Analysts need to be taking a far more in-depth view of the leadership potential within organisations before making either writing them off or recommending their stock, new research has suggested.
With the markets still volatile and organisations desperately needing every break they can get, an analysis of analysts by talent management consultancy DDI has concluded the vast majority have a worryingly "myopic" view of leadership.
The survey of 50 analysts from top banks and financial organisations in Europe and the US was carried out at the close of 2009.
There was, it argued, too much focus on past CEO performance and not enough on future leadership, succession and leadership development, resulting too often in what it termed "a catastrophic failure" of leadership.
Too often, when making investment recommendations, analysts failed to look much further than the CEO, made conclusions based on superficial information and rarely examined future organisational leadership strength.
Worryingly, argued DDI, the majority, 36 out of the 50, thought of leadership purely in terms of the CEO and almost never looked beyond this individual's performance in making their recommendations.
Only eight even considered an organisation's talent management or succession planning strategy and none of them felt fully conversant in this area, with one summing up the general attitude by telling the researchers: "I don't spend my time worrying about how companies are fostering their next generation of star managers."
What's more, their analysis was also often based on past and current performance, rarely on what qualities the CEO possessed that might help see the organisation through an unexpected crisis, grow or enter a new market, argued DDI.
Instead, analysts overwhelmingly relied on short-term financial results to judge a CEO's performance.
Moreover, they lacked the insight to judge how well an organisation was preparing its leaders for the future.
While growth rates, shareholder value, an ability to innovate and a clear vision tended to be the main CEO measures used by analysts, growing organisational talent tended to be a measure that was much higher on the CEOs' agenda, said DDI.
The skills of senior managers below board level were only considered by a minority of more senior analysts, it found. In fact, 44 of the 50 analysts polled said this would affect their likelihood to recommend a stock slightly or not at all.
Many analysts did not make the link between processes to ensure there is a steady supply of future leaders and having an effective CEO in place.
And, while analysts recognised that different CEO skills were needed at different times, they tended only to hold a short-term view of the success of the top position.
DDI director Simon Mitchell said: "Investors may risk putting all their proverbial eggs in one leader's basket. With executive turnover at an all time high, the risks to portfolios seem far too high. Even in good times one in three senior executives are likely to fail.
"Analysts in the research tell us that good leadership will be even more important in the future, to help control costs, cope with increasing change and tackle the expected upturn. Yet they rely on blunt instruments and lag measures to assess the CEO.
"Companies that invest in the development of their leaders and CEOs outperform those that do not, yet analysts do not seem to be looking at this. And it's not just about having future CEO candidates available; analysts have little idea if the business is developing leaders at every level to be able to meet present and future business challenges," he added.