience the beginnings of either positive or negative ripples.

Let’s say John is hired as a new CFO. He adds a couple of brilliant up-and-comers to his team to elevate the finance function and its operations. His strong hires clean up the financial accounting and reporting which helps improve analysis and forecasting. John elevates morale and capabilities, and inspires the best out of his team. He saves the company more and more money through improved operations and diligence. The CEO is then able to reinvest those funds into product development, new services, and even an acquisition. The company begins to grow and prosper.

One uniquely positioned leader leads to innumerable positive effects.

In contrast, when a C-Suite leader is hired who is not well-positioned to the situation, the opposite happens. A series of suboptimal decisions and behaviors create a negative effect that impacts the present and future state of the organization.

The compound effect of leadership is a powerful tool that can help or hinder an organization.

Therefore, it is vital for leaders to carefully consider the implications of their leadership selection choices before making them because the leaders they hire will also make decisions that will create a compound effect throughout the organization’s leadership chain—affecting the future of the organization, its culture, productivity, and outcomes.

The Trappings of Biased Leadership Decisions

Cognitive and emotional bias is a human condition that distorts decision-making and leads to suboptimal decisions and outcomes. Bias creates shortcuts in information processing which often lead to flawed reasoning, a misinterpretation of information, and ultimately inaccurate conclusions. An individual’s filtering system is unique and manufactured by personal experiences, and these unique decision filters in turn lead to biased analysis, a deviation from rational thinking, and therefore poor decisions.

Now let’s consider a couple of examples illustrating how bias and flawed thinking can get in the way of leadership selection and a positive leadership compounding effect. We’ll look at The Halo Effect and The Well-Traveled Road Effect both of which commonly put a kink in leadership assessment and selection.

“Proven” Leaders and The Halo Effect

It is possible that a proven leader in one organization can be equally successful in another. But it’s not a given. And too often the critical thinking necessary to inform leadership selection decisions gets derailed due to The Halo Effect.

“Proven” doesn’t always translate to a positive leadership experience, nor to positive compounding effects.

Sometimes hiring executives make leader choices that are heavily influenced by their perception of the success or performance of the company, or companies in which the individual has previously operated – transferring the positive performance of the company onto the leader – giving them “proven leadership’ status. This happens often – even though company performance is immensely complex and occurs due to many factors including leadership, strategy, execution, innovation, and many other fundamental practices and principles of business – including external factors like markets, economics etc., which are out of the leaders control.

Nevertheless, it is not uncommon for a hiring executive and team to cast the glow of strong company performance or reputation onto a leader with previous experience in that company. Worse yet, the hiring executive and/or team then extends the ‘glow’ of the company halo, making inferences about many traits the leader is ‘certain to have’ whether actually proven or not. This is the Halo Effect in action.

On the flip side, while a leader may have earned “proven” success status in a company that is less admired by a hiring executive or team, the opposite occurs, and this is known as The Horns Effect. In this case, the reality of a leader’s performance is tainted within the ‘shadow’ of negative company performance or reputation.

Both the Halo Effect and the Horns Effect are well recognized cognitive biases which interfere with the critical and rational thinking necessary in hiring a leader who is well-positioned to the present situation.

Past Performance and The Well-Traveled Road Effect

The Rearview Approach

Strong leadership in one situation is not necessarily a plug and play for strong leadership in another situation—even when the new mission and environment seem to mirror a situation in which the leader has previously succeeded.

Why? Because leadership performance is relative. Success in a previous situation is a worthy reference point. However, previous situations were not your situation – not your exact position, not your exact mission, not your exact team and organization, not your products or services, and most likely, not the same environment in which you are currently operating.

Past success is not a guarantee, nor a clear predictor of future success. Yes – I said it!

Sure, it may seem logical to select your next leader based on their experience and success in a previous situation. No doubt their experience will bring forward a repository of useful knowledge, whether practical, tacit or otherwise. But it may not be enough.

While experience and past performance are both important to consider in a leadership evaluation process, they don’t fully represent a leader’s unique positioning to your situation. In fact, past experience and success often introduce bias which can get in the way of leading with clear eyes. A bias called the Well-Traveled Road Effect is often the culprit.

The Well-Traveled Road Effect

The Well Traveled Road Effect explains the limitation and cost associated with the familiarity that comes along with an individual’s past experiences. Here’s what I mean. While a leadership mandate can resemble a mission previously led by an individual, it is never exactly the same. The journey ahead will inevitably present unfamiliar roadblocks, challenges and even detours. Relying on familiarity gained through a past experience is sometimes the biggest roadblock to future performance because it causes the leader to cling to a familiar and limiting playbook that may not provide the right route guidance to the new destination.

Past performance is often regarded as a big signal for predicting future performance because both the hiring executive, and a prospective new leader tend to over value previously “well travelled roads.” But, the comfort of familiarity can lead to cruise control, a lack of attention to nuance, missing important danger or risk signals, turns, and even detours that may be critical to the present mission, and to the destination outcome.

Our business and market environment changes rapidly. A leader’s playbook must constantly evolve to meet the context of the present, and the future. While rearview perspectives serve as good reference points, they can be deceiving and limiting. This backward focus often gets in the way of clear vision to the road ahead.

The Windshield Approach

A windshield view, in contrast is forward-looking. It considers both the current realities and future prospective of a leader’s unique positioning to the mission ahead, the organization, team dynamics, economic climate, as well as the ambiguity of what is yet to come.

How well a leader understands and intuits the complexity, nuance, and challenges of the business within its specific context suggests the pace at which positive momentum is likely to occur. Therefore, it is the responsibility of the executive hiring team to carefully evaluate a leader’s ‘positioning’ to the defined coordinates of the current mission, as well as a leader’s ability to be effective within the uniqueness and context of the current situation.

‘Unique Positioning’ – Key To A Positive Leadership Compound Effect

Choosing the right leader is complex. Selecting a leader who is ‘uniquely positioned’ to your situation, or ‘coordinates’ is critical.

Remember the Leadership Compound Effect. It starts with hiring the right leader. And to hire the right leader you need the right intel. Because a good leadership decision will compound, accelerating positive momentum. And a poor leadership decision… well, you know how the sentence ends.

Making the right leadership choice starts with defining the critical coordinates of your situation – position, mission, organization, environment and targeted outcome. These coordinates set the course for a clearly defined leader profile. Know your coordinates. Then, you can define your leader profile accordingly, and gather the right intelligence to inform your leadership selection decision.

It’s all about ‘Unique Positioning’.

To use a GPS analogy, you need to know your current positioning to get to your targeted destination – efficiently and effectively.

Leadership positioning matters – for the leader and for the organization. Without strong alignment between a leader’s unique positioning and the situation, the compounding effect is bound to forge a dangerous route. To make the right leader choice, you need a convergence of signals that indicate that a leader is ‘uniquely positioning’ to the uniqueness of your situation. Then you will be well-positioned to harness the positive power of the compound effect.

Getting “unique positioning” right is not easy but it’s essential for creating a positive leadership compound effect. And the best way to understand a leader’s “unique positioning” to the uniqueness of a situation is through a ‘convergence of evidence’ approach.

This approach ensures that you are selecting leaders for more than leader athleticism. Rather, you choose leaders for their ‘unique positioning’ to the specific coordinates of your situation – position, mission, organization, environment, and outcome.

The ‘Unique Positioning’ Process

Defining your situation always comes first – position, mission, organization, environment and targeted outcome. These coordinates tell you where you are and where you need to go to get to your destination. They help you select a leader with the unique positioning to lead your mission, and to achieve your targeted outcome.

With an efficient assessment process, and an effective decision framework that references subjective data, or ‘Human Intelligence, combined with objective data, or ‘Augmented Intelligence gained from targeted assessment tools, you gain signals that are relevant and that support an intelligent leadership decision.

The objective – a leader who fits the context of your organization’s situation and its needs to create positive momentum and compounding effects – for the benefit of the leader, and the organization.

A Convergence of Evidence Approach For Leadership Selection

A convergence of evidence approach considers multiple streams of evidence. It’s up to you to gather the most relevant signals, including subjective and objective indicators for your situation.

The key is to leverage both “Human Intelligence” and “Augmented Intelligence,” because neither set of signals on its own provides a single source of truth.

The first data set is anchored in conventional evidence including experience, functional and industry knowledge, and credentials. Through traditional interviewing and referencing, you’ll gather subjective evidence in the form of impressions and intuitive insights. And through a referencing process, you’ll gain further insights related to professional reputation and demonstrated performance – reflective of previous situations. These traditional methods indeed provide important data signals. But are they enough?

Conventional ‘positioning’ signals, are easy to access, and they are observable and in plain sight. Other important signals are not.

Objective evidence and data signals require a deeper dive. Targeted objective tools that reveal natural and adapted behaviors, traits, drivers, mindset, cognitive capacity, and other valuable attributes and competencies add an important dimension to your assessment. These data signals add critical indicators of a leader’s ‘positioning’. This evidence can confirm or challenge signals picked up in the course of a traditional subjective process. And, objective signals often introduce evidence that is nearly impossible to fully glean through a purely subjective assessment process.

When conventional, subjective ‘human intelligence’ signals are combined with objective ‘augmented intelligence’ signals, the result is a convergence of evidence that highlights the ‘unique positioning’ of a leader. Most importantly, when this ‘intelligence’ is mapped to your defined coordinates – position, mission, organization, environment, and targeted outcome ‘ you gain a clearer view of a leader’s ‘unique positioning’ to your specific situation – an indication of whether the leader can create a positive or negative compounding effect in your organization.

Unique Positioning and The Leadership Compound Effect

‘Unique Positioning’ Leadership Signals

  1. Vision, values, and character.
  2. Motivation and Performance drivers.
  3. Commitment, confidence, capability, and conviction.
  4. Ability to influence, inspire, select, develop, and elevate the right future leaders.
  5. Mindset and attitude.
  6. Operating and communication style, and instincts that drive behavior.
  7. Competency strengthsthose that matter for success in the role and for the mission.
  8. Learning agility.
  9. Thinking style – decision-making approach, and problem-solving ability.
  10. Acumen and situational awareness.
  11. Emotional intelligence.
  12. Cognitive capacity.
  13. Cognitive bias subconscious influencers that get in the way of clear eyes and rational thinking. Biases are tricky to reveal, yet they are perhaps the most important signals to understand since they affect pretty much everything else on this list. Biases leave clues. (More on cognitive bias and all of these signals in upcoming issues of LeaderEdge)
  14. Business and Professional credentials, industry and functional knowledge, technical skills

Driving A Positive Compounding Effect In Your Organization

Hiring a leader who aligns with the coordinates of your business, sets a positive compounding effect in motion. Hiring a leader with the the wrong ‘positioning’ can cripple your organization – creating a domino effect of costly negative consequences.

Every leader makes team choices that create compounding effects impacting today and far into the future – positively or negatively.

Before you hire your next leader, ask yourself whether you have the right process and decision framework to make the best leadership choices for your organization. Are you well-positioned to harness the positive power of the leadership compound effect – for the future good of your organization and your leaders?

The Leadership Compound Effect Starts at the Helm

Steer leadership decisions  - Helm to Crew for a positive Leadership Compound Effect.
Steer Leadership Decisions From the Helm to Crew For A Positive Leadership Compound Effect

Here’s the big takeaway…

Every choice has a consequence.

Every leadership choice delivers a consequential compounding effect… positive or negative.

The Leadership Compound Effect is always in motion. You cannot choose to pause it or flip the switch to ‘off.’

Fortunately, or unfortunately, there is no choice about whether the leadership compound effect will take place in your organization. It will occur.

Whether that’s good news or bad news depends on how well you manage it.

What Will You Do to Manage The Leadership Compound Effect in Your Organization?

Will you harness its “power” and create ever-increasing momentum for good? Or will you default to subjective, biased, and unstructured leadership decision-making – potentially leading to disastrous negative momentum from the top of your leadership chain, and throughout your organization?

Choose leaders strategically, critically, and wisely by understanding their ‘unique positioning’ and how well they align to your unique situation. These choices matter immensely.

Use the leadership compound effect to your advantage.

Your team, organization, stakeholders, and markets are counting on you.

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And, don’t forget to share this issue with your team and colleagues – because developing other leaders is part of leading with edge. Simply copy the link and share!

Thank you for your leadership and your readership!

Lisa Tromba, Founder, Leadership Intelligence Services
and Co-Founder, Luisi Tromba Advisors / Executive Search

Lisa@luisitromba.com or Lisa@leadershipintell.com

As an executive recruiter and trusted advisor for over 20 years, my passion guides my work which is centered on helping organizations and leaders to advance missions and achieve outcomes together – through clear thinking, reasoning, and evidence-based decision-making – and with a focus on aligning leaders who are uniquely positioned to the uniqueness of a situation.

The advantage is leadership edge.

Lighthouse signifies guiding leadership decisions wisely.

Copyright LeaderEdge© by Lisa Tromba, Leadership Intelligence, 2023

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