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In business books, blogs and magazines, the terms ‘business leadership’ and ‘business management’ are everywhere — you can’t avoid them. But what do they actually mean?
Are ‘leadership’ and ‘management’ more than buzzwords that authors use to sell books?
If you’re the CEO of a small company rather than a large corporation, is it business leadership skills you need or business management skills? Or maybe both?
In this article, I’ll start by looking at how performance often varies considerably between competing companies and why this confirms the importance of leadership quality for business success.
Then I’ll run through the main responsibilities of small business leaders and managers and the skills that you need in order to execute either role effectively. What are the must-have qualities in order to manage a small business for maximum productivity?
Finally, I’ll cover the related issues of personality and learning. Are some people ‘born leaders’ and the rest of us should give up trying? Or is leadership a skill that most of us can learn?
If you’d like to click straight to one of the later sections, here are my chapter headings:
What is the evidence that leadership quality plays a key role in business performance?
Time and again, we see some companies perform better than their peers in the same industry — they grow faster and report higher profitability. These differences eventually translate into share price performance (for listed companies) and sale valuations (for unlisted ones).
Let’s consider a few examples from the UK’s blue chip FTSE 100 index. Over the last 10 years [i]:
Sainsbury’s has outperformed Tesco by 2% p.a. (considering share price appreciation plus accumulated dividends).
Berkeley Group has outperformed Persimmon, Barratt Developments and Taylor Wimpey by between 2-3% p.a.
Schroders has outperformed abrdn by 4% p.a.
Those differences might not sound large. But a variance of (say) 3% p.a. is worth 34% by the end of year 10. When you’re comparing two companies in the same industry, that’s a lot.
What causes business performance to vary like this?
While we can’t quantify the effect, some performance variations within industries will be driven by structural advantages enjoyed by the leading firm. For example, a market leader may have accumulated superior scale or developed a proprietary technology. Or it may compete in a particularly favourable segment of its market. It can be hard for second tier competitors to match the leader’s performance or erode its advantage.
Yet there are some companies that just do better than their peers with equivalent scale and resources. When performance is compared over a long period of time, random effects (i.e. good and bad luck) should even out. It’s hard to attribute these remaining variations to anything other than quality of leadership and management.
The importance of leadership skills in business is most clearly visible in the case of company collapses and company turnarounds:
Company collapses can often be traced directly back to the actions of the leadership team. In some cases collapses have resulted from excessive risk taking (e.g. Lehman Brothers, The Royal Bank of Scotland, Silicon Valley Bank). In others, fraud has occurred (e.g. Enron, Parmalat, Theranos).
Company turnarounds are often linked to radical changes of strategy or culture which are themselves catalysed by changes of leadership. Celebrated examples of leadership changes bringing about huge performance turnarounds include Apple, Starbucks, LEGO, IBM and Microsoft.
So a company’s success or failure is not preordained. Its destiny is not merely a function of the industry it operates in or the qualifications of its rank and file staff. A company’s fortunes depend significantly on the way a business is led and managed.
What are the responsibilities of small business leaders and managers?
To tackle this question, let’s work our way up the corporate hierarchy, starting with the functions of a manager and ending with the role of a leader.
I’ll refer here to the demands on a manager working for a small business and heading a team (or department or business unit). They could be the Chief Financial Officer (CFO), Chief Operating Officer (COO), Chief Marketing Officer (CMO), Chief Technology Officer (CTO) or similar.
The key responsibilities of a C-level manager in a small business include the following:
Develop strategies for the team that are consistent with the firm’s top level strategy and which enable the team to reach the targets that the manager has agreed with the CEO.
Hire the right staff to execute the team’s strategy. Making good hiring decisions is one of the most critical tasks a manager has. Hiring mistakes tend to result in a cascade of negative consequences.
Allocate the team’s workload between its staff.
Evaluate the short- and long-term professional development needs of team members. Sign off on appropriate external training and internal coaching and mentoring. Ensuring that new hires go through an effective onboarding process is particularly important.
Set annual performance objectives for team members in the context of the team’s goals and each individual’s development potential.
Evaluate the performance of individuals relative to their objectives. Take decisions about financial or other incentives (basic pay, variable compensation, promotion, job title etc).
Resolve any conflicts with or between team members. Investigate and handle staff complaints. Deal with ‘problem’ staff and staff misconduct, including warnings and dismissals. Be alert to risks related to potential claims against the firm (e.g., discrimination, unfair dismissal) and mitigate these. Promote employee health and wellbeing and monitor levels of absence due to sickness.
Identify key business risks that the team can influence and develop mitigation strategies.
The main responsibilities of a small business leader (in this case the CEO) partly overlap with those of managers but in other ways are distinct. They include the following:
Develop a guiding long-term vision for the business.
Identify and communicate the values by which the company will operate. Create and enforce the right culture. Lead by personal example with respect to values and culture.
Set appropriate medium- and long-term objectives for the firm and design an effective set of firm-level strategies to achieve them. Being an effective business strategist is a key responsibility of a CEO. It can pay to take specialist outside advice from a small business consultant.
Set overall objectives for each team in the context of wider firm goals.
Hire managers with the right professional skills and personal qualities. As for managers, it’s critical for the CEO to take good decisions when hiring the senior executive team.
Foster constructive debate within the senior management team about the key opportunities and risks facing the business. Generate enough friction between executives to avoid group think without damaging good working relationships.
Guide and coach the members of the senior management team. Help them to develop their higher level skills.
Inspire the firm’s employees, win their loyalty and motivate them to do their best work. These are key responsibilities of the whole management team but they rest first and foremost with the CEO. This is especially true in a small business where the CEO interacts with staff every day.
Identify key firm-level business risks and develop mitigation strategies.
Evaluate the performance of managers relative to their objectives and take decisions about financial or other incentives (basic pay, variable compensation, promotion, job title etc).
To sum it up, the dividing line between the responsibilities and skills of a business leader and a manager isn’t clear and sharp — there are plenty of overlaps:
Both must guard against doing day to day work themselves and focus instead on guiding and supporting others to do that work. Both must attend to some of the same key functions, such as contributing to strategy development, hiring the right people and developing the skills of their direct reports.
On the other hand, a leader’s role is even more hands off than a manager’s. A CEO should avoid getting dragged into the operational details of the business. Only by retaining a high level perspective will the CEO be able to give enough attention to the big issues that will deliver success for the business.
When a business is still at the startup stage, the CEO will usually need to carry out many managerial functions themselves. But as the business grows and it becomes possible to put a management team in place, the CEO must learn to step back and delegate.
What skills are needed to excel at small business leadership or small business management?
What technical skills and personal qualities do you need for success as a small business manager or leader? I have compiled an ideal leadership skills list below.
Whether you are in a leadership or a managerial role, the skills you need are broadly similar, although their relative importance may change as you move up the corporate ladder. The main aptitudes you need include the following:
Good organisational skills, including the ability to prioritise effectively.
Sound judgment when taking decisions, including a capacity for analytical thought and a temperament that is not excessively emotional or impulsive.
Decisiveness — the ability to take tough decisions when they are needed without procrastinating, even when (as is often the case) decisions must be taken in circumstances of uncertainty.
An appropriate level of self-confidence.
An open mind that is receptive to new ideas and a willingness to change course if new facts or changed circumstances call for it.
Personal charisma — an important contributor to inspiring and motivating others.
Creativity and imagination — the ability to find solutions to apparently intractable challenges.
Communication skills — the ability to communicate clearly and firmly but also with tact and sensitivity. Effective communication also requires good listening skills. Misunderstandings don’t only arise when a speaker expresses themselves poorly, but also when a listener fails to listen attentively. Written communication skills (both writing and reading) are as important as verbal.
Emotional intelligence. Different people hold to different values and are motivated by different incentives. A talent for understanding what makes others tick and calibrating one’s own behaviour in response is an important skill.
The ability to trust others and to delegate.
Personal integrity.
It’s a long and demanding list! Few of us command all of these skills and aptitudes. For that reason, it’s important to have enough self-awareness to diagnose your own weak points. You can then make sure that your top management team contains executives whose strengths compensate for any blind spots you may have.
Of course, some of the above skills are essential. If you lack strong analytical skills, by all means lean on a strategically strong CFO. But it’s hard to think that someone can be a successful business leader without integrity — you can’t outsource that to someone in a next door office.
What role does personality play in business leadership and management?
How does personality come into play?
We’re all different. Some of us are natural optimists while others have a more sceptical mindset. Some of us are more gregarious, others more private. Some are decisive, others vacillate.
But is there a single ‘leadership personality’?
Over the years, experts have developed many methods that claim to organise human personalities into types, the better to explain our motivation and behaviour. Examples include the following:
The Myers-Briggs system [ii] is based on four pairs of characteristics that give rise to 16 potential combinations and personality types. These relate to the way we direct and receive energy (Extraversion vs Introversion), take in information (Sensing vs Intuition), come to conclusions (Thinking vs Feeling), and approach the outside world (Judging vs Perceiving).
The EQ test [iii] is a test based on Daniel Goleman’s four quadrants of emotional intelligence: self-awareness, self-management, social awareness and relationship management.
True Colors [iv] is a temperament and personality typing and identification system. It uses colours — Orange, Gold, Green and Blue — to differentiate four primary personality types.
Plenty of companies spend a lot of money on tools like these to analyse the personalities of their managers and staff. They presumably find the results useful. But it’s unlikely they’re trying to spot staff who have a magic ‘leadership personality’.
That’s because good business leadership is not about your personality, but how you act. For example, it’s about how you form judgments and take decisions. It’s about how you interact with other people to inspire them to do their best work in pursuit of your goals.
Successful leaders are driven by the needs of their business — they don’t allow their behaviour to be dominated by their own personality traits or emotions.
If that is so, people with a range of different personality types should be able to succeed as business leaders.
That doesn’t mean that personality typing exercises have no value. Rather, these tests may enable aspiring business managers and leaders to develop greater awareness of their own personality traits (e.g. by diagnosing overconfidence or a deficit of emotional empathy). In so doing, they may help executives understand how they should seek to develop and grow personally in order to be able to lead more effectively.
Can leadership and management skills be learned?
So if the capability to be a good leader or manager is not itself a personality trait, but more a set of skills, can anyone learn to be one? Can you become a good leader or manager through practice?
By the time they reach adulthood, some people clearly demonstrate greater talent for leadership than others. But by observation, few people start their working life with a complete set of leadership skills in place.
That suggests that any of us who aspire to excel at small business leadership or small business management will need to develop new skills that we don’t already possess. And if it weren’t possible to learn leadership or management skills, MBA programmes probably wouldn’t be as popular or as expensive as they are. Nor would MBA graduates occupy as many business leadership positions as they do.
So while there has always been a healthy debate about whether leadership ability is innate or can be learned, it seems sensible to believe that many of us could learn to be better leaders than we are.
Of course, learning any demanding skill requires a lot of effort. Malcolm Gladwell has famously argued [v] that it takes 10,000 hours of intensive practice to master complex skills.
Whether you can learn to lead effectively in 10,000 hours or not is hard to know. But the positive conclusion is that many of us can probably develop good leadership skills, provided we are willing to put in the effort.
[i] According to data from Morningstar (as at 14 September 2023). [ii] The Myers-Briggs system is offered by The Myers-Briggs Foundation – see https://www.myersbriggs.org/ for more details). [iii] The EQ test is offered by the Global Leadership Foundation – see https://www.g-l-f.org/ for more details. [iv] The True Colors personality assessment is offered by True Colors International – see https://www.truecolorsintl.com/ for more details. [v] Gladwell, M. (2009) Outliers: The Story of Success. London, Penguin Books Ltd. For Malcolm Gladwell’s profile and more about his books and other work, see https://www.gladwellbooks.com/ .
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