icr doesleadershipstyle_062011

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2

Leadership, the process of inspiring others to

work together to achieve a common goal, is an

inevitable element of group dynamics. Yet, the

relationship between a leader’s participation and

his or her effectiveness in accomplishing goals is

complex. Leadership style , a term that has been

defined in numerous ways, most commonly refers

to the characteristic manner in which an individual

leads others. Researchers have suggested that a

participation theory of leadership (Vroom, 1959),

which assumes that a group’s performance

depends in part on the extent to which leadersshare or retain their decision-making authority,

is one way to begin to assess leadership effec-

tiveness. Early conceptualizations categorized

leadership styles as autocratic, democratic, or

laissez-faire (White and Lippitt, 1960). Assessing

leadership styles is challenging. We know that

leaders influence their groups, but the question

remains of why some groups prosper when

guided by good leaders (Bass, 1990).

Vanguard decided to explore this question by

examining whether leadership style can dramaticallyalter the eectiveness o investment committee

decision-making. In 2010, we conducted a survey—

titled “Investment Committees: The Dynamics o

Leadership Styles”—to determine the eects o a

leader’s participation in decision-making. We received

213 responses, rom a range o client types (deined

beneit [DB], 40; deined contribution [DC], 71; and

endowment and oundations [E&F], 102) and portolio

asset levels (the largest asset level being $250

million). (See the appendix or urther details on the

survey sample.)

Leadership style: ‘Democratic’

most prevalent

Vanguard’s survey asked respondents to characterize

their leadership climate as autocratic, democratic, or

laissez-aire; hereater, their responses are reerred

to as the “stated” leadership style. We then asked

respondents which style they would have preferred ,

i given the choice. We also asked several “derived”

(i.e., with embedded assumptions) leadership style

questions to veriy the authenticity o the stated

leadership style (discussed more in next section).

The shaded text box on page 3 provides an overview

o the three leadership styles and also shows thebreakdown o the 213 responding committees by

“stated” and “preerred” types.

Results o this survey reinorce the presumption that there will always be powerul situational

determinants that drive leadership eectiveness. This reality should serve as a reminder to all

investment committee leaders to ocus on what they can control. We suggest that a good

place to begin is with Vanguard’s view o investment committee best practices (Gordon and

LaBarge, 2010); namely: have a clear understanding o the portolio’s purpose; create acharter that outlines members’ responsibilities; adopt a clear investment strategy; and ollow

a straightorward process or hiring and terminating managers. Encouraging healthy debate

and avoiding common behavioral biases within group decision-making can also do more to

pave the way or long-term success than ocusing on uncontrollable actors such as short-

term perormance.



Source: Vanguard.

Autocratic

Leader seeks to have the most

authority and control in decision-

making. Leader seeks to retain

responsibility rather than use

complete delegation.

Democratic

Leader seeks consultation and

welcomes feedback on all major

issues and decisions. Leader

effectively assigns tasks to commit-

tee members and gives them full

control and responsibility.

Laissez-faire (hands-off)

Leader provides minimal direction.

All authority is given to committee

members, and they must determine

goals, make decisions, and resolve

problems on their own.

Stated autocratic

12 survey respondents (6%)

Stated democratic


Stated laissez-faire


In Vanguard’s ‘Leadership Styles’ survey, investment committees were given the

following definitions of three leadership styles.

Respondents were asked to characterize their current leadership climate (”stated”)

and were then asked which style they would have preferred:

Autocratic Democratic Laissez-faire

Some potential advantages and disadvantages of each leadership style:

Identifying the style of committee leadership

Potential advantages

• Faster decision-making.

• Increased productivity.• Reduced stress, because of

increased control.

Potential disadvantages

• Deskilled, demotivated, and less

confident group.

• Micro-management.

• Less-creative decision-making.

• Creative thinking.

• Fewer grave mistakes.• Cohesive team.

• Lengthy decision-making.

• Certain individuals may dominate.

• Creative thinking.

• Flexibility.• Originality.

• Allows for an emergent leader.

• Frustration.

• Poor quality of outcomes.

• Disorganization.

• Limited personal growth.

Autocratic Democratic Laissez-faireEach box represents a respondent, and color denotes a preference :



4

By ar the most common “stated” leadership style

was democratic (80%), ollowed by laissez-aire

(14%) and autocratic (6%), with responses showing

little dierence by client type (DB, DC, or E&F). The

data or preerred styles showed a more revealing

story, however. The majority o committees, nomatter which stated leadership style, would have

preerred a democratic leadership style (see blue

boxes on page 3).

A closer look at the laissez-aire committees

preerring democratic leadership revealed that

this group did have a worse impression o their

committees’ behavior. For instance, as discussed

later in this paper, respondents reported using ewer

investment committee best practices as identiied in

the survey; at the same time, they perceived group

behavioral bias to be higher. These indings were

revealing, since a primary unction o a committee

leader is to ensure that the decision-making

processes are outlined and that rules are established

and enorced. Thereore, leaders—particularly those

that are “hands-o”—should be aware that a lack o

structure can actually be disruptive. (Note that these

results should be interpreted with caution, given the

small sample sizes o the autocratic and laissez-aire

committees in the survey.)

As described earlier, to check the legitimacy o

the stated leadership style, we queried respondents

about their leader’s behavior. As expected, within

each style the answers to the derived questions

were closely aligned with the stated style, no matter

whether the respondent was the chairperson or a

committee member. Figure 1 highlights this, as

shown by the act that the derived mean leadership

style bars were generally highest within each stated

style. The results were statistically signiicant or the

stated democratic responses. For example, the

derived democratic mean was 3.5 or respondents

who stated they were democratic, compared withthe derived autocratic mean o 1.7 and derived

laissez-aire mean o 2.8.

The laissez-aire derived leadership style was less

clear. Respondents who indicated that their stated

leadership style was laissez-aire gave the same

answers or the derived laissez-aire and democratic

questions (see Figure 1). This could indicate that

the leadership style o the stated laissez-aire

Figure 1. Respondents’ ‘stated’ and ‘derived’

leadership styles were closely aligned

The survey asked respondents how often the committee leader

displayed a series of behaviors. We assigned 1 point for an

“often or always” response; 0 points for “occasionally”; and –1

for “seldom or never.” We totaled the points for each leadership

style (for a maximum of 4 points per style) per respondent. The

average mean for each derived style is represented by the

height of the bars; the higher the bar, the higher the relation-

ship between stated and derived styles.

Derived autocratic

Derived democratic

Derived laissez-faire

0

1

2

3

4

Stated laissez-faireStated democraticStated autocratic

1.7

0.60.5

1.1

2.8 2.8

1.6

3.5

2.7

M e a n

o f r e s p o n s e s

Notes: An example of a derived “autocratic” description posed to respondents was

“closely monitors member’s participation.” A derived “democratic” description was

“seeks to create an environment where the members take ownership of an issue.”A derived “laissez-faire” description was “allows members to determine what

needs to be done and how to do it.”

Source: Vanguard.



respondents was actually more democratic than they

believed. Finally, the derived autocratic mean o the

stated autocratic groups was low (see the igure),

suggesting that respondents answered “occasionally”

or “seldom or never” to the autocratic derived

question. It is also noteworthy or this group that thederived democratic and laissez-aire means were low,

suggesting that the leaders may use a mixture o

leadership styles.

In groups, there can either be designated or

emergent leaders. When there is no designated

leader, an opportunity can present itsel or a natural

leader to emerge. Research has shown that there

is more “leadership behavior” when there is a

designated leader as opposed to an emergent leader

(Borg, 1957). In our survey, 87% o committees

polled had a designated leader. As expected, the

greater the leader’s level o participation, the more

likely it was that there was a designated leader. All

o the autocratic leadership styles had a designated

leader, compared with 88% o the democratic styles

and 73% o the laissez-aire leadership structures.

We also ound that E&F clients had the most

designated leaders (95%), compared with DB (83%)

and DC (77%). The higher rate o designated E&F

leaders could relate to the act that 95% were

also volunteers.

In our survey, the stated designated democratic

leaders received statistically signiicant higher

rates o satisaction rom committee members

(see Figure 2): 99% o democratic committees

reported being “oten or always” satisied,

compared with laissez-aire (84%) and autocratic

(78%) styles.

The next three sections o this paper—addressing

best practices, selection and evaluation o managers,

and group decision-making, respectively—point to

the act that leaders o investment committeescan achieve similar results no matter the level o

participation in committee processes. Surprisingly,

whether a leader employed an autocratic, democratic,

or laissez-aire style did not signiicantly alter

the results.

To what degree are members satisfied with the

leader’s performance?

Source: Vanguard.

Figure 2. Satisfaction ratings of stated leadership

style by committee member respondents

0

20

40

60

80

100%

P e r c e n t a g e

o f r e s p o n d e n t s

Seldom/ occasionally

Often Always

Autocratic

Democratic

Laissez-faire

22%

1%

16%

67%

53%58%

11%

46%

26%



6

Investment committee best practices

We recommend that by ollowing a series o

Vanguard best practices, investment committees

can improve their productivity and eectiveness.

We surveyed respondents on how requently they

adhered to certain best practices and ound that the

results did not vary signiicantly by leadership style

or portolio asset size. Also, best practices were used

most o the time. For instance, more than 90% othe time, on average, committees reviewed the

asset allocation at least annually, ollowed proper

documentation procedures, conducted regular

meetings, and used processes that were in line with

their policy statements. Two areas o opportunity or

improvement included encouraging continuing

education relevant to investments (respondents

reported engaging in this activity just 35% o the

time, on average) and regularly assessing ees

(reportedly done 77% o the time) (see Figure 3).

The one area in which there was statistical

signiicance across leadership styles pertained

to reviewing the asset allocation. Just 76% o

committees with a laissez-aire leadership style

“always” reviewed the asset allocations, compared

with 92% or committees with a democratic style.

Selecting and evaluating a fund manager

Investment committees tend to hire at least one

outside advisor to manage their assets, with a

majority hiring multiple managers. In our survey,

the average number o managers per investment

committee was ten. We asked respondents to rank

the ollowing seven actors in order o importance:

integrity o the irm, portolio perormance, depth and

skill o managers, investment philosophy, portolio

construction consistency/conviction, investment

process, and cost (see Figure 4). Generally, there

was little dierence in respondents’ ranking o

criteria when comparing leadership style, clienttype, or whether the respondent was a chairperson

or member.

Figure 3. Percentage of respondents whose committees used best practices

Often Always

97%

Encourages additional education or training for members on relevantinvestment topics

Regularly assesses whether portfolio fees are reasonable relative toperformance expectations

Reviews the investment policy statement at least annually

Assesses portfolio risk at least annually

Ensures that the process used to operate the portfolio conforms tocommittee documents such as the investment policy statement

Conducts regular meetings on all aspects of the portfolio, bothadministrative and investment-related

Documents meeting minutes, attendance, member contributions,reasons for manager changes

Reviews asset allocation at least annually

92%

91%

90%

88%

82%

77%

35%

Source: Vanguard.



The survey’s results reinorced that there is an

opportunity to educate investment committees on

the importance o reducing costs and the ineective

reliance on past perormance when evaluating

managers. On average, as Figure 4 shows, just 2%

o respondents ranked cost as the most important

criterion, and 15% ranked it as second. In particular,

DC clients (22%) placed more emphasis on cost

(ranking it irst or second) than DB (12%) or E&F

(14%) clients. Over time, in Vanguard’s view, the

inability to control manager ees and expenses can

impair a committee’s, or participant’s, ability to meet

a portolio’s goals.

Our survey results diered slightly rom those o a

previous Vanguard survey that evaluated managers,in which perormance was rated irst out o ive key

actors inluencing investment manager turnover

(e.g., LaBarge, 2010). In the LaBarge study, cost was

rated the third most important actor. Surprisingly, in

our survey, respondents reported that ees were a

relatively less important actor (see Figure 4).

O note, the level o expertise o the leader

(Figure 5) did aect respondents’ ranking o criteria

or evaluating/selecting managers. In particular, a

lower level o expertise in all o the ields—whether

investment, inance, or business—meant that

perormance was rated more important. On the other

hand, higher levels o a particular type o experience

did aect which actor was dominantly ranked. For

example, higher investment experience correlated

with greater emphasis on the depth and skill o the

managers, but less ocus on a irm’s integrity. Higher

general inance experience ranked investment

philosophy higher, but cost became less so. More

general business experience was aligned with more

importance given to the irm’s integrity, but less

emphasis on the investment process.

Figure 4. Respondents’ ranking of criteria forselecting/evaluating manager(s)

Percentage ranked first and second in importance

33%

Cost

Note: Some percentages may not sum to 100 because of rounding.

Source: Vanguard.

Investment process

Portfolio constructionconsistency/conviction

Investment philosophy

Depth and skill of manager(s)

Performance

Integrity of the firm

First Second

12%

25%18%

16%23%

11%

17%

8%7%

4%8%

2%

15%

Leaders’ level of expertise

Figure 5. Committee leaders’ reported levelof expertise

0

20

40

60

80

100%

5%

High

Medium

None/low

22%

72%

52%

35%

12%

32%

15%

53%

Investment

experience

Finance

experience

Business

experience

Note: Some percentages may not sum to 100 because of rounding.

Source: Vanguard.



8

Group decision-making behavior

Groups, by their nature, make decisions that are

susceptible to behavioral and psychological biases.

These biases can undermine their decisions and have

negative consequences or committees (Mottola and

Utkus, 2009). Conventional wisdom might suggest

that when members are more satisied with the

leadership, their committees may exhibit less bias.

This was not the case with our survey results,

however. Although we ound that democratic leaders

enjoyed higher levels o satisaction, there was not a

statistically signiicant relationship between this

leadership style and a lower level o bias in group

decision-making.1

Our results indicated that the level o bias was

generally low (see Figure 6), as was the case inVanguard’s previous research (Stockton, 2009). To

gauge the level o bias—such as overconidence

or group think—we asked survey participants to

respond to several statements (see the igure).

The greatest amount o reported bias was that o

“shared-inormation bias” (the tendency to discuss

only the inormation currently available to the team),

at 30%. O particular interest was the dierence in

the level o bias reported by the chairperson versus

committee members. In all cases, members reported

approximately 10% more bias occurring “oten or

always.” Aside rom querying about bias, we alsoasked i the leader inspired extra eort among

members. This was the only area in which leaders

indicated the perormance occurred more requently

than did members; chairpersons reported that the

leader “oten or always” (53%) inspired extra eort,

compared with 39% or members.

The level o assets had a signiicant impact onthe amount o social loaing. For committees with

more than $250 million in assets, more social loaing

was reported (24% reporting “oten or always”),

compared with committees with less than $50

million (just 10% reporting social loaing “oten or

always”).

Figure 6. Group decision-making

Notes: To gauge the degree of bias, we asked survey participants to respond to

several statements:

1. There is a tendency to develop unduly optimistic forecasts of the future.

(Indicator of overconfidence bias .)2. Members are more interested in avoiding conflict and maintaining unanimity

than realistically appraising the various courses of action. (Group think .)

3. There is a tendency for a group to acquire information that confirms the group’s

views and to disregard information that conflicts with the group’s views.

(Confirmation bias .)

4. The committee contains members who do not make meaningful contributions.

(Social loafing .)

5. There is a tendency to discuss only the information that is available to all of the

group’s members before discussion. (Shared-information bias .)

Source: Vanguard.

Overconfidence

30%

Group think

Confirmation bias

Social loafing

Shared-information bias

16%

10%

10%

6%

1 The small sample size of autocratic and laissez-faire style respondents affected the statistical significance of our findings.



Use of external consultants

Consultants can be a key source o inormation

or investment committees ocused on portolio

construction, investment management, research,

iduciary and compliance matters, and data analysis.

In this study, nearly 80%2

o the investmentcommittees surveyed employed an external

consultant, and 41% o those indicated that the

consultant had a high degree o involvement

(see Figure 7). We did ind that consultant use

was dependent upon the leadership style and

asset size, but that it did not vary by client type.

Surprisingly, consultant use did not dramatically

aect the degree to which best practices

were ollowed.

Committees with democratic and laissez-aire

leadership styles were more inclined to hire aconsultant (80% and 77%, respectively), versus

50% o committees with autocratic leadership styles.

Figure 7. Respondents’ use of external consultants

and their involvement level

Source: Vanguard.

Level of involvementUse of external consultants

41%

25%8%

4%

High

MediumLow

None

78%

22%

Yes

No

Caution should be used in drawing conclusions,

however, given both the small number o aggregate

autocratic respondents (12) and all respondents’

subjective interpretation o low, medium, and high

levels o involvement (see Figure 7). Not surprisingly,

committees with less than $50 million in assets wereless likely to employ a consultant (69%).

Conclusions

Conventional wisdom suggests that leadership

style could dramatically alter the eectiveness o

investment committee decision-making. Our research

ound otherwise, reinorcing the presumption that the

leader, the committee members, and the group

situation are all important considerations. Conse-

quently, we suggest that most successul leaders are

able to adjust their behavior as circumstances dictateto eect positive outcomes.

We did ind that a democratic leadership style was

the most popular and successul o the three types,

i measured by satisaction o the committee

members. However, there was little indication that

committees with democratic leaders achieved

increased productivity or superior behavior among

their members. We do caution committees with

laissez-aire leaders to remain aware o the risk that

a lack o structure can actually be disruptive. We

ound that ailure o a leader to ulill his or her rolesand responsibilities was likely to undermine the

committee’s conidence and ability to make decisions.

Finally, we recommend that investment committees

remain ocused on addressing concerns within their

control, such as implementing best practices or

investment committees, promoting a cohesive and

uniied team, determining speciic roles and responsi-

bilities or members, adhering to the agreed-upon

decision-making process, and regularly assessing ees.

2 See also Vanguard research by Stockton (2009 ), who reported that many institutions hire consultants to assist with investment decisions: 81% of

respondents for nonprofits, 75% of respondents for defined benefit, and 51% for defined contribution reported using an ex ternal consultant.



10

References

Bass, Bernard M., 1990. From Transactional to

Transormational Leadership: Learning to Share

the Vision. Organizational Dynamics 19(3): 19–32.

Borg, Walter R., 1957. The Behavior o Emergent

and Designated Leaders in Situational Tests.

Sociometry (American Sociological Association)

20(2, June): 95–104.

Forsyth, Donelson R., 1999. Group Dynamics .

Belmont, Cali.: Wadsworth Publishing Co.

Gordon, Catherine D., and Karin Peterson LaBarge,

2010. Investment Committees: Vanguard’s View

of Best Practices . Valley Forge, Pa.:

The Vanguard Group.

LaBarge, Karin Peterson, 2010. What Matters Most?

An Analysis of Hire/Fire Decisions . Valley Forge, Pa.:

The Vanguard Group.

Lewin, K., R. Lippitt, and R.K. White. 1939.

Patterns o Aggressive Behavior in Experimentally

Created Social Climates. Journal of Social Psychology

10: 271–301.

Moore, Lori L., and Rick D. Rudd, 2006.

Leadership Styles o Current Extension Leaders.

Journal of Agricultural Education 47(1): 6–7.

Mottola, Gary, and Stephen P. Utkus, 2009.

Group Decision-Making: Implications for Investment Committees . Valley Forge, Pa.: The Vanguard Group.

Stockton, Kimberly A., 2009. Investment

Committee Decision-Maker Study .

Valley Forge, Pa.: The Vanguard Group.

Vroom, Victor H., 1959. Some Personality

Determinants o the Eects o Participation.

Journal of Abnormal and Social Psychology

59(3, Nov.): 322–27.

White, R.K., and R. Lippitt, 1960. Autocracy

and Democracy: An Experimental Inquiry .

New York: Harper & Row.



1

Percentage of respondents, by client type and size of

portfolio assets

$50M–

Client type <$50M $250M >$250M Total

DB 10% 38% 52% 100%

DC 27 38 35 100

E&F 54 29 17 100

Total 37 34 29 100

Note: M = million.

Number of committee members reported by respondents

0–5 46%

6–10 49

11–15 5

Tenure of respondents on the investment committee

0–1 year 3%

2–3 years 22

4–5 years 18

5+ years 57

Age of respondents

40 years or less 7%

41–50 years 27

51–60 years 39

61+ years 27

Respondents’ role on the committee

Chairperson 24%

Member 76

Responses to the question

“Is the committee leader volunteering?”

Yes 79%

No 21

Method of choosing committee leader

Selected by senior management 44%

Elected by other committee members 30

Other 26

Portfolio composition

Active 60%

Index 31

Alternatives (private equity,

hedge unds, commodities) 9

Appendix. Details for ‘Investment Committees: The Dynamics of Leadership Styles’ survey



Vanguard research >

Vanguard Center for Retirement Research

Vanguard Investment Counseling & Research

Vanguard Investment Strategy Group

E-mail > [email protected]

P.O. Box 2600

Valley Forge, PA 19482-2600

© 2011 The Vanguard Group, Inc.

All rights reserved.

Vanguard Marketing Corporation, Distributor.

ICRLSM 062011

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