Are leaders "made" or "found"? A practical view

For decades, leadership theory has been split between two camps: those who believe great leaders are born with the right traits (Trait theory), and those who argue that effective leadership depends on the situation (Contingency theory).

The Trait school says leadership is largely innate — things like decisiveness, resilience, empathy and strategic thinking are either present or not. This is the thinking behind countless “seven habits of successful leaders” books and psychometric tests.

Contingency theory takes the opposite view: no single set of traits works everywhere. The best leadership style depends on the organisation, the team, the market conditions and the specific challenge at hand. A leader who excels in a stable, mature business may struggle in a fast-moving start-up, and vice versa.

From my experience advising executives and boards, both perspectives have merit, but Contingency theory is far more useful in practice. Leaders are rarely “found” fully formed. Most are made — or at least significantly shaped — by the situations they face and how they adapt to them.

Practical takeaways for today’s leaders:

• There is no universal “leadership formula”. What works brilliantly in one company or industry can fail in another.
• Self-awareness is critical — understand your natural strengths and consciously adjust your style to the situation.
• Organisations should stop hunting for the mythical “perfect leader” and instead focus on developing people who can flex their approach according to context.
• In uncertain or rapidly changing environments (most markets today), the ability to read the situation and adapt is often more valuable than any fixed set of traits.

Great leadership is rarely about being born with the right qualities. It’s about learning how to deploy the qualities you have — or develop the ones you need — for the specific challenge in front of you.

What do you think — are leaders mostly made or found in your experience? I’d be interested to hear your views.

This is an abridged version of an essay I wrote a couple of years ago. If you would like the full version as a PDF, please contact me.

Hold the abacus, remember the time value of money

This post was written in 2012–2013 and reflects thinking at the time. For current views and topical discussions, please see recent articles.

A lot of people commenting on the economy make simplistic assumptions about how rational individuals should behave. Below is an example of that, in the shape of a flawed comparison between two telephone pricing schemes.

I read a curios article today ("The cheap iPhone is already here, if Americans can do the math") about a deal that Walmart is offering on the new iPhone 5. The deal is this: you pay a non-subsidized handset price of $650, and get unlimited data for $45/month. The second cheapest deal from AT&T is $200 upfront and $85/month, for 1GB of data. "The math behind these plans isn’t very complicated", writes the author Zachary M. Seward. Walmart's deal is $1,730 over two years, whereas AT&T's is $2,240, hence Walmart's is 23% cheaper. The author then goes on to say that, by not rushing to take advantage of the deal, the American public is being irrational. They should "dust off their abacuses and recognize a discount for what it is".

I would argue, however, that the math is (slightly) more complicated than Mr Seward suggests, the discount is smaller than he thinks, and Americans less irrational than he thinks. What the "simple math" forgets is the time value of money. Money today is worth more than the same amount in two years' time. This is of course Finance 101. On a discounted cashflow basis, the difference between the two deals is bound to be smaller. What is the correct discounting factor though? For individuals this depends largely on the rate at which they are able to borrow.

Ever since 2008, credit has been tight. A lot of people cannot obtain credit at all, while others pay a high interest rate. Assuming a "typical" credit card rate of 25% annualised, AT&T's deal is $1,733 in today's money over two years, whereas Walmart's is $1,481 still less, but only by 16% rather than 23%. The two deals become equal in value only at 57% ($1,152 in today's money). Most people who can borrow at all, can probably borrow at a lower rate than this. Let's remember, however, that individuals, unlike firms, maximise not expected profit but expected utility. Hence a person's discounting factor reflects not just the cost of borrowing but the subjective expectations of future income and the confidence they feel in the future generally (including the likelihood of losing their job).

In sum, for a large proportion of the American public the high cost of credit and the uncertainty about future incomes can make it perfectly rational to eschew a seemingly cheap deal that is heavily front-loaded. This may well explain the lower than expected take-up of the Walmart deal.