Stephen Archer says there are two types of confidence governing business leadership behavior – external and internal. In light of the Eurozone crisis and the stagnant US economy, Stephen says we are seeing repeated evidence of general weak external confidence in the economy but also, and more serious weakening self confidence on the part of business leaders and their leadership teams.

What has emerged over the past year with great clarity is that there are two forms of confidence governing business leadership behaviour – external and internal. Usually, it is external confidence that is referenced – where leadership takes a view on the state of the business and economic environment – including the apparent or perceived confidence of others (consumers and businesses) and makes decisions according to how they feel.

This type of confidence will influence new product development, decisions about expansion, investments, marketing, debt or financing. This is where caution creeps in, though ‘gut feel’ or from economic data. Business leaders are quite used to the normal economic cycles of economic recession and have largely learnt to weather the conditions and batten the hatches somewhat as the mood or economic indicators dictate.

But this recession and downturn is very different. No one has ever seen anything of this nature though the actual recessions in the UK, EU and US have not been dramatic, they have however been sustained, unpredictable and fraught with new types of doubts derived from credit and liquidity issues at the bank and sovereign level. The fuel crisis of the 1970s was a shock and the depression of the 1930s was far worse.

But this time we are seeing chancellors looking and sounding scared; Ben Bernanke is sounding unsure and in short, no one has the answers to solve the financial crisis that has been unfolding in many phases since mid 2007.

The crash of late 2008 led to the recession of 2009 and the usual drop in external confidence. But therein lies a huge paradox, it partly speaks to the lag effect but throughout 2008 the financial crisis was very serious though it never reached into the commercial or consumer economy in a significant way. 2010 looked like being the recovery year and enough people believed it for external confidence to rise and help the recovery. Then it all slowed down again in late 2010 and growth in the western world has been flat ever since. In part, this is due to the confidence knock that the Eurozone crisis has caused as well as the stagnant US economy. In truth, the recovery was always fragile, like the confidence which was also fragile during 2010.

Now – we are seeing repeated evidence not only of a general weak external confidence in the economy but more seriously a weakening self confidence on the part of business leaders and their leadership teams.

Understandably perhaps since the scale and nature of the downturn does not have precedent and no one is predicting the time of full global recovery. Financial and economic commentators are generally gloomy and the Governor of the Bank of England has been unwisely pessimistic in his pronouncements.

This has led to a loss of external and internal confidence. This is manifested in terms of leaders deferring even decisions that have little or no cost implications. Business leaders are sitting on their hands – as if hoping that the storm will pass and that they will be able to ride on the coat tails of the sunnier economic climes to come. Many business are suffering and leaders simply do not know what to do or when and their self confidence has taken a knock. There are two clear manifestations of this:
Firstly, UK and US corporate are sitting on more cash in their balance sheets than at any time in history. In the US case, the figure is $20 trillion. That’s 50% more than the staggering US debt of $14.3 trillion. No wonder Obama is imploring businesses to invest and hire.

This is a remarkable and unwelcome state of affairs. Corporates are taking the view that cash is the safest insurance against any further economic shocks. This is to damage the economic cycle. The larger businesses need to be investing to support the collectively larger small businesses. The wider economy is lacking the growth opportunity that it would otherwise have as a result.

Innovative and bold incentives as well as political pressure will be needed to break this cycle before it causes long term damage.

The second manifestation is that M&As are occurring at a surprisingly high level given the conditions. Company cash is being used on a higher number of deals than the economic conditions would suggest would be likely. Why? Again, it’s a form of protectionism and with cash can come growth through acquisition.

However, acquisitions do not add value to the economy; they usually lead to shrinkage as the combined resources are consolidated. M&As rarely lead to net aggregate growth. They do however, make CEOs look good and shareholders get an extra hope kick. Investment banks are of course a key driver in this behaviour – they are doing very well from M&As.

Meanwhile, innovation, organic growth drivers and performance progress resulting from good leadership are taking a back seat. This will lead to reduced global competitiveness and a sapping of the enterprise culture.

Clear thinking is needed on this and it is incumbent on boards and shareholders to wake up to the unfolding disaster. The problem is currently being ignored – mainly because very few people recognise it.

The engagement of management is vital if companies are to increase performance and develop externally focused enterprise initiatives. Leadership must regain its grip on its own raison d’etre as well as the purpose of business.

Since the recession, UK companies are hungrier than ever for strong leadership. Now even the good leadership is being challenged; too few examples exist of leadership courage.

In February, Henley Business School reported that developing leadership skills was a top priority for 2500 HR and learning professionals this year. But although leadership seems to be the holy grail of private and public sector organisations today and pursued incessantly, it remains persistently elusive for many organisations.

Where are they going wrong and how can they adapt themselves, their management and teams in order to foster a culture that cultivates leaders capable of making courageous yet low risk decisions?

The answers lie in: Focus, simplification, structure for organic growth; balancing the short term and long term demands of shareholders and stakeholders; respect for the wisdom of your own people.