Is This a Level 5 Leader?

Before my second year as a teacher, our principal had us read Jim Collins' Good to Great, a book about the key ingredients to business success. The lessons from the book helped me become a better teacher and continue to pay dividends as an investor.

Leadership levels
Collins and his team spent five years looking for what helped companies excel. Their most important finding, for the purposes of this article, was the difference between "Level 4" and "Level 5" leaders. Here's a simplified breakdown of what I took from their discussion of the two groups and what sets Level 5 leaders apart.

A hidden risk
Level 4 leaders are often very successful in their own right. I own shares in a number of companies with Level 4 leaders, but I'm also mindful of something that many investors overlook.

Businesses with Level 4 leaders have a hidden risk: Things tend to fall apart when the leader leaves. Success often proves to have been too dependent upon that leader's charisma and ideas alone. For this reason, Fools always want to be on the lookout for stocks with Level 5 leaders at the helm who can take their companies to the next level.

Examples of Level 5 leaders
Berkshire Hathaway's (NYSE: BRK-B) Warren Buffett is a timeless Level 5 example. He gives autonomy and praise to those surrounding him. He also recently put in place a succession plan. And in 2008, although Berkshire stock lost 32% of its value, it still beat the S&P 500. Instead of spinning this as a victory, Buffett shouldered responsibility, saying, "I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action."

Shareholders in steel refiner Nucor (NYSE: NUE) should also take solace in the fact that they have a Level 5 leader at the helm. CEO Dan DiMicco has a firm grasp on reality, facing the brutal facts of an economic downturn instead of being a mindless cheerleader for his industry. The downturn, however, hasn't changed DiMicco's view that the most important people are the employees who do the day-to-day work, not the executives in the front office. Executives are the first to take a pay cut during a downturn, and because of the company's "pain-sharing" plan, the company claims that not a single employee has ever been laid off because of not having enough work.

Level 4 leaders
As I see it, there's no better example of Level 4 leadership than Strayer (Nasdaq: STRA) CEO Robert Silberman. Yes, the company enjoyed rapid expansion since Silberman took over as CEO in March 2001, and the stock jumped 650% during his first nine years at the helm.

However, Silberman's true colors have recently been on full display. The U.S. Department of Education has for-profit schools under the microscope, citing low graduation rates and high federal student-loan defaults as concerns. During his most recent conference call, instead of dealing with these concerns directly, Silberman looked out his window. He blamed the 20% drop in enrollment on bad press. I don't think Buffett or DiMicco would ever pass the buck like this.

Joining Silberman is Netflix (Nasdaq: NFLX) CEO Reed Hastings. Netflix is one of my most successful holdings, appreciating in value more than 40% annually since going public. Hastings has executed fabulously, expanding into ever more homes while forcing one-time market leader Blockbuster into bankruptcy.

However, there are two big ticks against Hastings. First, he has espoused a degree of unhealthy hubris in responding to his detractors recently. Furthermore, Netflix is in a very critical stage for growth: It needs to balance plans for international expansion against bandwidth issues and rising prices for content. I have little reason to believe that if Hastings were to disappear tomorrow, there would be a successor lined up who could navigate all of the potential pitfalls.

How would Steve Jobs rate?
And this brings us to Apple (Nasdaq: AAPL) CEO Steve Jobs. His recent departure has Apple's future literally depending on whether Jobs has produced enduring greatness. I want to go through all the above points and give my view of where Jobs stands.

1. Perception: No company's image is more closely tied to its CEO than Jobs; he definitely holds rock-star status (Level 4).
2. Ego: If succession were truly important to Jobs, he should be turning over the reins now, as this is his third medical leave in the past decade (Level 4).
3. Failure: Jobs deserves a lot of credit here. He has talked openly and honestly about what he learned from his own ousting back in the 1980s (Level 5).
4. Success: Jobs only sparsely appears during conference calls these days and has associates represent the company at some product launches (Level 5).
5. Managerial Approach: This is the most troubling area. Jobs is said to be the ultimate micromanager, having veto power on everything from product launches to daily press releases. (Level 4).

Ironically, Collins inadvertently made the case for Jobs' Level 4 status while trying to praise him. In a 2009 interview, Collins stated, "Steve Jobs is an industrial Beethoven. I think that ... the iPhone is the Seventh Symphony." Taking the comparison a step further, the musical genius of Beethoven wasn't something that could be easily replaced or replicated. The same could be said of Jobs.

Remember, in the end, there's nothing wrong with investing in companies that have irreplaceable CEOs. What's needed is a balanced view of the risk such a CEO presents.

Have any opinions on Steve Jobs or any other CEO? Share your thoughts below.