Does leadership help the bottom line?

From the transformational leadership research conducted in
the 1980s and 1990s, we know that effective leadership consistently has positive impact on number of financial and other measures of organisational performance. Correlations of 0.30 or more have been found consistently.
Transformational leadership represents effective leadership. It is about transforming the hearts and minds of followers to higher levels of motivation and performance.
It contrasts with transactional leadership, which emphasises the enactment of transactions and contracts with followers to reach specified and agreed levels of performance, and emphasises the corrections of deviations from standard levels of performance.
Managers need to be transactional, but those who are transformational as well are the most effective.

Leadership as competitive advantage
We also know that leadership is source of sustained competitive advantage. Leadership is long-term investment in the future, not quick-fix for the balance sheet. And, because the investment is long-term, the advantages are also long-term.
Figure 1 helps to represent the relationship between leadership and the bottom-line.
It shows that leadership has positive impact on the bottom line of organisational output.
But it’s not direct impact.
Leadership has an immediate effect on the social psychology of the workforce. It improves the motivation, perceptions, attributions, commitment, persistence, understanding, organisational citizenship, integrity and satisfaction of the workforce.
Improvements in these psychological outcomes improve the behaviours and performance of the workforce, which, in turn have positive impact on the bottomline.
Figure 1 emphasises that the organisation must meet its intermediate social outcome goals (ie social psychology of followers) as well as the bottom-line output goals.
This is for three reasons. First, meeting the intermediate goals indicates that effective leadership exists, and we know that leadership works. Second, the intermediate social outcome goals are important in their own right. They are reflection of the social capital of the organisation and of the community. Third, meeting the intermediate goals helps to ensure the achievement of the bottom-line goals further down the line.
When managers concentrate on the bottom-line and not on leadership or the social psychology of the workers, we find that outputs might be achieved because of short-term and unsustainable actions, and in spite of the more sustainable benefits of leadership. For example, many organisations have pursued restructuring and downsizing strategies that have an immediate and quantifiable impact on the accounting bottom-line. However, the loss incurred to the social capital of the organisation has often outweighed any short-term financial gain. It is akin to an athlete taking painkillers — the performance is achieved short-term, but the real problems are merely disguised. The athlete knows that sustained long-term advantage will accrue through longer-term investment in treatment for the injury so that career might be salvaged and lengthened.

Survey findings
We found that increased demonstration of leadership has strong impact on:
* the motivation of followers (0.76 correlation)
* the belief in the future management capability of leaders (0.56 correlation)
* the degree to which followers believe their leader has integrity (0.52 correlation) and correlates strongly (0.45) with the presence of strong, positive, productive organisational culture.
In line with previous findings about the effectiveness of transformational leadership, leadership has smaller impact on perceptions that the organisation achieves its bottom-line (0.34). This is because the bottom-line is affected by things other than leadership, as stated above.
However, the relationship between leadership and the bottom-line is still quite considerable.
The findings from the 1999 New Zealand Leadership Survey are consistent with previous findings from around the world about the effectiveness of transformational leadership, and support the process indicated in Figure 1.

Impact of the climate of work
Trends in restructuring, reform, and downsizing have generated number of outcomes in the perceptions, attitude, motivation, commitment and behaviour of workers. When assessed collectively, these outcomes amount to an increased sense of job insecurity and worker alienation from within large sections of the workforce. In summary therefore, the climate of work is largely characterised by selfish, cynical, short-term transactional, contractual attitude to social networks and relationships. There is less time for the development of social networks. There is less discretionary time at work to engage in ‘organisational citizenship’ behaviours. There is less ‘connectedness’. There is less trust. Therefore, there is less social capital.
Leadership has role to play in reversing these negative attitudes. On the other hand, these negative attitudes have the impact of negating much genuine leadership throughout organisations. This paradox is challenge for those in leadership positions. It is also challenge for organisational systems and processes to maintain positive social outcomes in the face of rising job insecurity and worker alienation. Whichever way you look at it, we know that as the demonstration of leadership increases, the bottom line improves.
An HRM challenge to respond to this climate of work is to develop (including train), select, design jobs, manage careers, according to leadership criteria.

Implications for practice
To build leadership competencies within individuals, in New Zealand we need to concentrate on increasing transformational leadership capabilities, in this order:
Top developmental priority: Intellectual Stimulation – Leaders stimulate and encourage innovation, creativity, and questioning of old assumptions. New ideas are welcomed and there should be no fear of mistakes or going against the grain.
2nd priority: Individualised Consideration – Attention is paid to each individual’s needs and differences. People are developed accordingly. Effective listening, developing of potential and personalised interaction are all components of this leadership style.
3rd priority: Idealised Influence – Leaders are seen as respected, trusted role models, they can be counted on, and demonstrate high moral and ethical standards.
4th priority: Inspirational Motivation — Leader’s behaviour motivates and inspires followers, team spirit is aroused, enthusiasm and optimism is displayed and both leaders and followers create positive visions of the future.
Source: Bass, 1998
Bass and Avolio’s transformational leadership model is the most rigorously researched explanation of effective leadership in the world today. It is widely reported in the public domain literature. It has been translated into developmental intervention, the Full Range Leadership Development (FRLD) programme, which in turn has been shown in New Zealand to effectively generate increased leadership outcomes.
The next most researched and proven model of leadership is Kouzes and Posner’s model, which is operationalised with the Leadership Practices Inventory (LPI).
Bass and Avolio’s model is best at incorporating the ‘management’ component of the leadership challenge effectively. With the Kouzes and Posner model, the ‘management’ issue is implicit more than explicit. Both models are effective in generating the desired leadership outcomes that this research has examined in New Zealand. Both models utilise validated leadership measures with which individuals, teams and cultures should be profiled as the precursor to any developmental intervention.

Success in training leadership
Bass and Avolio have two-stage Full Range Leadership Development programme to generate transformational leadership competencies. This involves:
1. Pre-hoc testing of lead

Visited 16 times, 1 visit(s) today

A focus on culture

Rabobank’s 520-plus New Zealand employees work from 27 locations – places like Ashburton, Pukekohe and Feilding and from a purpose-built head office in Hamilton. Its employees are proud of the

Read More »
Close Search Window