TOP MANAGEMENT TEAM DIVERSITY AND PERFORMANCE OF COMMERCIAL BANKS IN KENYA

ANNE WAMBUI MUCHEMI

A THESIS SUBMITTED IN FULFILLMENT OF THE REQUIRE MENT FOR THE AWARD OF THE DEGREE OF DOCTOR OF PHILOSOPHY IN BUSI NESS ADMINISTRATION, SCHOOL OF BUSINESS, UNIVERSITY OF N AIROBI

NOVEMBER 2013

ii

DECLARATION

This thesis is my original work and has not been submitted for a degree in any other

University or Institution.

Signed…………………………………………… Date…………………………………

ANNE WAMBUI MUCHEMI

Reg. No. D80/81121/2009

This thesis has been submitted with our approval as University Supervisors.

Signed………………………………………… Date…………………………………

DR. AWINO ZACHARY BOLO, PhD

Senior Lecturer

Department of Business Administration

School of Business

University of Nairobi

Signed…………………………………………… Date…………………………………

PROF. MARTIN OGUTU, PhD

Associate Professor

Department of Business Administration

School of Business

University of Nairobi

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COPYRIGHT

No part of this thesis may be used or reproduced in any form, or stored in a database or

retrieval system without prior written permission of the author or the University of Nairobi,

except in brief quotations or references universally accepted for purposes of reviews, articles

or research papers.

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DEDICATION

This work is first dedicated to my Supervisor, Dr. Zachary Bolo Awino. No words can

describe you! You can only be an Angel that was sent to shape my academic life. It is

amazing the passion you have had to see me graduate. Your commitment to the completion

of this study went beyond the call of duty. You have become a household name and the

pillar of my academic success. Am certain that this thesis will outlive me and as long as it

remains, God shall surely bless you and your generations. Am so blessed to have met you!

Further, this work is dedicated to my Dad and Mum (Daniel and Esther Muchemi). Thanks

for teaching me the fear of God, indeed it has been the source of knowledge. Thanks for

teaching me the value of hard work. Thanks for believing in me and for loving me the way

you do! For the many days you woke up early to pray for me, for the phone calls you made

at every point of the doctoral programme, am sincerely grateful! May the lord God whom

you love and continue to hold close to, forever bless you.

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ACKNOWLEDGEMENTS

This thesis would never have been completed without the contribution of many individuals

whom I would wish to acknowledge. First and foremost I would like to thank God for his

providence and his faithfulness. This is another living testimony that you will bring to pass

that which we commit to you. “Great is your faithfulness, oh Lord my Father”. Special

gratitude goes to my two supervisors, Dr. Zachary Bolo Awino and Professor Martin Ogutu

who were both a source of invaluable guidance, mentoring and commitment to this study.

Their rigorous contributions, dedication, sacrifice and commitment went beyond the call of

duty. God is not unfair to forget the good works that you have done and am certain that he

shall continuously bless you and your generations. Special thanks also go to Prof. Aosa,

Prof. Pokhariyal, Prof. Kobonyo, Dr. Machuki, Dr. Njihia, Dr. Wainaina and Dr. Omoke

who encouraged me in the doctorial programme.

My deepest gratitude goes to my family who were the main source of encouragement,

potency and support. Special mention goes to my Dad and Mum for teaching me the value

of hard work and for constantly following me up to establish my progress in the doctoral

programme. Your prayers, love and encouragement kept me going even in the toughest

times. To my brothers and sisters Isaac Muchemi, Dr. Timothy Muchemi, Tabitha Muchemi,

Doris Kamau, Dr. Sammy Muchemi and my baby brother Thuku Muchemi, you will forever

be my best friends. When I feared to go for defence, you all reminded me am a great girl, a

genius and have God on my side. Thanks for praying with me, believing in me, making me

feel loved and appreciated and for constantly reminding me to be focused on my studies.

Thanks a million times Thuku for reading my work, teaching me Economics, helping me

understand and love figures and for assuring me that you will follow my footsteps. To my

sweet little nieces Faith, Joy, June and Purity, nephews Kanyi, Kevin, Ham, Isay, Dan, Kim

and Tim, always remember that hard work never goes unrewarded. Special thanks go to my

fellow doctoral studies colleagues and departmental staff for their contribution and support.

Special recognition goes to Dr. Ogolla and Linet who were with me at every point of this

journey. Thanks for keeping me on my toes and keeping me company even in the loneliest

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part of this journey. Dr. Bagire, George Kimani and Juliana further require special mention

for being a great source of inspiration throughout the doctoral studies. To my best friend

Wangeci Muriuki, I will forever thank God for the day I met you. Thanks Wangeci for

praying with me and standing with me at every point of this journey. This is the fulfillment

of the prayer we made when we enrolled in the programme and am certain your thesis will

be next to mine in the library. Special mention further goes to Dr.Beth and Pat

Mbuthia.Thanks for praying with me and reminding me that the promises of God are yes

and Amen. To my many other friends like, Isaac, Mungai, Wambua, Maina Rugami,

Karanja Nyingi, Kiiru, Dr.Kilika, Patrick, Dr.Ngari, Migwi , Leah, Irene, Helen and

Shadrack Bett, am forever grateful.

To my employer, Kenyatta University, thanks for the support you accorded to me. Special

mention to Prof. Wangari Mwai, my role model, Dr. Muathe (Chairman Business

Administration), Ms.Kimutai (Chairperson Management Science), Mr. Sang (Associate

Dean) and Mr. Atheru (Dean-School of Business), you all believed in me and supported me,

God bless you. To the KU Nyeri Campus staff and all my students, thanks for believing in

me. God bless you all.

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TABLE OF CONTENTS

Declaration ............................................................................................................................. ii

Copyright ............................................................................................................................ iii

Dedication ............................................................................................................................ iv

Acknowledgements .................................................................................................................v

List of Figure ........................................................................................................................ xii

List of Tables ....................................................................................................................... xiii

Abbreviations and Acronyms ............................................................................................ xiv

Abstract ............................................................................................................................xv

CHAPTER ONE:INTRODUCTION ....................................................................................1

1.1 Background of the Study ....................................................................................................1

1.1.1 Top Management Team Diversity ...........................................................................2

1.1.2 Firm Innovation .......................................................................................................5

1.1.3 Leadership Styles .....................................................................................................7

1.1.4 Corporate Performance ............................................................................................9

1.1.5 Top Management Team Diversity and Corporate Performance ............................10

1.1.6 Commercial Banks in Kenya .................................................................................11

1.2 Research Problem .............................................................................................................13

1.3 Research Objectives ..........................................................................................................16

1.4 Value of the Study ............................................................................................................17

1.5 Structure of the Thesis ......................................................................................................18

CHAPTER TWO: LITERATURE REVIEW ....................................................................20

2.1 Introduction .......................................................................................................................20

2.2 Theoretical Perspectives of the Study ...............................................................................20

2.2.1 Social Identification and Categorization Theory .................................................21

2.2.2 Similarity and Attraction Theory .........................................................................23

2.2.3 Information and Decision-Making Theory ..........................................................24

2.2.4 Behavioral Theory of the Firm ............................................................................25

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2.2.5 Resource Based View of the Firm .....................................................................26

2.2.6 Resource Dependency Theory ...........................................................................28

2.2.7 Structural Contingency Theory ..........................................................................29

2.2.8 Upper Echelons Theory .....................................................................................30

2.3 Top Management Team Diversity ....................................................................................32

2.3.1 Age Heterogeneity .............................................................................................33

2.3.2 Functional Diversity ..........................................................................................36

2.3.3 Education Heterogeneity ...................................................................................37

2.3.4 Organizational Tenure Heterogeneity ................................................................38

2.3.5 Team Tenure Heterogeneity ..............................................................................40

2.3.6 Ethnic Diversity .................................................................................................41

2.3.7 Gender Diversity ................................................................................................42

2.4 Corporate Performance .....................................................................................................43

2.4.1 Quantitative Measures of Performance .............................................................46

2.4.2 Qualitative Measures of Performance ...............................................................47

2.5 Firm Innovation ................................................................................................................48

2.5.1 Service Innovations ...........................................................................................49

2.5.2 Process Innovations ...........................................................................................51

2.5.3 Business Model Innovation ...............................................................................52

2.6 Leadership Styles ..............................................................................................................53

2.6.1 Authoritarian Leadership ...................................................................................55

2.6.2 Free Reign Leadership .....................................................................................56

2.6 .3 Democratic Leadership .....................................................................................57

2.6.4 Transactional Leadership ...................................................................................58

2.6 .5 Transformational Leadership ............................................................................60

2.7 Top Management Team Demographic Diversity and Corporate Performance ................62

2.8 Firm Innovation and Corporate Performance ...................................................................67

2.9 Leadership Styles and Corporate Performance .................................................................68

2.10 TMT Demographic Diversity, Firm Innovation and Corporate Performance ................72

2.11 TMT Demographic Diversity, Leadership Styles and Corporate Performance .............74

2.12 TMT Demographic Diversity, Firm Innovation, Leadership Style and Corporate ........76

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2.13 Previous Studies and Knowledge Gaps ..........................................................................79

2.14 Conceptual Model ...........................................................................................................82

2.15 Conceptual Hypotheses ..................................................................................................84

2.16 Chapter Summary ...........................................................................................................85

CHAPTER THREE: RESEARCH METHODOLOGY ............... ....................................86

3.1 Introduction .......................................................................................................................86

3.2 Research Philosophy .........................................................................................................86

3.3 Research Design ...............................................................................................................88

3.4 Population of the Study ....................................................................................................89

3.5 Data Collection .................................................................................................................90

3.6 Reliability Test ..................................................................................................................91

3.7 Validity Test .....................................................................................................................93

3.8 Data Analysis ....................................................................................................................94

3.9 Operationalization of Variables ......................................................................................100

3.10 Chapter Summary .........................................................................................................102

CHAPTER FOUR:DATA ANALYSIS & INTERPRETATION OF RESU LTS .........103

4.1 Introduction .....................................................................................................................103

4.2 Response Rate .................................................................................................................103

4.3 Reliability and Validity Test ...........................................................................................104

4.4 Demographic Profile of the Banks Studied ....................................................................105

4.4.1 Age of Banks ...................................................................................................105

4.4.2 Number of Branches ........................................................................................106

4.5 Extent of TMT Involvement in the Decision Making Processes ....................................107

4.6 Influence of Attributes on Involvement Of TMT in Decision Making .........................109

4.7 Corporate Non Financial Performance Indicators ..........................................................112

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CHAPTER FIVE:TESTS OF HYPOTHESES AND DISCUSSION OF FINDINGS..114

5.1 Introduction .....................................................................................................................114

5.2 Test of Hypothesis ..........................................................................................................114

5.2.1 Top Management Team Demographic Diversity and Corporate Performance115

5.2.2 Firm Innovation and Corporate Performance ..................................................125

5.2.3 TMT Demographic Diversity, Firm Innovation and Corporate Performance .133

5.2.4 Leadership Style and Corporate Performance .................................................135

5.2.5 TMT Demographic Diversity, Leadership Style and Corporate Performance 142

5.2.6 TMT Demographic Diversity, Leadership Style, Firm Innovation .................144

5.3 Discussion oF Findings...................................................................................................146

5.3.1 Top Management Team Demographic Diversity and Corporate Performance147

5.3.2 Firm Innovation And Corporate Performance .................................................152

5.3.3 TMT Demographic Diversity, Firm Innovation and Corporate Performance .156

5.3.4 Leadership Style And Corporate Performance ................................................157

5.3.5 TMT Demographic Diversity, Leadership Style and Corporate Performance 159

5.3.6 TMT Demographic Diversity, Leadership Style, Firm ...................................162

CHAPTER SIX: SUMMARY, CONCLUSION AND RECOMMENDATION ...........165

6.1 Introduction .....................................................................................................................165

6.2 Summary .........................................................................................................................165

6.3 Conclusion ......................................................................................................................168

6.4 Recommendation ............................................................................................................170

6.5 Limitations of the Study .................................................................................................172

6.6 Suggestions for further Research ....................................................................................173

6.7 Implications on Theory ...................................................................................................175

6.8 Implications on Practice .................................................................................................176

6.9 Implication on Policy ......................................................................................................178

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REFERENCES ...................................................................................................................180

APPENDICES .....................................................................................................................206

Appendix I: University Introductory Cover Letter..........................................206

Appendix II: Researcher’s Introductory Cover Letter .....................................207

Appendix III: Questionnaire ..............................................................................208

Appendix IV: Commercial Banks in Kenya.......................................................214

Appendix V: Summary of Findings on Level of Involvement in Decision-

Making ........................................................................................216

Appendix VI: Summary of Findings on Role of Attributes in Decision-Making216

Appendix VII: Summary of Findings on Achievement of Corporate

Non-Financial Performance ........................................................217

Appendix VIII: Summary of Findings on Level of Achievement of Process

Innovation .................................................................................218

Appendix IX: Summary of Findings on Level of Achievement of Business

Model Innovation ......................................................................218

Appendix X: Summary of Findings on Level of Achievement of Service

Innovation .................................................................................219

Appendix XI: Summary of Findings on the Level of Manifestation

of Transformational Leadership ...............................................220

Appendix XII: Summary of Findings on the Level of Manifestation

of Transactional Leadership ....................................................221

Appendix XIII: Regression Analysis Results for the Moderating Effect of Firm

Innovation on the Relationship between TMT Diversity and

Organizations Performance .....................................................222

Appendix XIV: Regression Analysis Results for the Moderating Effect of

Leadership Style on the Relationship between TMT Diversity

and Organizations Performance ................................................223

Appendix XV: Regression Analysis Results for the Joint Moderating Effect

of Leadership Style and Firm Innovation on the Relationship

Between TMT Diversity and Organizations Performance .......224

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LIST OF FIGURE

Figure 2.1: Conceptual Framework ...........................................................................83

xiii

LIST OF TABLES

Table 2.1: Previous Studies and Knowledge Gaps ............................................................79

Table 3.1: Summary of Statistical Tests of Hypothesis .....................................................96

Table 3.2: Operationalization of Variables .......................................................................101

Table 4.1: Year of Incorporation of Bank .........................................................................105

Table 4.2: Number of Branches for the Banks ................................................................107

Table 4.3: TMT Nature of Involvement in Decision Making..........................................108

Table 4.4: Influence of Attributes on Involvement in Decision Making ........................110

Table 4.5: Non Financial Measures of Corporate Performance ......................................112

Table 5.1: TMT Demographic Diversity Factors and Financial Performance ................116

Table 5.2: TMT Demographic Diversity Factors and Non Financial Performance .........119

Table 5.3: TMT Demographic Diversity Factors and Organizational Performance ........121

Table 5.4: TMT Demographic Diversity and Organizational Performance .....................123

Table 5.5: Firm Innovation Factors and Financial Performance .....................................126

Table 5.6: Firm Innovation Factors and Non Financial Performance .............................127

Table 5.7: Firm Innovation Factors and Organizational Performance ............................129

Table 5.8: Firm Innovation and Organizational Performance .........................................131

Table 5.9: Firm Innovation, TMT Diversity and Organizational Performance ...............133

Table 5.10: Leadership Styles and Financial Performance ................................................135

Table 5.11: Leadership Styles and Non Financial Performance ........................................137

Table 5.12: Leadership Styles and Organizational Performance ......................................139

Table 5.13: Leadership Style and Organizational Performances .......................................140

Table 5.14: Leadership Style, TMT Demographic Diversity and Organizational

Performance ......................................................................................................142

Table 5.15: TMT Demographic Diversity, Leadership Style, Firm Innovation and

Organizational Performance .............................................................................145

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ABBREVIATIONS AND ACRONYMS

CBK: Central Bank of Kenya

CEO: Chief Executive Officer

COTU: Central Organization of Trade Unions

CSR: Corporate Social Responsibility

EPS: Earnings per Share

FKE: Federation of Kenyan Employers

ICT: Information Communication Technology

KU: Kenyatta University

PWC: Price Waterhouse Coopers

ROA: Return on Assets

ROE: Return on Equity

ROI: Return on Investment

TMT: Top Management Team

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ABSTRACT

The debate as to whether Top Management Team diversity influences corporate performance has continued to attract attention from scholars and practitioners. Among researchers fueling this surge, many have argued that higher levels of diversity lead to executive creativity, more effective executive decision-making, and more positive organizational outcomes. Other researchers, however, have argued that higher levels of executive diversity result in less communication among executives, less effective executive decision-making, and less positive organizational outcomes. Thus the question of whether diversity is advantageous to organizations still remains open. Therefore, this study sought to contribute to knowledge by assessing the relationship between Top Management Team demographic diversity and corporate performance while taking cognizant of the probable role of leadership style and firm innovation as moderating variables. The specific objectives were: to establish the relationship between Top Management Team demographic diversity and corporate performance; to establish the relationship between firm innovation and corporate performance; to establish if the strength of the relationship between Top Management Team demographic diversity and corporate performance is influenced by firm innovation; to establish the relationship between Chief Executive Officer leadership style and corporate performance; to determine if the strength of the relationship between Top Management Team demographic diversity and corporate performance is influenced by the Chief Executive Officer leadership style and to establish the joint effect of Top Management Team demographic diversity, leadership style and firm innovation on corporate performance. The study population comprised of all the 43 commercial banks as listed by the Central Bank of Kenya report. The relevant data was collected from 29 banks (representing 72.5%) response rate out of the probable 40 banks since 3 banks had already been used to pilot the questionnaire hence were not included in the final study. Organizational performance was measured using financial and non financial indicators. The data analysis and interpretation were based on descriptive statistics, correlation and multiple regression analysis. Hypothesis testing revealed statistically insignificant results for the relationship between Top Management Team demographic diversity and organizational performance, firm innovation and organizational performance and on the relationship between Chief Executive Officers leadership style and organizational performance. In addition, both firm innovation and leadership style were found to influence the relationship between Top Management Team demographic diversity and organization performance and their joint effect was established to be lower than the individual moderating effect. The study encountered some limitations such as the fact that the study was done in the banking sector, it was difficult to generalize results to other sectors and thus future researchers should include firms from other sectors in the economy. In addition, data analysis was done using regression analysis technique with the assumption that relationship between data variables was linear and it is probable that relations between variables are not necessarily linear. Future researchers should consider using some other tools for statistical analysis. This study has extended our understanding on the relationship between Top Management Team demographic diversity and corporate performance by introducing the moderating effect of leadership style and firm innovation. Similarly, the study has clearly depicted that different types of diversities have different effects on corporate performance. While providing a mile stone on pertinent Top Management Team diversity literature, this study has both theoretical and practical implications. From the study, it is clear that diversity has both positive and negative effects on organizations performance. Thus diversity should be managed to enhance organization’s performance. The need to establish other factors influencing the relationship between Top Management Team demographic diversity and corporate performance has been underscored. Similarly, the study has supported the complex nature of relationships between Top Management Team diversity and corporate performance and advocates for more research in this area.

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CHAPTER ONE

INTRODUCTION

This chapter presents the background of the study and a description of the key variables under

study, namely Top Management Team demographic diversity and organization performance.

The chapter also briefly highlights on the two moderating variables, leadership style and firm

innovation. Further the chapter gives a review of the commercial banks in Kenya. In addition,

the chapter presents research problem, research objectives, value of the study and the

structure of the thesis.

1.1 Background of the Study The search to explain corporate performance variability has developed from what are

essentially inanimate variables strategy/structure relationships, a focus which shifted

towards the more animate problems of strategy implementation and more recently, upon the

impact of the dominant coalition within the top management team (Hambrick and Mason,

2007). Does, in fact, the Top Management Team matter? Despite the large number of studies

on TMT heterogeneity, research has yielded inconsistent results, and the question of whether

diversity in managerial backgrounds is advantageous for companies still remain open

(Canella et al, 2008) and hence the focus of this study.

The ongoing globalization and technological advancements have dramatically changed the

business landscape affecting business organizations. The challenge for organization’s

management team today in their quest to improve their performance, is how to deal with the

changed business landscape. Some scholars have argued that by applying theoretical

2

directions to their research in their attempt to explain performance of organizations, a

systematic analysis is achieved that translates into improved practical application (Nham &

Hoang, 2011). Arising from this proposition, this study just like most of the scholarly

investigations set the starting point as an assumption indicating that the TMT determines the

strategic direction the organization is likely to take (Child, 1972).

This necessitates employing a theoretical framework that incorporates ideas of the various

theoretical streams. These include the social identification and categorization theory,

similarity and attraction theory and information and decision-making theory. Other theories

guiding this study include the resource based view of the firm, resource dependency theory,

stakeholder’s theory, structural contingency theory, behavioral theory of the firm and the

upper echelons theory. According to Hambrick and Mason, (1984), top management team

members with diverse characteristics bring different perspectives in the decision making

process, thus influencing the performance of organizations and TMT in the commercial

banks are not an exception.

1.1.1 Top Management Team Diversity Top management team members have been defined as powerful decision makers who

consciously choose among diverse courses of action and thus determine the fate of their

firms (Weiner and Mahoney, 1981). Further, they are the primary unit that governs the

firm’s environment, makes strategic choices and evaluates feedback (Child, 1972). Some

researchers have defined TMTs in terms of constituent members and such definitions

include the CEOs and the people who directly report to the CEOs (Michel and Hambrick,

3

1992). According to Miller et. al, (1998), top management team refers to all executives who

report to the Chief Executive Officer or Chief Operating Officer. This study conceptualized

TMT as dominant coalitions in organizations, comprising the Chief Executive Officer and

other senior level managers in an organization reporting directly to the CEOs.

Diversity has been defined in different ways by different scholars. According to Cox,

(1993), diversity is the variation of social and cultural identities among people existing

together in a defined employment or market setting. Social and cultural identity refers to the

personal affiliation with groups and research has shown that this has significant influence on

peoples’ major life experiences. These affiliations include gender, race, national origin,

religion, age cohort and work specialization. According to Jackson et al., (2003), diversity is

the distribution of personal attributes among interdependent members of a work unit.

Further, diversity can be defined based on observable, surface-level demographic

differences such as race, sex or age, or on deep-level psychological differences in values and

ways of thinking (Harrison et al., 2002). Often there is an implicit linkage in that it is

assumed that organization members with different observable differences will bring along

different ways of thinking as part of their identity (Brickson, 2000).

Studies on diversity can be viewed in two perspectives which include demographic and

cognitive diversity. Demographic diversity includes variables such as age, gender, ethnic

background, tenure, functional background, religion, race and education amongst others.

Demographic characteristics have served as surrogates for measuring cohort behavior and

4

the advantages of using demographic variables include their objectivity, parsimony,

comprehensiveness, logical coherence, predictive power and testability (Hambrick and

Mason, 1984). Previous studies show that team demography influences team processes, such

as social integration and communication, and these processes in turn affect organizational

strategy and outcome. Specifically, the profiles of the TMT influence the selection of

competitive fields and the patterns of actions and responses in the chosen fields. For

example, firms with high TMT heterogeneity in demographic characteristics are likely to

compete in a dynamic environment where diverse capabilities of top managers are required

to outperform competitors (Michel and Hambrick, 1992).

Similarly, firms with low TMT heterogeneity may show dominant presence in stable

environments where group cohesion produces better results. Therefore, TMT heterogeneity

provides vital information on a firm's preference for environmental niches to compete and

on the likelihood of success in the chosen market niches. Further, TMT traits such as age,

organizational tenure and educational level influences the firm's decision-making process in

terms of receptivity to change and willingness to take risk, which in turn affects the degree

of corporate strategic changes (Knight et al., 1999).

Cognitive diversity is defined in terms of differences in beliefs and preferences held by

upper- echelon executives within a firm. More specifically, cognitive diversity refers to

variation in beliefs concerning cause-effect relationships and variation in preferences

concerning various goals for the organizations (Miller, 1990). Cognitive diversity includes

knowledge, values, perception, affection and personality characteristics (Peterson, 2000).

5

Such variation underlies differences in perspectives that tend to endure through time. When

TMTs are the unit of analysis, the demographic approach has the advantage of being more

practical than the cognitive approach (Hambrick and Mason, 1984) and thus this thesis used

the demographic approach. High diversity teams can improve the capabilities to identify

new strategic opportunities (Alexiev et al., 2010) but this may however also fuel conflicts

(Nielsen, 2010). Hence, the topic of TMT heterogeneity remains a highly controversial one

and thus the primary focus of this thesis. This thesis was based on the premise that TMT

demographic diversity influences organizational performance, but performance is moderated

by other factors such as a firm’s innovation and the CEO’s leadership style.

1.1.2 Firm Innovation Definitions of innovation abound, each emphasizing a different aspect of the term. The first

definition of innovation was coined by Schumpeter in the late 1920s (Dougherty, 1996) who

stressed the novelty aspect. Innovation is reflected in novel outputs, a new good or a new

quality of a good, a new method of production, a new market, a new source of supply, or a

new organizational structure which can be summarized as doing things differently.

However, Dougherty (1996), states that, “it is practically impossible to do things identically”

which makes any change an innovation by definition.

Tushman and Nadler (1986), define the concept of innovation as the creation of a product,

service or process which is new for the business unit. For Damanpour (1996), innovation

involves the adoption of an idea which is new for the organization which adopts it. Thus the

term innovation covers the creation as much as the acquisition of a product or service which

is new for the adopting unit. In general, three dimensions which underline the different

6

definitions of the concept can be established: innovation in results, which would be the

creation of a new product to the business unit (Damanpour, 1996), innovation in process

(O’Sullivan, 2000) and innovation as an attribute of organizations (Bantel and Jackson,

1989).

Innovation research has distinguished between innovation types because they have different

characteristics. The variety of innovation types notwithstanding, the best known and most

widely studied typology of innovation is the distinction between product and process

innovations (Light, 1998). Another widely recognized but less researched typology is the

distinction between technological (technical) and administrative (organizational and

management) innovations (Birkinshaw et al., 2008).

Meeus and Edquist (2006) offered a taxonomy that distinguishes between two types of

product innovations (in goods and in services) and two types of process innovations

(technological and organizational). Hamel (2006) distinguished between two types of

process innovation: innovations in operational processes (such as customer services,

logistics, and procurement) and innovations in management processes (such as strategic

planning, project management, and employee assessment). This study employs three

innovation types that are applicable to service organizations: service innovations, process

innovations (technological process innovations and administrative process innovations) and

the business model innovation.

7

The role of TMT decisions is very relevant in innovation (Ireland et al., 2001). Innovation is

an accumulative, collective and uncertain process, a fact that management directs, promotes

and encourages (O’Sullivan, 2000). The preferences of its leaders can impose serious

restrictions on a company’s innovation, compromising its ability to identify and act on

profitable opportunities (Penrose, 1959).

1.1.3 Leadership Styles House and Aditya (1997) provide an extensive historical review of the scientific study of

leadership and the prevailing theories of leadership. According to their view, studies on

leadership in organizations have moved in several directions, but two approaches have

dominated the literature. The first approach has focused on the leader’s characteristics and

behavior, and the second on the circumstances necessitating the demonstration of leadership

and the possible results of different leadership styles. Their definition of leadership is based

on House (1995) who suggested that leadership is behavior that gives purpose, meaning, and

guidance to collectivities by articulating a collective vision that appeals to ideological

values, motives and self-perceptions of followers.

House (1995) further states that the outcomes of such behavior are heightened awareness of

organizational values, unusual levels of effort, and the foregoing of self-interest of followers

for the good of the collective. Today, the starting point of most studies on the topic is that

organizational leadership is first and foremost the ability to influence people to perform

tasks over a period of time using motivational methods rather than power or authority

(Kotter, 1996).

8

This definition emphasizes the subordinate’s choice to perform a task of his or her own free

will and largely rejects the use of power, force, or coercive actions by managers, who are

considered leaders. Such a definition also makes a clear distinction between leadership and

coercive rules. However, it relates leadership with the processes of informal influence,

power and to a lesser extent, formal authority, which comprises the political environment in

organizations. When people act out of obedience to authority, it is difficult to decide

whether they are acting of their own free will or out of fear of punishment by their superior

(Kotter, 1996).

Thus, modern theories on leadership are much more interested in transformational

leadership than in any other type of leadership (Wang et al., 2005). Nonetheless, the current

theory of leadership still focuses on transformational and transactional leadership as core

concepts in the field. These concepts were first introduced by Burns (1978) and developed

by Bass and Avolio (1993) to encompass the full range model of leadership. According to

this theory, there are two basic levels of influence evident in the interaction between the

leader and the led.

One influence comes from the understanding that the leader creates a cost-benefit interaction

in his constituency. Burns (1978) called this influence transactional leadership, meaning that

the employees will function in accordance with the leader’s wishes because they believe

they will benefit by such actions. The second influence of the leader is an emotional

excitement, which Burns (1978) called transformational leadership. This proposal will focus

on the moderating effect of transactional and transformational leadership styles.

9

1.1.4 Corporate Performance

Organizational performance refers to efficiency and effectiveness in utilization of resources

as well as the accomplishment of its goals. Organizational effectiveness is the measure of

how successfully organizations achieve their missions through their core strategies.

Efficiency is the cost per unit of output, describing the relationship between the goods and

services produced by a programme or activity and the resources used to produce them

(Richard and Tomassi, 2001). Corporate performance is a complex and multi-dimensional

phenomenon in strategic management literature (Balta, 2008).

Measuring performance is essential in allowing researchers and managers to evaluate the

specific actions of firms and managers, where firms stand against their rivals, and how firms

evolve and perform over time (Sabina, 2009). However measuring corporate performance

has been a major challenge for scholars and practitioners as well. The Sink and Turtle model

of 1989 proposes that the performance of an organization system is a complex interaction

among seven performance criteria: effectiveness, efficiency, quality of products,

productivity, quality of work life, innovation and profitability.

Additionally the Kaplan and Norton (1996) balanced score card indicates that corporate

performance not only includes financial measures but also customer criteria’s such as

customer satisfaction and retention, improving business processes such as best practices and

innovativeness and also employees’ criteria’s such as job satisfaction and wellbeing.

According to upper-echelon theory (Knight et al., 1999), top management team (TMT)

characteristics have important impacts on organizational outcomes because top executives

10

are empowered to make strategic decisions for organizations. Most commonly used methods

of measuring organizational performance in studies on the top management include ROA,

Total Assets, Profit before Tax, market share, share price and sales revenue. In this study,

financial performance was operationalised in terms of the Total Assets and Profit before

Tax, and the non financial measures included customer satisfaction, corporate image,

process improvements and employee development.

1.1.5 Top Management Team Diversity and Corporate Performance

The relationship between diversity and corporate performance can be positively correlated

(Carpenter, 2002), negatively correlated (Michel and Hambrick, 1992) or even some studies

show that the relationship is not significant (Ferrier, 2001). Diversity results in greater

knowledge, creativity and innovation and thus, organizations tend to become more

competitive (Watson et al., 1993). Further, cultural heterogeneity results in issue-based

conflict which in turn enhances greater organizational performance.

In addition, heterogeneity is positively linked to better problem solving and offering creative

solutions (Michel & Hambrick, 1992). On the other hand, diversity can be disadvantageous

to organizational performance (Hambrick et al., 1996); team diversity fuels conflicts and

thus has negative effect on performance (Naranjo-Gil et al., 2007). The extent to which team

effectiveness is affected by the heterogeneity among members is thus a complicated matter.

11

1.1.6 Commercial Banks in Kenya The Banking Industry in Kenya is governed by the Companies Act (Cap 486), the Banking

Act, the Central Bank of Kenya Act and the various prudential guidelines issued by the

Central Bank of Kenya (CBK, 2011). The Industry comprises of 43 commercial banks, 2

mortgage finance companies and 123 foreign exchange bureaus (CBK, 2011). The CBK

places commercial banks in Kenya in four broad categories based on ownership; foreign

owned not locally incorporated, institutions with government participation, foreign owned

but locally incorporated institutions (partly owned by locals) and locally owned institutions

(CBK, 2011). Thus the TMT in commercial banks are diverse based on the ownership of the

banks and also since they attract, select and retain demographically diverse employees.

During the period ended December 31, 2010, commercial banks recorded significant growth

in assets driven by growth in deposit, injection of capital and retention of profit. Further, in

the same period, commercial banks continued to embrace new technology to improve their

customer service delivery. A considerable number of banks adopted the use of mobile phone

technology as a service delivery channel to enhance convenience to their customers. In this

regard, a number of new products that leverage on ICT, in particular mobile phone

telephony were introduced by several institutions (CBK, 2011). In addition, there has been a

significant change in customer's landscape in the commercial banks from corporate clients

due to the unprecedented interest in individuals, micro finance sector and Small and

Medium scale Enterprises (SME’s).

12

In an effort to promote financial access by the majority of customers, the Central Bank and

the banking industry has continued with initiatives to put in place a credit information

sharing mechanism which will enable individuals to use their information capital as

collateral to access bank services. In addition, the environment in which banks in Kenya are

operating has been experiencing significant changes including rapid technological

innovations, creating pressure on service delivery cost (CBK, 2012). Further, the

amendment of the Banking Act to permit banks to use agents in their outreach has also

extended the formal financial services access frontier, thus enhancing their penetration level

of commercial banks which has been very low (CBK, 2011). Agency banking will further

enable institutions to provide banking services in a more cost effective way which is equally

cheaper to the customers.

An appropriate banking environment is considered a key pillar as well as an enabler of

economic growth (Koivu, 2002). Banks are essential for each country’s economy, since no

growth can be achieved unless savings are efficiently channeled into investment. Banking

industry is competitive and thus requires a lot of creativity and innovation both in terms of

human resources and product development. Because creativity and innovation require the

combining of facts and ideas in novel ways, diverse teams are an important precursor to

innovation (Rothwell and Zegveld, 1985) which may be a necessity to enable the

commercial banks to continue surviving in the competitive environments they are in today.

13

1.2 Research Problem

The results of research on diverse team composition suggest that it offers both a great

opportunity for organizations as well as numerous challenges. Numerous studies have

suggested that more diverse teams have the potential to consider a greater range of

perspectives and to generate more innovative and higher quality solutions than less diverse

teams (Austin, 1997). In contrast, other studies have revealed a negative relationship,

inconsistent or no relationship between team heterogeneity and organizational outcomes

(Van Knippenberg et al., 2004). Within the management literature, there have been a series

of suggestions regarding these conflicting results.

Some researchers have focused on exploring the mechanisms through which diversity exert

its influence in workgroups. This has included investigating into the mediator variables, for

example, member commitment and decision comprehensiveness (Jehn et al., 1999). Other

authors have cited moderator variables, for example, that the relationship between diversity

and performance is moderated by the time that a team has been working together and task

characteristics (Van der Vegt and Bunderson, 2005).

A review of research demonstrates that leadership has been regarded as one of the most

important factors to determine organizational performance and creativity (Berson et al.,

2006). Little research however has been conducted to understand the relationship between

leadership and performance of diverse groups. Extant research has focused on unmanaged

diversity (Nkomo and Cox,1996) despite research indicating that leader strategies can

mitigate against the emergence of affective conflict and distrust that often hamper the

14

performance of such groups (Somech, 2006). Research further suggests that firms that

innovate increase their chances of survival and growth (Drach-Zahavy and Somech, 2001).

However, little has again been done to establish how firm innovation would moderate the

relationship between diverse teams and performance.

The banking industry in Kenya has changed dramatically from being a virtual cartel to a

highly competitive market. Commercial banks in Kenya are transcending from their normal

business operations and diversifying their activities in response to economic and financial

reforms (Arora and Kaur, 2006). The deregulation, disintegration, emergence of advanced

technologies along with the consolidation wave in the commercial banks sector have been

instrumental in making banks to diversify their operations (Arora and Kaur, 2009).

However, the industry’s low penetration level of 19% still provides opportunities for banks

to exploit.

For this reason, commercial banks need to improve their learning and leadership capabilities

to facilitate innovation. Key attention must thus be paid to the TMT in the commercial banks

since they provide the strategic direction of these organizations. Despite the large number of

studies on TMT diversity, research has yielded inconsistent results, and the question of

whether diversity in TMT is advantageous for companies still remains open (Canella et al.

2008).

15

This thesis suggests that inconsistency among TMT demographic diversity and performance

relationship shown in prior studies may point to the possibility that important moderating

variables have been overlooked, and that such omissions create opportunity for further

research. Further, the consequences of TMT diversity are highly dependent on context and

thus varying context will help in clarifying the nature of the relationship.

Studies undertaken in the Kenyan context by Irungu (2007), Awino (2007) and Sifa (2009)

have all treated corporate performance as a dependent variable. The findings of each of these

studies indicate that corporate performance is a function of a combination of factors.

Irungu’s (2007) study revealed that there exists a relationship between TMT characteristics

and various indicators of organizational performance. Awino’s (2007) study focused on the

effect of selected strategy variables on corporate performance while Sifa’s (2009) study

focused on the influence of core competencies on the relationship between co-alignment

variables and corporate performance.

In due considerations of the unique business environment in which Commercial Banks in

Kenya operate, this study sought to answer the following critical question: Does firm

innovation and leadership style affect the relationship between TMT demographic diversity

and performance of commercial banks in Kenya.

16

1.3 Research Objectives The main objective of this study was to determine the effect of firm innovation and

leadership style on the relationship between TMT demographic diversity and corporate

performance of commercial banks in Kenya.

The specific objectives were to:

i. Determine the relationship between TMT demographic diversity and corporate

performance of commercial banks in Kenya.

ii. Establish the relationship between firm innovation and corporate performance of

commercial banks in Kenya.

iii. Establish if the strength of relationship between TMT demographic diversity and

corporate performance of commercial banks in Kenya is influenced by firm

innovation.

iv. Establish the relationship between CEO’s leadership style and corporate performance

of commercial banks in Kenya.

v. Determine if the strength of the relationship between TMT demographic diversity

and corporate performance of commercial banks in Kenya is influenced by the

CEO’s leadership style.

vi. Establish the joint effect of TMT demographic diversity, leadership style and firm

innovation on corporate performance of commercial banks in Kenya.

17

1.4 Value of the Study The performance of the commercial banks in Kenya has a direct effect on Kenya’s economic

performance. However it is the top management in these banks that determine the strategic

direction of organizations and consequently their performance. This study was intended to

significantly shed light on the implications of the TMT demographic diversity on the

performance of commercial banks. Although many similar studies have been conducted

elsewhere, especially in the United States of America, Europe and Japan, very little has been

done in Africa. Various studies have revealed that culture, values and contextual challenges

differ from one geographical and demographic region to another, and these are expected to

impact differently on organizational performance (El-kot and Leat, 2005).

This study will thus contribute to theory building by enhancing our understanding of the

inhibiting or enabling role played by organizational setting issues or contextual factors on

diversity and firm performance relationship. Further, this study will be contributing to

theory building by introducing the moderating role played by leadership style and firm

innovation on the relationship between TMT demographic diversity and Corporate

Performance.

In addition, by the study contributing to the understanding on how diversity in top

management affects firm performance, it will be contributing to effective human resource

recruitment strategies that will inevitably translate to high organization’s performance. This

study will further be relevant to management practice in a number of ways.

18

First, understanding of the antecedents of multiple dimensions of top management team

diversity may allow managers to carefully evaluate the trade-offs associated with

increasing team diversity while maintaining diversity balance. Furthermore, the findings of

this thesis will assist executives of such firms in evaluating individual executive profiles and

their fit to the existing composition of the firm’s top management team.

In addition, the study will address the gaping need for scholarly studies from the emerging

economies and in particular Kenya, on the concept of diversity in top management and its

effect on organization’s performance. Lastly, despite the growing number of studies on

diversity in the TMT, there is no consensus on the effect of the TMT diversity on firm

performance. Thus this study will aid in further validation of the direction of the relationship

between the diversity in top management and organization’s performance.

Following the implementation of the new constitution in Kenya, diversity management is of

paramount importance to organizations today. The government is responsible for all workers

through the Ministry of labour. Thus this study can guide the government in policy

formulation on equal employment opportunities, diversity audit and diversity management

by understanding the effects of embracing diverse teams.

1.5 Structure of the Thesis The study is organized into six chapters. Chapter one presents the introduction and

background of the study variables which include demographic diversity in Top Management

Team, firm innovation, leadership styles and corporate performance. It further highlights the

research problem, the research objectives and the value of the study.

19

Chapter two is an extensive literature review of the major study variables namely

demographic diversity in the Top Management Team, firm innovation (business model

innovation, process innovation and service innovation), leadership style (transactional and

transformational leadership styles) and corporate performance. This is culminated into a

conceptual framework showing the relationships between the variables under study.

Chapter three discusses the research methodology used and outlines how the variables were

operationalized and the analytical models used to test the hypotheses. Chapter four provides

the descriptive data analysis while chapter five focuses on results on test of hypothesis and

discussion of findings. Chapter six presents the summary of the findings, conclusions,

limitations of the study, suggestions for further research and implications of the study on

theory, policy and practice.

20

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction This chapter explores the related theoretical and empirical literature suitable to answer the

research questions for this study. The chapter begins by discussing the main theories the

study has relied on to build the framework for the research. The chapter then discusses the

specific literature for the study with a focus on the main variables whose relationships are

being investigated.

This covers literature review on the demographic diversity in the TMT, leadership styles,

firm innovation and performance relationship. An empirical overview of the relationships

among diversity, leadership style, firm innovation and performance is also presented. The

chapter further presents a summary of previous studies on the area of diversity in TMT and

finally a conceptual model and test of hypotheses.

2.2 Theoretical Perspectives of the Study There are a large number of theoretical underpinnings relating TMT diversity to

performance. These include social identification and categorization theory, similarity and

attraction theory and information and decision-making theory. Other theories guiding this

study includes the resource based view of the firm, resource dependency theory,

stakeholder’s theory, structural contingency theory, behavioral theory of the firm and the

upper echelons theory . The basic tenets of each theory are reviewed below:

21

2.2.1 Social Identification and Categorization Theory Social identification begins with the assumption that each individual wishes to maximize his

or her self-esteem. In order to ensure high self-esteem, individuals engage in a series of

social comparisons with others. These self-comparisons involve individuals placing

themselves, and others, into a series of categories along organizational, religious, gender,

ethnic, socioeconomic lines, amongst others. This process leads each individual to establish

his or her social identity, with that identity defined as one’s membership in a given group of

different categories (Turner, 1987).

Given the initial assumption that an individual does all of this in order to maintain a high

level of self-esteem, it follows that individuals will deem the categories in which they

belong as good (often called the in-group) and the categories in which others belong as bad

(the out-group). Empirical research has shown that individuals often (falsely) attribute

negative characteristics to out-group members as part of this process, believing the out-

group to be comprised of individuals who are less trustworthy, honest, cooperative, or

intelligent (Turner, 1987).

The process of categorization often involves physical traits such as gender, ethnicity, and

age. Given that membership in the out-group is seen as a deficiency, this classification often

results in individuals assuming those from different ethnic backgrounds are either inherently

worse than they are, or at the very least, untrustworthy (Loden & Rosener, 1991).

22

Social identification and categorization theory, then, assumes that individuals quickly

stereotype and make judgments about those from other groups (Tajfel, 1981). This theory is

applicable to this study since TMT members will categorize themselves into groups based

on their characteristics. Further, TMT members are likely to be affiliated to people with

whom they share a social identity and conversely provide a basis for conflict with people of

different social categories.

In a diverse work team or organization, there are many more out-groups than in-groups, a

pattern which is expected to cause heightened problems with trust, communication, and

cooperation. As a result, work processes will be made much more difficult, thus causing the

final product, idea, or solution to be weaker (Daft and Lengel, 1986). This theory, then,

suggests a negative relationship between organizational diversity and work-related

outcomes. Much of the research on effects of diversity on organizational performance if not

the majority, predicts a negative relationship between diversity and organizational

performance that is premised on faulty work processes.

As a group becomes more and more diverse, breakdowns in communication, coordination

and cohesion make it harder for members to work together effectively. These process-

oriented difficulties prevent the group from producing a final product, solution, or idea that

is at par with one produced by a group that did not fall prey to the same procedural

difficulties (Turner, 1987).

23

2.2.2 Similarity and Attraction Theory The similarity and attraction theory is based on the premise that similarity in attributes,

particularly demographic variables, increases interpersonal attraction and liking (Byrne et

al., 1996). Individuals with similar backgrounds may find that they have more in common

with each other than with others from different backgrounds, making it more comfortable

for them to work together and collaborate toward producing a product or solving a problem.

Similarity allows one to have his or her values and ideas reinforced, whereas dissimilarity

causes one to question his or her values and ideas, a process that is likely to be unsettling. In

a situation where an individual has the opportunity to interact with a number of different

people, he or she is most likely to select a person who is similar (Burt & Regans, 1997). The

fact that one is likely to be more attracted to those with similar attributes, yields clear

predictions that high levels of diversity in an organization are likely to lead to faulty work

processes, leading to weaker performance (Burt and Regans, 1997).

This theory is applicable to this study since it endeavors to explain individuals behavior

based on their attributes, particularly demographic variables. TMT in organizations have

different demographic characteristics and the theory predicts individuals with similar

characteristics will be attracted to each other leading to better performance. However,

dissimilar teams are likely to have low performance due to faulty work processes (Burt and

Regans, 1997).

24

2.2.3 Information and Decision-Making Theory

The information and decision-making theory focuses on knowledge and its role on group

outcomes. People understand and interpret the world they experience based on their

cognitive structures (Bhatt, 2000). Cognitive structures are the internal representations of

ourselves, others and our environments, which are based on previous knowledge, experience

and learning and they are used to explain how individuals create their own realities as they

make sense of and interact with their world (Markovits and Barrouillet, 2002).

Cognitive structures are socially formed and develop based on social paradigms (Bhatt,

2000) which imply that people “know” based on their social interactions (Young and Collin,

2004). It follows then that learning is always contextualized, that is, what is learnt and how

it is learnt always reflects the social context of the learner (Gergen, 2001). At work, the

functional identity of the learner, or the collegial context, is vital to the learner’s perspective.

Through extended in-depth interaction and shared practice, individuals from the same

functional area develop similar cognitive structures or corresponding mental models (Brown

and Duguid, 2001). This leads to shared perspective and knowledge of the world and work.

These commonalities in their cognitive structures differentiate members of one functional

area from members of other areas.

25

This theory is applicable in this study since the performance of an organization is bound to

be influenced by the nature of decisions made by the TMT members which is influenced by

their knowledge levels. Diverse TMT members will have knowledge-based advantages

based on cognitive effects stemming from the connection of previously unconnected

knowledge and this will result to improved performance (Nemeth, 1985).

Thus the information-and-decision-making perspective focuses on the potential creativity

and problem-solving benefits of having more diverse information and analyzing it from a

variety of perspectives. This theory thus predicts that diverse teams will have a positive

impact on organizations performance. The idea that diversity brings a number of new

perspectives to the table, making it possible for an organization to be more effective, has

served as the basis for a number of claims that diversity is a strength and a resource for

organizations (Adler, 2003).

2.2.4 Behavioral Theory of the Firm The behavioral theory of the firm (Cyert & March, 1963) introduces sociological aspects to

the economic theory of the firm and emphasizes the role of individuals. The theory regards

organizations as a collection of individual members who have their own goals and

aspirations. It acknowledges that organizational goals are not defined at the firm level but at

the individual level and are therefore often conflicting. Based on Simon’s (1947) work on

behavior under conditions of uncertainty, the behavioral theory challenges the assumption

that individuals have rational motives and maximizing behavior.

26

Instead, the behavioral theory of the firm stresses the limitations of human cognition such as

bounded rationality and explains how it influences decision-making. Under conditions of

uncertainty, organizational decisions are predominantly driven by problematic search, where

the generation of alternatives is based on and limited to the definition of the problem.

Furthermore, individuals do not always strive to maximize their utility but rather attempt to

attain realistic goals (satisficing behavior) (Cyert & March, 1963).

The behavioral theory of the firm emphasizes how human limitations affect firm decision-

making and behavior (Cyert & March, 1963). This theory is relevant to this study since it

explains how human limitations influence decision choices and this study focuses on how

TMT diversity affect their decision choice especially those related to corporate performance.

2.2.5 Resource Based View of the Firm

The resource-based view of the firm offers another rationale for the explanation of

arguments on the effect of TMT diversity on corporate performance. According to this

perspective, firm performance is significantly influenced by the physical, organizational, and

human resources available to management. Firms can develop strong competitive

advantages by accumulating or controlling unique or difficult to duplicate bundles of

resources, as well as dynamic capabilities that integrate, build and reconfigure internal and

external competencies to address rapidly changing environments (Barney, 2001).

27

Employee and management capabilities are firm-level resources that are among the most

sustainable and difficult for competitors to imitate. Such difficulties, Barney (1991) posits,

arise out of the resource’s inherent causal ambiguity, unique historical contexts, and social

complexity. Even if dynamic capabilities are similar across firms, performance differences

may arise between firms due to the different timing with which they are used (Zott, 2003).

The differential timing may be rooted, for example, in the cognitive biases of managers that

cause them to make decisions at different points in time.

Given the body of research supporting the demographic differences (Schyns and Sanders,

2005), it follows that such differences could potentially be a resource given the extent to

which each diversity attribute contributes different and complementary competencies to the

task of management. For example, many men may be predisposed towards leading in ways

that emphasize competition, hierarchy, rational problem-solving, high control, low

emotionality, and a bias for analysis. On the other hand, many women may be predisposed

conversely to facilitating cooperation, supporting and maintaining relationships, team-based

accomplishment, intuitive problem-solving, lower levels of control, dissemination of

information, and high levels of emotionality.

In any case, the combination of these behavioral differences suggests a richer repertoire of

management skills and competencies leading to enhanced performance. This theory is

applicable to this study since TMT capabilities are firm level resources and if these

resources (TMT capabilities) are heterogeneous in nature, they will translate into firms

having a sustainable competitive advantage thus improving performance.

28

2.2.6 Resource Dependency Theory

Proponents of resource dependency theory attempted to explain organizations in terms of

their interdependence with the environment (Pugh and Hickson, 1997). Some scholars

have argued that the provision of resources enhances organizational functioning, a firm’s

performance and its survival (Daily et al, 2003). This theory concentrates on the role of

TMT in providing access to resources needed by the firm (Abdullah and Valentine,

2009).

Hillman et al., (2000) contends that resource dependency theory focuses on the role that

TMT play in providing or securing essential resources to an organization through their

linkages to their external environment. This theory states that organizations are

interdependent with their environment and or other organizations for their survival since

they are not self-dependent (Pugh and Hickson, 1997). The theory thus proposes that

TMT is a mechanism for managing external dependencies (Pfeffer and Salancik, 1978),

reducing environmental uncertainty (Pfeffer, 1972) and environmental interdependency.

According to resource dependency theory, TMT act as a linkage between the firm and the

external environment which generate uncertainty and external dependencies (Balta,

2008). Organizations are supposed to comply with uncertainty as well as with different

environmental changes in order to survive (Pfeffer and Salancik, 1978). This theory is thus

applicable to this study since the composition of the TMT in terms of their demographics

will play a critical role in influencing the extent to which organizations will respond to the

uncertainty in the environment.

29

It is important to note that organizational adaptations to environmental changes are strongly

influenced by the interpretations executives make of the environmental changes (Thomas,

Clark, & Gioia, 1993). Because the effectiveness of organizations is influenced by the

degree of fit between organizations and their environments (Doty, Glick, & Huber, 1993),

it is important that organizational adaptations be appropriate for the environmental

changes. Because environmental changes are often ambiguous (Ford & Baucus, 1987),

interpretations of environmental changes play a large part in the future actions and the

continuing effectiveness of an organization.

2.2.7 Structural Contingency Theory The term contingency theory was coined by Lawrence and Lorsch (1967) in an

empirical study showing that the effects of organizational structure on relative

economic performance were contingent upon environmental attributes. Contingency

theory thus offered a synthesis of two conflicting research paradigms in organization

theory both claiming universal virtue.

According to Lawrence and Lorsch (1967), organizations had to be both differentiated

and integrated to an extent of optimality, which was contingent upon environmental

uncertainty. A “contingent” proposition is one which hypothesizes a conditional

association of two or more independent variables with a dependent outcome (Fry &

Schellenberg, 1984). The theory has dominated the study of organizational design and

performance during the past twenty years. It is a more complex and elaborated approach

compared to the universal effects perspective since it assumes that the strength and

30

direction of the performance impact on certain success factors are affected by the

environment (Ferguson & Ketchen, 1999). The theory argues that individual

organizations adapt to their environment. The environment is seen as posing

requirements for efficiency and innovation which the organization must meet to survive

and prosper (Hage & Aiken, 1970). Structural contingency theory posits that

organizational performance is affected by the fit or misfit between the structure and the

contingency.

Further, the theory informs the theory of organizational design by providing a

framework that relates variations in organizational design to variations in the situation

of the organization (Hage & Aiken, 1970). One of such situations could be the differences

in the perspectives of the TMT members influencing the design of organizational structure

and in return influencing firm’s performance.

2.2.8 Upper Echelons Theory

Upper echelons theory (Hambrick & Mason, 1984) is deeply rooted in the behavioral theory

of the firm. Its main underlying assumption is that human limitations influence the

perception, evaluation and decision about organizational problems and hence influence firm

choices and behavior. The starting point of understanding the upper echelons perspective is

March and Simon’s (1958) notion that managers bring their own set of givens, such as

values and cognitive bases, to a decision-making situation. Thus, strategic choice is made

not on the basis of an actual situation, but rather on manager’s perception (Sutton, 1987).

31

This argument is congruent with the behavioral view of Cyert and March (1963) that

variables that affect choice are those that influence the definition of a problem within the

organization. In a perceptual model of strategic choice under conditions of bounded

rationality, Hambrick and Mason (1984) visualize how managerial characteristics affect

strategic choice in a three-stage process. As humans have only a limited field of vision,

when scanning the environment, managers cannot depict the whole complexity of a

situation. In addition, due to the selective perceptions managers have, of all information

available to them, only a certain part is noticed and registered. Finally, the stimuli noticed

are interpreted based on a manager’s given , which can be classified into two broad sets of

personality attributes: psychological factors, such as values, cognitive models and other

personality factors, and observable experiences, such as age, education, functional

background and tenure (Finkelstein & Hambrick, 1996).

The main theoretical perspective this study adopts is upper echelons theory (Hambrick &

Mason, 1984), a strategy theory explaining differences in firm behavior and performance

with managerial characteristics. A distinct feature of upper echelons theory compared to the

other theories guiding this study is the sole focus on the upper echelons of the organizations.

Such focus brings along the team level of analysis where individuals are regarded as team

members and the theoretical and empirical unit of analysis is the team rather than the

individual. This study is thus anchored on this theory since the study focuses on the TMT

rather than the individual characteristics of the TMT members.

32

2.3 Top Management Team Diversity Diversity is the distribution of personal attributes among interdependent members of a work

unit (Jackson et al., 2003). The majority of upper echelons studies use variations of this

broad definition. According to Cox, (1993), diversity is the variation of social and cultural

identities among people existing together in a defined employment or market setting. Social

and cultural identity refers to the personal affiliation with groups and research has shown

that this has significant influence on peoples’ major life experiences. These affiliations

include gender, race, national origin, religion, age cohort and work specialization, among

others.

Primary categories of diversity include age, race, ethnicity and gender whereas secondary

categories of diversity include education, experience, income and marital status. Further,

diversity can be defined based on observable, surface-level demographic differences such as

race, sex or age, or on deep-level psychological differences in values and ways of thinking

(Harrison et al., 2002).

Often there is an implicit linkage in that it is assumed that organization members with

different observable differences will bring along different ways of thinking as part of their

identity (Brickson, 2000). Demographic characteristics have served as surrogates for

measuring cohort behavior (Pfeffer, 1983). The advantages of using demographic variables

include their objectivity, parsimony, comprehensiveness, logical coherence, predictive

power, and testability (Hambrick and Mason, 1984).

33

Because diversity represents distributional differences among members of a team with

respect to a common attribute, diversity is attribute specific (Harrison & Klein, 2007). A

team in not simply diverse, rather, a team is diverse with respect to specific attributes. The

attribute of interest should influence the demographic diversity and team performance

relationship (Jackson et al., 2003). This study focuses on a number of demographic diversity

variables which include age, functional, educational, organizational tenure, team tenure,

ethnic and gender diversity.

2.3.1 Age Heterogeneity

Managerial youth appears to be associated with corporate growth (Child, 1974). There are

several reasons to expect younger managers to bring better cognitive resources to decision-

making tasks. First, some cognitive abilities seem to diminish with age, including learning

ability, reasoning, and memory (Burke and Light, 1981). Second, younger managers are

likely to have received their education more recently than older managers, so their technical

knowledge should be superior.

Third, younger managers have been found to have more favorable attitudes toward risk-

taking (Vroom and Pahl, 1971). Younger people tend to be more willing to take risks than

older ones, possibly because older individuals may have diminished physical and mental

abilities (Child 1972) or may be less able to generate new ideas and learn new behaviors and

because having these characteristics makes one fearful of risks.

34

There are three possible explanations for the apparent conservative stance of older

executives. The first is that older executives may have less physical and mental stamina

(Child, 1974) or may be less able to grasp new ideas and learn new behaviors (Chown,

1960). Managerial age has been negatively associated with the ability to integrate

information in making decisions though it appears to be positively associated with

tendencies to seek more information, to evaluate information accurately, and to take longer

to make decisions (Taylor, 1975).

A second explanation is that older executives have greater psychological commitment to the

organizational status quo (Stevens, Beyer, & Trice, 1978). Third, older executives may be at

a point in their lives at which financial security and career security are important. Their

social circles, their spending traits and their expectations about retirement income are

established. Any risky actions that might disrupt these generally are avoided (Carlsson &

Karlsson, 1970).

Older people also may have a stronger psychological commitment to the status quo. And

older individuals may have reached a time in their lives when financial and career security is

of greatest importance. Social circles and retirement expectations become key factors in

their lives. At this time, they tend to avoid any risky action that might affect these elements

(Burke and Light, 1981). Age cohorts are likely to differ in their attitudes, values and

perspectives for two reasons. A major reason is that different age cohorts experience

different social, political, and economic environments and events, which have a fundamental

role in shaping attitudes and values.

35

In addition, perspectives change as a function of the developmental process of aging (Elder,

1975). Assuming that diversity of attitudes and values facilitates group creativity, teams

composed of members of diverse ages should be more innovative. However, differences in

values and attitudes could result in conflicts that hinder the development of team

cohesiveness (Pfeffer, 1983). The greater the age heterogeneity of the team, the greater the

social fragmentation we might expect.

On the other hand, a social comparison theory perspective (Festinger, 1954) might lead us to

suggest that people of the same age would regard each other as competitors within the group

for valued roles and promotions. Age diversity can have unexpectedly negative effects on

work group conflict. When age similarity in a group increases, there is a career progress

comparison, which prompt jealous rivalry (Pelled et al., 1999). Diversity in managers’ age

is an observable relations-oriented characteristic that may have negative influence on

team processes.

Previous researchers have also suggested that age similarity in teams might promote

interpersonal rivalry and conflict (Lawrence, 1997). The anticipated consequences of age

similarity are shared visions of life and experiences, which in turn leads to high degrees

of interpersonal attraction and shared values.

36

2.3.2 Functional Diversity Function can be regarded as both background characteristic and experience: an

executive’s current function reflects a background, whereas previous functions he or she

has had reflect a range of experiences. Top management teams are naturally comprised

of individuals representing different functional areas. As a result, they bring along specific

knowledge and experience from the different areas of a firm’s operations. A certain

degree of variety in managers’ knowledge of the different functional areas is a prerequisite

for successfully managing the complexity of firms operations (Hambrick and Mason,

1984).

Managers with differing histories of functional experiences are likely to differ in their

attitudes, knowledge, and perspectives (Hambrick and Mason, 1984). Differences among

managers from different functions may be due in part to differences in their education, but

work experiences in functional areas are likely to further shape cognitive and attitudinal

perspectives. These can affect how managers behave at all stages of the innovation

process. A person's functional background should affect which problems he or she

identifies as important, how these problems are formulated, types of solutions generated,

evaluations of alternative solutions, and involvement during the implementation phase.

Because creativity and innovation require the combining of facts and ideas in novel ways,

cross-functional communication is generally acknowledged as an important precursor to

innovation (Rothwell and Zegveld, 1985). Diversity in functional backgrounds is believed

to be related to diversity in TMT’s perspectives (Bunderson & Sutcliffe, 2002).

37

Hambrick and Mason (1984) suggest that managers make different strategic decisions based

on their experiences in different functional areas. Hence, it is hypothesized that individuals

adopting entrepreneurial strategies have experience in the areas of marketing and research

and development (R&D), as these functional areas are more oriented to change and

innovation than other areas. By contrast, managers using conservative strategies are

expected to have greater experience in the areas of finance and production, given these

areas’ relative stability and emphasis on efficiency (Mehra, Kilduff, & Brass, 1998).

2.3.3 Education Heterogeneity

An individual’s level of formal education reflects cognitive abilities and qualities. The

highest levels of formal education are associated with a high ability to process information

and to discriminate between a wide variety of alternatives. Educated individuals are more

likely to tolerate ambiguity and to show themselves to be more able in complex situations

(Dollinger, 1985). Furthermore, the highest levels of education tend to be associated with

receptivity to innovation (Kimberly and Evanisko, 1981).

Thus it is expected that individuals with higher levels of education are more likely to adopt

entrepreneurial behavior. Further, Hitt and Tyler (1991) found that the type of academic

education managers had influenced their strategic decisions, that is, certain academic

disciplines are more oriented to innovation and change than others. Thus, since the sciences

and engineering are related to invention and innovation, it is to be expected that these

disciplines are associated with the willingness to innovate to a greater extent than law,

economics, and business.

38

The level of education among TMT members reflects their varying degrees of knowledge

and skill, thereby affecting the capacity of the team to generate more or less creative

solutions to resolving complex problems (Bantel and Jackson, 1989). Therefore, a high level

of education in the team will result in a greater awareness of the need to change and

innovate (Wiersema and Bantel, 1992), a greater understanding of information and a greater

capacity to analyze many-sided, complex problems thoroughly (Calori et al., 1994).

People with a high level of education generate more creative solutions because they are

more receptive to innovative attitudes (Kimberly and Evanisko, 1981). Indeed, to the extent

that educational level is related to general mental ability (Sewell & Shah, 1967), teams

composed of members higher in educational level should outperform teams composed of

members with lower levels of education.

2.3.4 Organizational Tenure Heterogeneity Organizational tenure is the amount of time that a team member has worked with the

organization. Team members’ organizational tenure may influence performance through its

ties with organizational socialization which is the process through which an individual

comes to understand the social knowledge, values, and expected behaviors necessary to

assume an organizational role (Sturman, 2003). A team composed of members with long

organizational tenure may have a greater understanding of how to successfully operate

within the organizational system.

39

For example, members of a research and development team with long organizational tenure

might have a better understanding of how to access valued organizational resources needed

for team performance. In addition, members of organizations develop a common unique

language that facilitates transmission of work-related information, which should make

communication among team members with greater organizational tenure more efficient

(Jackson et al., 1995).

.

Despite the apparent advantage of having teams composed of members with long

organizational tenure, the attraction–selection–attrition framework (Schneider, 1987)

suggests that organizational members become homogeneous over time, which might have

negative consequences in terms of dealing with an uncertain environment or unexpected

change. As such, composing teams with members who all have long organizational tenure

might not lead to increased team performance.

When innovation is the criterion or the team is completing tasks that require access to a

greater variety of perspectives, diversity on organizational tenure might benefit team

performance because members of the team will have been socialized into the organization at

different times and will bring unique perspectives to the team in terms of organizational

know-how (Jackson et al., 1995).

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More tenured executives may have more psychological commitment to the organizational

status quo (Staw and Ross, 1980) and to organizational values (Schmidt and Posner, 1983).

Consequently, change, which is an inherent part of innovation, may be resisted. In addition,

long tenure within the same organization may result in insulation and a narrowing of one's

perspective (Pfeffer, 1983).

2.3.5 Team Tenure Heterogeneity Team tenure is defined as the length of time that team members have interacted with one

another (Katz, 1982). Team tenure affects project performance by reducing the

communication among team members to a particular information domain. Over time, team

members become cohesive and can become increasingly isolated from important sources

that provide evaluation, information, and feedback (Katz, 1982). As such, differences in

team tenure among team members might benefit team performance. If new team members

are integrated into the team over time, new team members can provide fresh ideas and

approaches, and challenge existing methods, while more tenured team members can offer

information about the team’s existing structure and responsibilities.

The average organizational tenure of team members is more likely to affect their attitudes

toward innovation and consequently performance. More tenured executives may have more

psychological commitment to the organizational status quo (Staw and Ross, 1980) and to

organizational values (Schmidt and Posner, 1983). Consequently, change, which is an

inherent part of innovation, may be resisted. In addition, long tenure within the same

organization may result in insulation and a narrowing of one's perspective.

41

As individuals are socialized, they learn what is important in their organization. This

transforms outsiders into participating and effective organizational members by allowing

them, through observation and modeling, to understand and assimilate the policies and

processes of their organization (Feldman, 1984). Several contributors have explicitly

extended this line of reasoning to organizational decision processes arguing that long-

tenured individuals are more likely to have assimilated the organization's strategic decision-

making norms. Therefore, as the average organizational tenure of TMT members increases,

we would expect them to increasingly share a common perception of their firm's strategic

decision process.

2.3.6 Ethnic Diversity Ethnicity as a basis for identity is a social rather than a physiological phenomenon. As a

cultural phenomenon, ethnicity is highly persistent and people choose to pass on their

culture by marrying within their own groups (Bisin and Verdier, 2000). Before the 20th

Century, ethnic groups were defined as ‘people of other countries (Yin, 1973) but however,

ethnic groups do not necessarily share a country of origin but instead share a sense of

common political or cultural origin (Capehart, 2003). Alesina and La Ferrara (2000) present

a theory of ethnic diversity and community group formation in which individuals dislike

mixing across ethnic lines and this taste for homogeneity drives their theoretical prediction

that diverse areas exhibit lower participation in community activities.

42

Their theory implies that all individuals would opt to sort into ethnically homogeneous

organizations to avoid the costs of mixing with individuals from other ethnic groups. There

is more social cohesion and social capital within ethnic groups than across groups. People

identify more strongly with their kin group, ethnic group, or religious group, than with the

nation. Organizations divided by ethnicity are seen as less likely to reach co-operative

solutions, and more likely to victimize minorities (Bisin and Verdier, 2000). Thus ethnic

diversity is likely to have a negative effect on organizations performance outcomes.

2.3.7 Gender Diversity According to Van Knippenberg et al. (2004), the salience of various demographic variables

contributes to social categorization and demographic diversity is negatively related to team

performance only in situations where social categorization results in intergroup bias. Social

psychology research supports the notion that people form first impressions and categorize

one another on easily observable characteristics such as age, sex, and race (Fiske &

Neuberg, 1990).

The initial categorization tends to be tied to immediate physical features thought to be

informative about another person’s disposition. These social categories are so frequently

activated in daily social perception that they are chronically accessible and habitual in all

situations (Fiske & Neuberg, 1990). Research is clear that individuals take surface-level

information (sex, race, age) into account when categorizing others. There is evidence that

the saliences of race, sex, and age are not necessarily equal.

43

Harrison et al., (2002) found that surface-level aspects of diversity (age, sex, and race) were

differentially related to team members’ perceptions of similarity. Specifically, race diversity

was most predictive of team members’ ratings of how similar they were to one another. In

comparison, sex diversity had the least influence on perceptions of surface-level diversity,

and age diversity had a moderate effect. Taken together, these results suggest that age, sex,

and race diversity might be related to team performance through the activation of social

categorization, each to a different extent.

2.4 Corporate Performance

Traditionally, performance measurement is defined as the process of quantifying

effectiveness and efficiency of action (Neely, 2000). In other words, measuring performance

means transferring the complex reality of performance into a sequence of limited symbols

that can be communicated and reported under similar circumstances. Organizational

performance refers to efficiencies and effectiveness in terms of utilization of resources as

well as the accomplishment of its goals. Organizational performance is probably the most

widely used dependent variable, in fact it is the ultimate variable of interest to many

researchers in the field of management yet it remains vague and loosely defined

(Richard et al., 2009). The definition of organizational performance is an open question

with few studies using consistent measures (Kirby, 2005).

Performance has multiple meanings depending on the discipline and the context of the

discussion. Management scientists view performance as the degree to which actual results

have met the expected standards and taking corrective measures if not. Marketers view

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performance in quantitative and qualitative terms. Sales revenue and inventory turnover

are regarded as quantitative measures while qualitative measures include skills and

perceived share markets. Accountants judge performance by how much well a firm is

achieving set standards in terms of profitability. Economists on their part look at

performance in terms of sufficiency (Hersey and Blanchard, 1998).

They regard sales growth, productivity, employment and capacity utilization and export

performance as proxy for performance. Although performance plays a key role in

strategic management research, there is considerable debate on appropriateness of various

approaches to the utilization and measurement of performance. The complexity of

performance is perhaps the major factor contributing to the debate (Hersey and Blanchard,

1998).

There are three common approaches to large organization performance measurement,

namely; the objective measures that tend to be quantitative, the subjective measures that

tend to be qualitative therefore, judgmental and usually based on perception of

respondent, and triangulation. The objective and subjective approaches can also be

differentiated in terms of ends and means. Objective measures focus on end results while

subjective measures focus on the process or means by which ends results are achieved

(Cohen, 1990).

45

Perpetual measures such as profits and sales revenue can be used where there is

difficulty in obtaining quantitative data. It is not unique, as this has been used in several

studies and findings have shown little difference between objective and subjective data.

There is the last approach which is the call for triangulation from multiple measures and

the application of longitudinal analysis (Ailawadi et al., 2004, Richard et al., 2009).

Triangulation approach offers the advantage of simultaneously reducing error and

improving construct validity on the conditional fact that the multiple measures are tapping

the same theoretical domain (Venkatraman & Ramanujam, 1987). Triangulation also

handles the challenge of cross-industry study where it is difficult to control for industry

differences in both profitability and growth by allowing for perceptual measures and use

of multiple measures to compensate for weaknesses in each of the performance measures

individually (Tsai et al., 1991).

Scholars have also expressed dissatisfaction with the exclusive use of financial dimension

arguing that it encourages “short termness” and “local optimization” and therefore

overlooks the long term improvement strategy, ignoring competitor information and

interaction with customers (Kaplan and Norton, 1992). Researchers in such circumstances

recommend multiple measures of firm performance including both financial as well as non

financial measures.

46

Measurement of performance gives indication as to the effectiveness of an organization.

Whatever management decision is made within an organization, it is expected to be have a

relationship with its performance and hence its effectiveness. Performance measurement can

provide important feedback information to enable managers to monitor performance, reveal

progress, enhance motivation and communication, and diagnose problems (Wagner, et al.,

1984). As such, it is important for any firm to be in a position to evaluate overall

organizational performance.

2.4.1 Quantitative Measures of Performance

The most objective and most commonly cited indicators of performance are the financial

data. A financial performance measure should provide the corporation with a set of tools and

metrics that help to understand the corporation’s financial position. This information can be

used for making business decisions in a number of areas including business profitability,

pricing, budgeting, cost, strategic planning and incentive compensation. Most growing

businesses ultimately target increased profits, so it is important to know how to measure

profitability.

According to Murphy et al., (1996), profitability measures the extent to which a business

generates a profit from the factors of production which include labour, management and

capital. Profitability analyses focus on the relationship between revenues and expenses and

on the level of profit is relative to the size of the investment of the business. These include

performance sales or turnover profitability measures like return on investment (ROI), return

on assets (ROA), return on equity (ROE) and earnings per share (EPS) which measure

47

financial success (Parker and Bradley, 2000). Financial efficiency measures the degree of

efficiency in using labor, management and capital. Efficiency analysis deals with the

relationship between inputs and outputs. Because inputs can be measured using both

physical and financial terms, a large number of efficiency measures in addition to financial

measures are possible. These include depreciation expense, interest expense and net firm

income operation ratios (Gray, 1997).

2.4.2 Qualitative Measures of Performance In the last few years financial performance has been incorporated with other non financial

performance measures. This is because value creation comes from all parts of the business.

Scholars and practitioners have designed and connected the non financial aspects of the

strategic performance measures that focus on aspects such as market share, market growth,

current strategy, cost market effectiveness, technological effectiveness, diversification and

product development. Other measures include human resource development, leadership

effectiveness, customer retention, customer satisfaction, growth and brand reputation

(Evans, 2007).

Corporate effectiveness is the measure of how successful organizations achieve their

mission through their core strategies. Corporate effectiveness studies are concerned with the

unique capabilities that organizations develop to assure success (McCann, 2004). Kreitner

and Kincki (2007) discuss four generic approaches to be used for assessing corporate

effectiveness. Goal accomplishment is the most widely used. A performance outcome goal

targets specific end results such as improved customer satisfaction and increased profits.

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Goals may also be set for corporate efforts such as minority recruiting, pollution prevention

and quality improvement. The second approach is the resource acquisition which relates to

inputs rather than outputs. An organization is deemed effective in this regard if it acquires

necessary factors of production. Internal performance also referred to as the healthy system

is the third approach. Healthy organizations are characterized by focused and goal oriented

problem solving, balanced power relationships, experimentation and new behaviors,

dispersed decision making processes, top management commitment, support for ongoing

development and ability to sense suboptimal learning processes (Sayeed, 2001).

The fourth approach is the strategic constituencies’ satisfaction. Strategic constituency is

any group of individuals who have some stake in the organization for example resource

providers, users of the organizations product or services, producers of the organizations

output, groups whose cooperation is essential for the organizations survival or those whose

lives are significantly affected by the organization (Kreitner and Kincki, 2007).

2.5 Firm Innovation Innovation research has distinguished between innovation types because they have different

characteristics. The variety of innovation types notwithstanding, the best known and most

widely studied typology of innovation is the distinction between product and process

innovations (Light, 1998). Another widely recognized but less researched typology is the

distinction between technological (technical) and administrative (organizational and

management) innovations (Birkinshaw et al., 2008).

49

Meeus and Edquist (2006) offered a taxonomy that distinguishes between two types of

product innovations (in goods and in services) and two types of process innovations

(technological and organizational). Hamel (2006) distinguished between two types of

process innovation: innovations in operational processes (such as customer services,

logistics, and procurement) and innovations in management processes (such as strategic

planning, project management, and employee assessment). From Meeus and Edquist’s

(2006) four innovation types, this study employs three that are applicable to service

organizations: service innovations, process innovations and business model innovation.

2.5.1 Service Innovations Gadrey et al., (1995) define service innovations as innovations in processes and innovations

in organization for existing service products. Service innovations can, therefore, be

described as new developments in activities undertaken to deliver core service products for

various reasons, for example to make those core service products more attractive to

consumers. Such developments tend to involve interaction with customers and can be

associated with either new or existing service products.

Johne and Storey (1997) argue that service suppliers must develop the precise form of

service product and the appropriate nature of interaction with customers since the interaction

process is typically an integral part of an offering. Service innovations are, therefore, related

to variations in product delivery or add-on services embellishing the service experience for

the customer. The service innovations may influence or be influenced by innovations in the

core service product.

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Innovation research has not generally distinguished between product and service

innovations; that is, services offered by organizations in the service sector are

conceptualized to be similar to products introduced by organizations in the manufacturing

sector. A product innovation is the introduction of a good or service that is new or

significantly improved regarding its characteristics or intended uses; including significant

improvements in technical specifications, components and materials, incorporated software,

user friendliness or other functional characteristics (OECD Oslo Manual, 2005).

Product innovations can utilize new knowledge or technologies, or can be based on new uses

or combinations of existing knowledge or technologies. Product innovations are more

focused on the market and are mainly customer driven (Utterback and Abernathy, 1975).

The terms “service product innovations” and “product innovations” have been used

interchangeably in the literature to describe a particular set of innovations in service

companies (Miles, 2001).

Service product innovations are related to new developments in the core offering of service

companies that tend to create new revenue streams. In the financial and insurance services

sector, this includes new or improved mortgage products like interest only or other

repayment options, credit cards options like gold, silver, platinum, or blue cards or a

corporate card and general insurance products like buildings, contents, travel, medical,

motor and payment protection. Service product innovations for investment banks include the

development of investment solutions for clients like the restructuring of debt using

derivative instruments (Miles, 2001).

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2.5.2 Process Innovations A process innovation is the implementation of a new or significantly improved production or

delivery method. This includes significant changes in techniques, equipment and/or

software. Process innovations can be intended to decrease unit costs of production or

delivery, to increase quality, or to produce or deliver new or significantly improved products

(OECD Oslo Manual, 2005). Fagerberg et al. (2004) stressed that while the introduction of

new products is commonly assumed to have a clear, positive effect on the growth of income

and employment, process innovation, due to it is cost-cutting nature, can have a more hazy

effect.

Process innovations allow firms to improve the quality of the products, or attain

improvements in the efficiency of production. Through product innovations, the firm can

gain a competitive advantage by differentiating its output and increasing the quality and

variety of goods which allows it to increase demand and open up opportunities for growth

(Abernathy and Utterback, 1978). Process innovations are primarily driven by efficiency

(Utterback and Abernathy, 1975). The new processes can be associated with the

technological core or the technical system of the organization (technological process

innovations) or to the administrative core or the social system of the organization

(administrative process innovations) (Meeus and Edquist, 2006). Technological process

innovations are new elements introduced into an organization’s production system or service

operation for producing its products or rendering its services to the clients (Damanpour and

Gopalakrishnan, 2001).

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The drivers of these innovations are primarily reduction in delivery time, increase in

operational flexibility, and lowering of production costs (Boer and During, 2001).

Technological process innovations, therefore, modify the organization’s operating process

and systems (Meeus and Edquist, 2006). In service organizations, these innovations are

primarily innovations associated with information technology (Miles, 2001).

Administrative process innovations are new approaches and practices to motivate and

reward organizational members, devise strategy and structure of tasks and units and modify

the organizations management process (Birkinshaw et al., 2008). Whereas technological

innovations are directly related to the primary work activity of the organizations and mainly

produce changes in its operating system, administrative innovations are indirectly related to

the organizations basic work activities and mainly affect management systems (Damanpour

and Evan, 1984).

2.5.3 Business Model Innovation Business model innovation refers to how a company creates, sells, and delivers value to its

customers (Porter, 1985), whether it be new to the firm, customer, or industry. A business

model replacement improves performance in at least four of these business model elements

versus the competition to create sustained enhancements in company’s earnings, cash flows

and revenues. Business model innovation means business model replacements that provide

product or service offering to customers and end users that were not previously available.

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New business models provide alternative approaches to business practices for firms to

consider, not only in terms of what is done, but also in terms of how it is done. New

business models are business practices that result in greater efficiency by utilizing

information technology. Proponents of new business models suggest that new technology

and innovative business practices provide the potential for organizational efficiency gains

that are referred to as improvements in value (Porter, 1985).

They include quality of service production and delivery, research and development cost-

efficiency, transaction costs, productivity, inventory, and demand management, production

lead-time reduction, reduced search costs for customers, selling process improvement,

increased customization capabilities, supply chain and relationships improvement and an

increasingly long-term perspective of the firm, subsequently leading to business

performance (Fox, 2001).

2.6 Leadership Styles

Leadership is considered a factor that has a major influence on the performance of

organizations, managers and employees. Leadership is an important concept which is crucial

for understanding top management team dynamics and the concept of leadership is

associated with variables of power and influence (Cannella & Monroe, 1997). Jackson

(1992) points at the paradox that upper echelons theory, which argues on the strong impact

of leaders on their organization, ignores the role of the CEO as the leader of the top

management team.

54

The argument that an executive team as a whole has stronger influence on firm

behavior than the CEO alone has received much empirical support (Finkelstein &

Hambrick, 1996). Yet, aggregating individual characteristics to the team level without

paying due attention to and adequately hypothesizing the relative influence of each

team member may be problematic (Canella & Holocomb, 2005).

The dominant upper echelon reasoning is based on an assumption of equality of individual

effects. However, the degree of influence of individual executives on firm choices depends

on the power of the CEO, who as a group leader has the “potential to neutralize both

beneficial and debilitating composition effects” (Jackson, 1992) as well as the power

distribution within the team itself. CEO personality is likely to have a strong influence on

top management team dynamics (Peterson et al., 2003).

The extent to which all executives are involved in the strategic decision-making is

contingent on the CEO's personality and power. Furthermore, the CEO plays an important

role in selecting new TMT and the degree of similarity among top executives can be

regarded as a result of the CEO's dominance (Mace, 1971). More demographically similar

executives are more likely to agree with the CEO suggestions and decisions and to not

critically question his or her thinking. Thus, a powerful CEO would prefer to have top

management team members who are similar to himself and support his decisions (Hambrick

& Fukutomi, 1991). This study aimed amongst other things to establish the moderating

effect of the CEOs leadership style on the relationship between TMT demographic diversity

and corporate performance.

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2.6.1 Authoritarian Leadership Autocratic superiors act in more self-centered ways. They make decisions more unilaterally

and supervise subordinates’ work activities more closely (Muczyk & Reimann, 1987). An

autocratic leader is a leader who is very strict, directive, makes use of his power of influence

from his position to control rewards and force the followers to comply with his instruction

(Jogulu & Wood, 2006). This type of leader dominates and controls all the decisions and

actions by giving instruction and direction to the followers on what to do and how to carry

out a task whereby restricting follower’s creativity and innovativeness. In most previous

studies (Ansari, et al., 2004), managers who were autocratic and directive were deemed

effective. However, in view of globalization and the knowledge economy, autocratic

leadership may no longer be accepted by the subordinates who are becoming more

competent, independent and knowledgeable (Jayasingam, et al., 2008).

In this style the leader tells his employees what he wants them to do and how they should do

it without getting any advice from any one of them as followers. One of the appropriate

conditions to use this style of leadership is when the leader has all the information to solve

problems or there is no enough time or when the employees are well motivated. Some

people tend to think that the autocratic style is leading by threats and abusing their power.

Indeed, as Clark explains, this is not or should not be the authoritarian (autocratic) style, but

rather is an abusive, unprofessional style called bossing people around and this has no place

in a leader’s repertoire (Clark, 1997).

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2.6.2 Free Reign Leadership In this style, the leader allows the employees to make the decision, but the leader is still

responsible for the decisions that are made. This style of leadership is used when employees

are able to analyze the situation and determine what needs to be done and how to do it.

Using this style, the leader believes that he cannot do everything and thus delegate certain

tasks and set priorities (Clark, 1997).

If a manager wants to blame others when something wrong happens or when the employees

do something wrong, then this style is not the style this manager should use. A manager

should use this style when he has the full trust and confidence in the people below him and

this should be used wisely. This style is also known as laissez faire (or laisser faire), which

is the non interference in the affairs of others (Clark, 1997). The major indicator of laissez

faire behavior is the leader’s incapacity to get involved. The leader works intentionally on

avoiding involvement or confrontation.

He or she keeps personal interactions to minimum. In fact, this approach indicates that a

leader loses his or her power base very fast and he or she is out of touch with their worker

(Bill Lee, 2006). Laissez faire behavior reflects a lazy and sometimes non-committed

attitude among executives. It damages the organizational goodwill and frustrates hard

working executives who “do not walk the talk” (Sarros & Santora, 2001). Bill Lee (2006)

pointed out that if there’s anything that will prevent a company from optimizing its bottom

line, it is a laissez-faire management style, which is a propensity among company managers

to avoid too much interference in employee behavior.

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2.6 .3 Democratic Leadership Anderson (1959) defined the democratic leader as one who shares decision making with the

other members. He asserted that democratic leadership is associated with higher morale in

most situations. He denied that democratic leadership is associated with low productivity

and high morale and that authoritarian leadership is associated with high productivity and

low morale. Democratic leadership is associated with increased follower productivity,

satisfaction, involvement, and commitment (Hackman & Johnson, 1996). Member

satisfaction and nominations for leadership are greater under democratic leadership (Bass,

1990).

Although the significant drawbacks to democratic leadership are time consuming activities

and lengthy debate over policy, participation plays a key role for increasing the productivity

of leadership (Denhardt & Denhardt, 2003). Participation is a core characteristic of

democratic leadership; and the ideal of democratic leadership is friendly, helpful, and

encouraging participation (Luthar, 1996). On the other hand, Kuczmarski and Kuczmarski

(1995) cited the characteristics of a democratic leader as knowledgeable, influential,

stimulating, a winner of cooperation, a provider of logical consequences, encouraging,

permitting of self-determination, guiding, a good listener and respecting, and situation-

centered. Gastil (1994) defined the characteristics of democratic leadership as distributing

responsibility among the membership, empowering group members, and aiding the group’s

decision-making process

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In this style, the leader involves one or more than one employee in the decision-making

process determining what to do and how to do it. However, the leader in this style maintains

the final decision. As Clark (1997) explains, using this style is not a sign of weakness, but

rather a sign of strength that your employees will respect. The democratic style of leadership

is normally used when part of the information is available and the employees have other

parts, that is to say, you as a manager, have one part while the employees have the other

part. That is why managers employ skillful employees. Using this style has mutual benefit

for both a manager and the employees. From the employees’ side, using this style allows

them to become part of the team and from the manager’s side; it allows the manager to make

better decisions (Clark, 1997).

2.6.4 Transactional Leadership Transactional leaders identify and clarify for subordinates their job tasks and communicate

to them how successful execution of those tasks will lead to receipt of desirable job rewards

(Avolio & Bass, 1999). Transactional managers determine performance goals that

subordinates need to achieve, suggest how to execute related tasks, and provide feedback.

Transactional supervisors also recognize the immediate needs of their subordinates and

communicate to employees how those needs will be met (what organizational rewards they

will receive) through effective performance. As a result, subordinates presumably will be

motivated to accomplish their goals. Previous investigations suggest that transactional

leadership can have a favorable influence on attitudinal and behavioral responses of

employees (Bass, 1990). In transactional leadership, an exchange of materials, social, and

psychological benefits occur (Bass, 1985).

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In this process, leaders and followers reinforce each other’s behavior with reward or

punishment. In a transactional environment, employees work as independently as possible

from their colleagues and cooperation is dependent on negotiations not problem solving

(Bass and Avolio, 1996). Everything in this environment or culture is thought of in terms of

explicit and implicit contractual relationships (Jung, Bass and Avolio, 1999). In a

transactional culture, job assignments are given out based on terms of employment,

conditions, disciplinary codes, and benefit structures. There is a price on everything and

everyone has a price for his or her motivation to work in this culture.

Leaders are negotiators and resource allocators and individuals find little to identify within

the organization thus resulting in little innovation and risk taking in this culture (Bass and

Avolio, 1993). The primary focus of the transactional leader is setting goals, clarifying the

link between performance and rewards, and providing feedback that is constructive in order

to enable followers to stay on task (Bass, 1985). The characteristics of the transactional

leader are contingent reward, management by exception (active), management by exception

(passive), and laissez-faire leadership (Bass, 1990). Contingent reward leadership is highly

correlated in research studies to transformational leadership (Avolio et al., 1999).

Contingent reward leadership relates positively to subordinate outcomes, such as satisfaction

and performance but the strength of association is of a lower level than transformational

leadership (Lowe, Kroeck, & Sivasubramaniam, 1996).

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2.6 .5 Transformational Leadership Transformational managers normally adopt a long-term perspective. Rather than focusing

solely on current needs of their employees or themselves, they also focus on future needs;

rather than being concerned only with short-term problems and opportunities facing the

organization, they also concern themselves with long term issues; rather than viewing intra-

and extra organizational factors as discrete, they view them from a systems perspective. In

essence, such individuals tend to be leaders rather than merely managers because of the way

in which they execute their job responsibilities (Avolio, & Bass, 1988).

Although transactional leadership can produce positive effects on employees,

transformational leadership can engender even greater results. Transformational leadership

is not a substitute for transactional leadership; rather, it can be a complement. Previous

research has found that transformational leadership augments the effects of transactional

leadership (Bass, 1990).

Managers, who exhibit transformational leadership raise subordinates’ awareness of the

importance and value of designated outcomes, get employees to transcend their own self-

interests for the sake of the group or organization, and change or increase subordinates’

needs (Avolio & Bass, 1988). Through such means, employees’ motivation and self-

confidence are enhanced to accomplish these results. Transformational leaders possess and

display four key characteristics. These are charismatic leadership, inspirational motivation,

intellectual stimulation, and individual consideration.

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Managers demonstrating charismatic leadership have a vision, a strong influence, and a

sense of mission. They also instill pride in their subordinates and command respect.

Employees have a high level of trust and confidence in such managers, tend to adopt their

vision, seek to identify with them, and have intense feelings about them. In addition,

subordinates develop a strong sense of loyalty to their supervisor (Bass, 1990). Managers

manifesting inspirational motivation articulate high expectations to subordinates,

communicate important purposes (or objectives) in simple ways, and use symbols to focus

their efforts.

Also, they demonstrate self-determination and commitment to attaining objectives and

present an optimistic and achievable view of the future. Through these efforts, such

managers help convince employees that they can accomplish more than they initially felt

was possible. A transformational leader provides intellectual stimulation to employees by

encouraging them to use new approaches for solving old problems; to explore new ways of

achieving the organization’s mission and goals; to employ reasoning, rationality, and

evidence rather than unsupported opinions; and to utilize intuition (Bass, 1990).

Subordinates under such a supervisor may alter their way of thinking, are not hesitant to

offer their ideas, become critical in their problem solving, and tend to have enhanced

thought processes (Bass, 1990). Managers displaying individual consideration treat each

employee as an individual. Such supervisors are attentive to the unique concerns of

subordinates, give them personal attention, and consider their individual development and

growth needs.

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Additionally, they provide mentoring, communicate on a one-to one basis, and thus

personalize interaction with subordinates. Employees having this kind of manager tend to be

coached, feel supported by, listened to, respected by their managers, and have an enhanced

sense of self-confidence through superiors’ efforts at esteem building. Mentoring, coaching,

and counseling are means of a manager’s demonstrating individualized consideration (Bass,

1990).

As noted earlier, the same managers could exhibit both transactional and transformational

leadership behaviors; a predominantly transactional leader could exhibit qualities of

transformational leadership, and vice versa (Bass, 1990). A series of studies reviewed by

Bass (1996) support the distinction between transformational and transactional leadership

dimensions. There is also considerable evidence that transformational leadership is effective

and is positively related to subordinate satisfaction, motivation, and performance.

2.7 Top Management Team Demographic Diversity and Corporate Performance

Despite the large number of studies on TMT heterogeneity, however, research has yielded

inconsistent results, and the question of whether diversity in managerial backgrounds is

advantageous for companies still remains open (Canella et al. 2008). The findings of

empirical studies on the effects of TMT demographic diversity on corporate performance

range from positive (Carpenter 2002), through non-significant (Ferrier 2001) to negative

(Michel and Hambrick 1992).

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One study addressing diversity at organizational levels was conducted by Murray (1989).

Murray used 84 Fortune food and oil companies to investigate heterogeneous versus

homogeneous groups and their effect on organizational performance. Diversity was

measured as a composite of age, educational degree, average tenure and occupational

history. Findings showed that performance and diversity is related to the type of market the

organization is operating in.

Specifically, homogenous groups were more effective than heterogeneous groups during

intense market competition. Heterogeneous groups were more effective in dealing with

organizational change, suggesting that these groups may better respond to rapid dynamic

changes in the market. A limitation with Murray’s (1989) study was that diversity was

measured via the surrogates’ age, educational degree and tenure. While these are

undoubtedly important, it may be that racial and ethnical diversity are more informative and

relevant to the demographic make-up of the current workforce.

Shrader et al. (1997) examined firm financial performance with gender diversity at the

middle- and upper-management, and at the board of director levels for large firms. They

found general organizational effects, but few top-level diversity effects on performance and,

in general, reported a positive link between women (diversity) in management positions with

firm financial performance. Shrader et al (1997) explain the positive performance

relationship by suggesting that these companies were recruiting from a relatively larger

talent pool, and subsequently recruited more qualified applicants regardless of gender.

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In a more recent study conducted by Richard (2000), the relationship between organization-

wide diversity, business strategy and firm performance was examined in the context of the

banking industry. Performance was measured by productivity return on equity, and market

performance from 64 banks in three states. Study results showed that diversity added value

and was perceived as a relative competitive advantage for banks.

Focusing specifically on boards of directors, Catalyst (1995) reported that of the top 100 US

companies in terms of revenue, 97 had at least one woman member. In an earlier study by

Catalyst (1993), 82 per cent of the 50 most valuable Fortune 500 firms were found to

include at least one woman director on the board. In another recent work, Burke (2000)

found significant correlation coefficients between the number of women directors and

revenue, assets, number of employees and profit margins for Canadian firms. Therefore, the

findings above indicate that profitable firms may be amenable to diverse top management

team’s appointments.

Jackson et al (1995), in their paper on diversity in organizations, reviewed and summarized

empirical evidence from a number of related disciplines about the link between diversity and

team effectiveness. The findings suggested that heterogeneity is positively related to the

creativity and the decision-making effectiveness of teams. With enhanced creativity and

innovation due to the generation of greater variance in decision-making alternatives

(Jackson et al., 1995) performance of organization is bound to improve.

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Bantel & Jackson (1989) found that organizational innovations in the banking industry were

positively associated with heterogeneity of functional expertise among members of the top

management teams of firms in that industry. Watson et al (1993) reported that, over time (15

weeks), initial performance differences between newly formed culturally homogeneous and

culturally diverse groups disappeared and eventually crossed-over, such that culturally

heterogeneous groups that initially performed poorly relative to homogeneous groups later

performed better than homogeneous groups on selected aspects of task performance.

Bantel and Jackson (1989) concluded that, when solving complex, non-routine problems,

groups are more effective when composed of individuals having a variety of skills,

knowledge, abilities and perspectives. Further, Schneider (1983) argued that organizational

survival in turbulent environments may be aided by attracting, selecting and retaining

demographically diverse managers who will later make important strategic decisions.

Heterogeneous groups do have the advantage of enhanced adaptability and greater creativity

(Katz, 1982). Heterogeneous teams with diverse cognitive resources are able to better

identify strategic issues (Hambrick and Mason, 1984). Furthermore, heterogeneous teams

are able to recombine the resources and knowledge in different ways to develop strategic

alternatives in face of dynamic environment (Rodan and Galunic, 2004). While

heterogeneous groups may contain members whose usefulness is not immediately apparent,

thus making them less efficient in handling the current situation, they are more likely to

possess within them the skills required if that current situation changes.

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Heterogeneous groups do generate greater conflict but this can be productive (Deutsch,

1969) since resolving the conflict can lead the group to new and better solutions to the

problems of environmental adaptation. Thus, the diversity of skills and outlooks

characteristic of heterogeneous groups can increase the adaptability of the group. On the

other hand, diversity can be disadvantageous to organizational performance (Hambrick et

al., 1996), in which, homogeneous top management tends to produce better results as

compared to heterogeneous top management.

Knight et al. (1999) also argues that team performance tends to deteriorate as diversity level

increases. For example, diversity has been shown to have negative effects on both group

cohesion (Katz, 1982) and the frequency or quantity of communication (Smith et al., 1994).

In addition, diversity tends to lead to increased conflict within the group (Eisenhardt and

Schoonhoven, 1990) and increased political activity (Pfeffer, 1981).

Hambrick and Mason (1984) and Dess and Origer (1987) argued that differences in TMT's

backgrounds may be associated with less strategic consensus and subsequently poorer

performance, due in part to decreased communication and increased conflict. Social identity

theory, and group process theory suggests that team diversity fuels conflicts and thus has

negative effect on strategic change (Naranjo-Gil et al., 2007; Cho and Hambrick, 2006;

Yokota and Mitisuhashi, 2008; Nielsen, 2010).

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2.8 Firm Innovation and Corporate Performance Innovation is often claimed to be a cornerstone of competitiveness (Denton, 1999) and in

some cases also profitability. The role of innovation in a firm’s strategy is further said to

contribute to competitive advantage (Johannessen et al., 2001) organizational performance

(Yamin et al., 1999) and market share (Robinson, 1990). The positive effect of innovation

on the firm’s performance has been explained by the fact that through innovation the

company faces up to the changes in the firm’s environment (Agarwal et al., 2003).

However, some studies examining the relationship between product innovation and

performance have generally yielded inconsistent and unclear findings (Wright et al., 2005).

Innovation is an expensive and risky activity, with the potential to elicit both good and bad

effects on the firm’s performance (Simpson et al., 2006). It is not surprising, then, that in

some studies no direct or immediate effects have been found.

The popular notion that innovation is vital for the growth and survival of the firm ( Han et

al., 1998) may not be applicable in certain situations, particularly environment, where the

circumstances faced by the firm do not reward this behavior (Manu, 1992). For example, in

a sample of small manufacturers, Covin and Slevin (1989) stated that in benign

environments, with low levels of competition, resources allocated for research and

development to support innovation might better be directed to increasing promotional efforts

or customer service. In the same line, innovation is considered of less importance for those

firms operating in environments where competitive pressures are not so intense (Freel,

2006).

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Innovation is a way of adapting to the environment (Cooper, 1984) and therefore, it can be

expected that its effects on performance will vary, precisely, according to the firm’s

environment (Carbonell and Rodrı´guez, 2006). In particular, firms under higher stress

arising from the five competitive forces must develop a higher adaptation effort and,

therefore, it is likely that innovation exerts a higher influence on their performance.

In this type of hostile environment, as compared to environments with low pressure from the

five competitive forces, innovation, expensive and risky as it is, is an obligation imposed by

the environment that will be rewarded with higher performance (Miller and Friesen, 1983).

The TMT comprises individuals with the power and authority to make strategic decisions,

and, therefore, to develop strategies aimed at innovation. Upper echelon theory states that

TMTs exert a fundamental influence on strategic choice in their organizations, and, hence,

in their results (Wiersema and Bantel, 1992).

2.9 Leadership Styles and Corporate Performance An overview of the history of research into the topic of leadership finds that the literature on

leadership and performance can be broadly categorized into a number of important phases.

Early studies on leadership (frequently categorized as ‘trait’ studies on leadership)

concentrated on identifying the personality traits which characterize successful leaders

(Mahoney et al., 1960). Trait theories assume that successful leaders are ‘born’ and that they

have certain innate qualities which distinguish them from non-leaders (Stodgill, 1948).

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However, the difficulty in categorizing and validating these characteristics led to widespread

criticism of this trait approach, signaling the emergence of ‘style’ and ‘behavioral’

approaches to leadership (Stodgill, 1948). Style and behavioral theorists shifted the

emphasis away from the characteristics of the leader to the behavior and style the leader

adopted (Likert, 1961). The principal conclusion of these studies appears to be that leaders

who adopt democratic or participative styles are more successful (Bowsers and Seashore,

1966).

In this sense, these early studies are focused on identifying the ‘one best way of leading’.

Similarly to trait theories, the major weakness of style and behavioral theories is that they

ignore the important role which situational factors play in determining the effectiveness of

individual leaders (Mullins, 1999). It is this limitation that gives rise to the ‘situational’ and

‘contingency’ theories of leadership (Vroom and Yetton, 1974) which shift the emphasis

away from ‘the one best way to lead’ to context-sensitive leadership.

Although each study emphasizes the importance of different factors, the general tenet of the

situational and contingency perspectives is that leadership effectiveness is dependent on the

leader’s diagnosis and understanding of situational factors, followed by the adoption of the

appropriate style to deal with each circumstance. However, in an apparent return to the ‘one

best way of leadership’, recent studies on leadership have contrasted transactional leadership

with transformational leadership (Bass, 1990).

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Transactional leaders are said to be ‘instrumental’ and frequently focus on exchange

relationship with their subordinates (Bass and Avolio, 1993). In contrast, transformational

leaders are argued to be visionary and enthusiastic, with an inherent ability to motivate

subordinates (Bycio et al., 1995; Howell and Avolio, 1993). Although the brief summary

above indicates that research into leadership has gone through periods of skepticism, recent

interest has focused on the importance of the leadership role to the success of organizations.

Fiedler (1996), one of the most respected researchers on leadership, has provided a recent

treatise on the importance of leadership by arguing that the effectiveness of a leader is a

major determinant of the success or failure of a group, organization, or even an entire

country. Indeed, it has been argued that one way in which organizations have sought to cope

with the increasing volatility and turbulence of the external environment is by training and

developing leaders and equipping them with the skills to cope (Hennessey, 1998; Saari et al.,

1988). These claims are based on the assumption of a direct link between leadership and

organizational performance.

Widely celebrated cases of a direct leadership–performance link may be found in numerous

anecdotal accounts of improvements of company performance attributed to changes in

leadership (Simms, 1997). However, empirical studies into the links between leadership and

performance have been lacking. One notable exception is the detailed study of the impact of

leadership on performance in the somewhat surprising context of Icelandic fishing ships.

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Thorlindsson (1987) suggests that variations in the performance of different fishing ships,

under identical conditions, can be accounted for by the leadership skills of captains. Over a

three-year period, Thorlindsson (1987) revealed that the leadership qualities of the ship

captains accounted for 35 to 49 per cent of variation in the catch of different crews. Other

studies which examine the links between leadership and performance coincide with the re-

emergence of the ‘one best way to lead’ debate. Of particular relevance is the resurgence of

interest into charismatic leadership, which is frequently referred to as transformational

leadership (Bass and Avolio, 1993).

A number of researchers theorize that transformational leadership is linked to organizational

performance (Bycio et al., 1995; Howell and Avolio, 1993). Conceptually, it is argued that

the visionary and inspirational skills of transformational leaders motivate followers to

deliver superior performance (Quick, 1992). Teammates with different organizational roles

possess different skills and expertise and, hence, avail themselves of broader informational

resources and knowledge.

Moreover, heterogeneous teams carry not only diverse knowledge and information but also

different vocabularies, cognitive patterns, and styles (Drach-Zahavy & Somech, 2001).

These patterns of heterogeneity might potentially induce team members to discuss,

reanalyze, question, and debate. Without intervention by the superior, a team’s

heterogeneity may remain an untapped resource, existing but never used (Simons et al.,

1999).

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Regarding the intervening role of the participative superior, recent work (Dougherty, 1996;

Durham, Knight, &Locke, 1997; Sagie et al., 2002) has suggested that the more consistent

benefits of the participative style lie in the cognitive realm. These superiors can help reduce

barriers between diverse professionals in functionally heterogeneous teams by facilitating

the open exchange of ideas and analytical perspective across multiple functions (Barrett,

1998; Curral et al., 2001; Lewis et al., 2002).

2.10 TMT Demographic Diversity, Firm Innovation and Corporate Performance Innovation has become one of the key strategies of the firm for gaining competitive

advantage (Hitt et al., 1991), expanding market share and increasing firm performance.

There is also reason to believe that the demography of top leadership teams should influence

firm innovation. For example, Bantel and Jackson (1989) suggested that functional and

educational diversity on the executive team increases the team’s creativity and innovation

due to the diverse human capital of top management.

When elites make decisions, they are influenced by their past experiences (Cyert and March,

1963) and demographic characteristics (Hambrick and Mason, 1984). Robinson and

Dechant (1997) suggest that attitudes, cognitive functions, and beliefs are not randomly

distributed in the population, but tend to vary systematically with demographic variables,

such as age, race, and gender. Thus, scholars posit that diversity increases the number of

ideas, promotes creativity, and leads to increased innovation (Cox, 1993).

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Support for the idea that TMT racial and gender diversity should be related to firm

innovation may also be found in the behavioral theory of the firm (Cyert and March, 1963).

Further, the behavioral theory of the firm posits that the extensiveness of the search and

decision making processes can influence innovation in organizations. Decisions can be

biased by the information within the decision making group, especially when the search

process is conducted by a homogeneous group that focuses only on areas in which group

members have previous experience (Hambrick and Mason, 1984).

For example, TMTs advise and identify which businesses to enter and acquire, and the less

information they have on the attractiveness of the market, the more innovation is perceived

as a risk. Homogeneous groups may actually hamper innovation because high levels of

cohesion produce pressures towards conformity. Heterogeneous groups, on the other hand,

should produce a broader range of ideas and information because they contain a diverse

body of knowledge (Milliken and Martins, 1996). Unique ideas and perspectives impact the

identification, development and selection of decisions (Mintzberg et al., 1976).

Empirical research on group decision-making has supported this assertion, showing that

heterogeneous groups produce higher quality decisions than homogeneous groups on

complex tasks (Amason, 1996) and generate more innovative solutions than homogeneous

groups through cognitive conflict. This often occurs as TMTs are able to provide divergent

perspectives.

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Burt (1992) suggested the value of diversity of ties, asserting that greater information is

received by forming links with individuals outside the immediate network. When firms have

diverse ties, they are better able to innovate (Burt, 1997). Firms that have these non-

redundant ties engage in interactions which help executives overcome decision biases and

improve the quality of decisions (Daft and Lengel, 1984). This hence leads to improved

organizational performance since through innovation, the company faces up to the changes

in the firm’s environment (Agarwal et al., 2003).

Firm innovation is likely to transmit the effect of diversity to firm performance. Increasing

diversity on the TMT leads to more varied ideas, perspectives, and networks which, in turn,

increase innovation. Innovation would thus lead to improvement in a firm performance

(Caves and Ghemawat, 1992; Nelson and Winter, 1982). Therefore, innovation should

mediate the relationship between TMT diversity and firm performance.

2.11 TMT Demographic Diversity, Leadership Styles and Corporate Performance

The role of leadership style as a moderator of the relationship between diversity and

performance builds on findings that leaders can use intellectual stimulation or contractual

relationship with their subordinates as a strategy to influence their subordinates. Through

intellectual stimulation for example, leaders challenge existing assumptions and explicitly

encourage new ideas and innovative approaches to problem solving (Bass, 1985). This

stimulates followers to think outside the box, explore new alternatives and to voice their

divergent views.

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The intellectual stimulation of group members encourages team members to overcome

pressures towards convergent thinking and path dependence that operate in functional areas

and organizations (Teece and Pisano, 1998) and encourages novel interpretations of existing

information (Bhatt, 2000). The extent to which group members are stimulated to consider

opposing or conflicting ideas positively affects the groups’ ability to resist conformity

pressures (Nemeth and Nemeth-Brown, 2003) and avoids the risk of premature movement to

consensus.

This theoretical argument is supported by empirical findings. Shin and Zhou (2003) found

that transformational leadership was positively related to the manifestation of diverse ideas

and creative approaches. Evidence has also supported the role of transformational leadership

in facilitating divergent thinking in teams (Jung, 2001). Stimulating novel approaches

increases the likelihood of group norms that promote open-minded consideration of

divergent alternatives as well as group behaviour that involve the challenging, justification

and debate of different perspectives and solutions (Okhuysen and Eisenhardt, 2002).

Leader behaviors that explicitly encourage questioning and challenging of accepted ideas

lead to the development of a climate in which members believe that alternative views should

be expressed openly, attended to, debated and considered for integration into the final

solution. Leadership style may also act to lessen the likelihood of affective conflict

subsequent to social categorization by stimulating social identification of their followers

through the articulation of a compelling vision (Bass et al., 2003). By making the vision

salient and inspiring, followers internalize the vision and feel pride in being part of the team

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(Ashkanasy and Tse, 2000). They start thinking of collective interests, and perceive their

individual effort and work roles in the context of the group’s cooperative goals (Wang et al.,

2005). This in turn enhances the personal meaningfulness and importance of followers’

willingness to fulfill the vision articulated by the leaders (Bass et al., 2003).

Transactional leaders determine performance goals that subordinates need to achieve,

suggest how to execute related tasks, and provide feedback. Transactional supervisors also

recognize the immediate needs of their subordinates and communicate to employees how

those needs will be met (what organizational rewards they will receive) through effective

performance. As a result, subordinates presumably will be motivated to accomplish their

goals. Previous research suggests that transactional leadership can have a favorable

influence on attitudinal and behavioral responses of employees (Bass, 1990).

2.12 TMT Demographic Diversity, Firm Innovation, Leadership Style and Corporate

Performance

Research on group problem solving clearly demonstrates that cognitive resources are a key

determinant of group performance (Bottger and Yetton, 1988) resulting in either negative

outcomes or positive outcomes. Diversity may result in positive outcomes since when

solving complex, non- routine problems, the presence of people with differing points of

view ensures consideration of a larger set of problems and a larger set of alternative

potential solutions. The need to reconcile dissimilar solutions stimulates effective group

discussion, prevents group- think, and leads to high quality and original decisions (Nemeth,

1985).

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However, diversity may result in negative outcomes since diversity often implies

disagreement over strongly held preferences and beliefs that will not be compromised. Thus,

extensive decision-making may lead to head-butting rather than to issue resolution (Glick et

al., 1993). Further, diversity often implies that different people will use their own

specialized languages, images, and stories to communicate which may lead to

communication failures (Daft and Lengel, 1986).

Studies on TMT diversity are anchored on the upper echelon reasoning which is based on

an assumption of equality of individual effects among the TMT. However, the degree of

influence of individual executives on firm choices depends on the power of the CEO, who

as a group leader has the “potential to neutralize both beneficial and debilitating

composition effects” (Jackson, 1992) as well as the power distribution within the team

itself. CEO personality is likely to have a strong influence on top management team

dynamics (Peterson et al., 2003).

The extent to which all executives are involved in the strategic decision-making is

contingent on the CEO's personality and power. Strategic leadership and innovation

strategy are crucial for achieving and maintaining strategic competitiveness in the 21st

century (Ireland and Hitt, 2001). Strategic leaders have been repeatedly recognized for their

critical role in recognizing opportunities and making decisions that affect innovation

processes (Finkelstein and Hambrick, 1996). Strategic leaders' opportunity recognition and

exploitation add considerable business value (Yukl, 1999).

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Organizational innovation is encouraged through appropriate cultural norms and support

systems. The leaders of organizations help define and shape work contexts that contribute to

organizational innovation (Amabile, 1998). The leadership style of these top leaders has

become an important determinant of innovation (Dess and Picken, 2000). In particular,

transformational leadership has been shown to support and promote innovation, which in

turn ensures the long-term survival of an organization (Ancona and Caldwell, 1987).

According to Jung et al. (2003), transformational leadership enhances innovation by

engaging employees’ personal value systems and thereby heightening levels of motivation

toward higher levels of performance (Shamir et al., 1993); and encouraging employees to

think creatively (Sosik et al., 1997). Taken together, these empirical studies indicate that

transformational leadership has a significant relationship with organizational innovation,

both in terms of creating the conditions required for innovation and as a direct contributor to

innovation as an organizational outcome.

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2.13 Previous Studies and Knowledge Gaps The following are some of the empirical studies done in the study of top management and

the various areas suggested for further research:

Table 2.1: Previous Studies and Knowledge Gaps

Studies

Focus

Findings

Knowledge Gap

Focus of Proposed study

Hambrick &Mason (1984)

Importance of Top Management Team on Organizations Performance

Observed demographic characteristics can be used to infer psychological cognitive bases and values

Demographic characteristics of Top Management Team may be used as a potent predictor of strategies hence performance.

The proposed study will establish the extent to which demographic variables influence the innovativeness of a firm.

Murray (1989)

Top Management Group Heterogeneity and Firm Performance

-Composition of the TMT affects firm’s performance and the effect depends on the environmental conditions. -Effect of TMT characteristics on performance differed on the basis of Industry under study (Food and Oil Industry).

The study was limited to two industries, food and oil industries. It is vital to establish if these effects can be replicated in other sectors

The current study will be done in the commercial banks.

Bantel &Jackson (1989)

Top Management and Innovations in Banking? Does the Composition of Top Management Team Make a Difference?

-Innovation is negatively correlated to both average age and average tenure and positively correlated to average educational level -Tenure heterogeneity is not significantly correlated to innovation.

The study was limited to US Mid Western Bankers who have high levels of homogeneity thus the effects of team composition are underestimated in this study.

The current study addresses this gap by incorporating banks with foreign and Local ownership.

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-Functional heterogeneity and educational level were consistently the most powerful predictors of innovation

Ferrier, (2001)

Navigating the competitive landscape;the drivers and consequences of competitive aggressiveness

TMT heterogeneity does not have significant effect on corporate performance

The study only considered educational, functional and industry tenure industry. Study done in different industries that are bound to have differences in their mode of operation

The current study considered other diversity variable such as gender, ethnicity, team tenure and organizational diversity. -Study done in the same industry

Pegel et al (2000)

Management Heterogeneity, Competitive Interaction Groups and Firm Performance

-The characteristics of the TMT in a firm should be aligned with those of the competitive environment. -Firms in the same competitive interaction group have similar TMT heterogeneity, compared to the TMT heterogeneity of firms across groups.

Need to investigate implications of firms strategic leadership upon the competitive interactions and groupings which govern directly and indirectly the profit generation processes of the firm.

This study addresses this gap.

Michel and Ham bric (1992)

Diversification posture and Top management team characteristics

-Heterogeneity has a negative effect on firm performance

-The study considered and only tenure and functional diversity -Data used was collected in the year 1970

The proposed study considered other types of diversities and will show how underlying patterns have changed over time.

Previous Studies and Knowledge Gaps cont…

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Carpenter(2002)

The implications of strategy and social context for the relationship between top management team heterogeneity and firm performance.

TMT heterogeneity has a positive effect on corporate performance.

The study used firms strategy and social structure as moderating variables -The study considered three types of diversities namely educational, functional and tenure diversities

The current study used leadership style and firm innovation as moderating variables. -The current study incorporates other types of diversities

Irungu (2007)

Effect of Top Management Team on performance of Publicly Quoted Companies in Kenya.

Academic qualifications translate to more creative solution hence affect decision making positively. Cognitive and demographic characteristics do not affect decision making process. Effect of Top Management Team characteristics differed in different sectors

Studies used financial indicators and didn’t access effect of non financial corporate performance measures. Study limited to companies listed in the NSE. Study focused on the period 2001-2005.

The proposed study incorporates non financial measure of corporate performance i.e., customer satisfaction. The proposed study focuses on banks, some of which are not listed in the NSE.

Previous Studies and Knowledge Gaps cont…

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2.14 Conceptual Model The conceptual model presented in Figure 2.1 captures the relationships between and among

the study variables underpinning TMT demographic diversity, firm innovation, leadership

style and corporate performance. The schematic diagram presents linkage between sets of

variables and their influence on organization performance. It also presents the joint

relationship of these linkages and organization performance. Also demonstrated is the

moderating relationship of firm innovation and leadership style in understanding TMT

demographic diversity and the performance linkage.

The conceptual framework of the study is based on the integration of several organizational

theories that influence strategic decision making process. These theories include social

identification and categorization theory, similarity/attraction theory, information and

decision-making theory, the resource based view of the firm, resource dependency theory,

stakeholder’s theory, structural contingency theory, behavioral theory of the firm and the

upper echelons theory which have been presented in the literature review.

TMT demographic diversity which is the independent variable of this study is proposed to

influence performance. Firm innovation (process innovation, business model innovation and

service innovation) and leadership style (transactional and transformational leadership

styles) were treated as the moderating variables and corporate performance (which included

both the financial and non financial measures) was the dependent variable. These variables

have been identified and described in the literature review highlighting the relationships

among them as depicted in the conceptual framework.

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Figure 2.1 Conceptual Framework Relationship between Diversity, Innovation, Leadership Style and Corporate Performance

Leadership Style • Transformational leadership • Transactional leadership

Firm Innovation

• Business Model

• Process

• Service

TMT Demographic

Diversity

• Age

• Functional

• Organizational Tenure

• Educational Level

• Gender

• Ethinic

• Team Tenure

Corporate

Performance

• Financial

perspective

• Process

Improvement

• Customer

Satisfaction

• Staff development

• Secondary data

H1

H3

H4

H2

Independent variable

Dependent variable

Moderating variable

Moderating variable

H6

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2.15 Conceptual Hypotheses

H1: There is a significant relationship between TMT demographic diversity and corporate

performance.

H2: There is a significant relationship between firm innovation and corporate performance.

H3: The strength of the relationship between TMT demographic diversity on corporate

performance depends on firm innovation.

H4: There is a significant relationship between leadership style and corporate performance.

H5: The strength of the relationship between TMT demographic diversity on corporate

performance depends on leadership style.

H6: The joint moderating effect of firm innovation and leadership style on the effect of TMT

demographic diversity on corporate performance is greater than the independent moderating

effect of the same variables.

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2.16 Chapter Summary

This chapter has reviewed theoretical and empirical literature suitable to answer the

research questions under study. This chapter has discussed the theories guiding this study

and has clearly articulated the main theory in which this study is anchored. The literature

reviewed further relates to the constructs of the model guiding this research. These

include TMT demographic diversity, firm innovation, leadership style and organizational

performance. In this chapter, each construct in the model was defined and discussed in

terms of the factors measured in this research.

This chapter presented a review of the literature pertaining to the relationships among

these constructs. Some of the studies reviewed have linked one, two or three, of the

constructs, but no studies to date have linked all the four the constructs. The chapter also

discussed subjective and objective performance measures. By reviewing relevant

selected empirical studies on TMT demographic diversity, firm innovation, leadership

style and organizational performance, knowledge gaps that the study sought to address

were tabulated and presented. The chapter concludes by providing the conceptual

framework, which defined the relationships among the variables of study and a

summary of the study hypotheses.

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CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction This chapter discusses the research methodology used in the study. In particular the section

discusses the research philosophy, the design, population of the study, data collection,

validity and reliability of the instrument and data analysis.

3.2 Research Philosophy Research philosophy relates to foundation of knowledge upon which important assumptions

and predispositions of a study or research are based. Discussions on the philosophical

underpinnings of strategy research have always found great prominence in strategic

management (Nonaka, 1998). A research philosophy is a belief about the way in which data

about a phenomenon should be gathered, analyzed and used. In social sciences, there are two

main research philosophies, namely; the positivism (scientific) and phenomenology

(interpretivism) which may also be viewed in terms of two perspectives, namely the

quantitative and qualitative approaches (Coopers & Schindler, 2004).

Positivist philosophy premises that knowledge is based on facts and that no

abstractions or subjective status of individuals is considered. Positivism thus derives a

quantitative perspective which holds that there is an objective reality that can be

expressed numerically, with explanatory and predictive power (Neuman, 2006; Furrer,

Thomas & Goussevkaia, 2008).

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Positivism insists on continued use of the most logical, dominant, or relevant

framework (Pfeffer, 1993). Research on a positivist philosophy tends to be based on

deductive theorizing, where a number of propositions are generated for testing, with

empirical verification then sought (Babbie, 2005). Considerable data are often required as

a positivist study would favour the use of quantitative methods to analyze large-scale

phenomena (Travers, 2001). Phenomenology on the other hand premises that knowledge

is based on experience from perspectives of the individual and thus is subjective.

It focuses on immediate experience, personal knowledge and individual interpretations

(Saunders, Lewis & Thornhill, 2007) and starts from a premise of the coexistence and

compatibility of alternative frameworks (Grandori, 2001). Phenomenology is a

philosophical school of thought arguing that research is fundamentally theory-dependent

and that the theoretical position held by researchers not only guides their basic position,

but also determines what gets construed as a research problem, what theoretical procedures

are used, and what constitutes observations and evidence (Spender, 1996; Mir & Watson,

2000).

The current study on Top Management Team diversity and performance o f commercial

banks in Kenya set out to establish possible relationships that existed among the identified

variables and also set to determine the strength of that relationship. Researchers observe

that objective reality can be expressed numerically, with explanatory and predictive

power and this forms the foundation for positivism philosophy (Neuman, 2006; Furrer,

Thomas & Goussevkaia, 2008).

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The study thus adopted the positivistic philosophy since it looked at what caused a

particular relationship and what were the effects of this relationship. The study also

involves hypothesis testing based on facts obtained from data collected from both

primary and secondary sources in a survey of commercial banks in Kenya. Further,

contribution to the field of diversity and corporate performance can only occur only if we

are independent from what is being observed thus the positivistic philosophy.

3.3 Research Design

A research design is the plan and structure of investigation conceived by the researcher so as

to obtain answers to research questions. The plan is the overall scheme or program of the

researcher which includes the outline of what the investigator will do from formulating

hypotheses, operationalizing the study variables to the final analysis of data (Cooper &

Schindler, 2008). Further, a research design also seeks to provide confidence that the

findings derived from the design captures reality and possess high levels of reliability and

validity.

Considering the purpose of the study and the philosophical orientation adopted, the study

employed a descriptive cross-sectional survey research design. This design affords the

researcher an opportunity to capture a population’s characteristics and test hypotheses.

Further, the researcher has no control of the variables in the sense of being able to

manipulate them. Thus the researcher only reported what had happened since this research

design guarded against any bias.

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Zikmund (2003) notes that surveys provide quick and accurate means of assessing

information if properly conducted. A survey also attempts to quantify social phenomena

particularly issues, conditions or problems that are prevalent in the society. It assists the

researcher to establish whether significant associations among variables exist at one point in

time depending on the resources available and the target population. This design thus

offered the researcher the opportunity to establish the relationship between diversity in TMT

and corporate performance and also determine the influence of firm innovation, and

leadership style on this relationship in Commercial Banks in Kenya.

3.4 Population of the Study The population of this study was all the 43 commercial banks in Kenya which are normally

categorized into four categories based on ownership. The four categories include foreign

owned not locally incorporated, institutions with government participation, foreign owned

but locally incorporated institutions (partly owned by locals) and locally owned institutions

(CBK, 2010). According to the Banking Act (Cap 488), a banking institution means a

company which carries on, or proposes to carry on, banking business in Kenya but does not

include the Central Bank.

Their business includes accepting money from members of the public on deposit repayable

on demand or at the expiry of a fixed period or after notice; accepting money from members

of the public on current account and payment, accepting cheques and employing of money

held on deposit or current account, by lending and investment. Given that there were only 43

commercial banks in Kenya (Appendix II), a census study was conducted.

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3.5 Data Collection Both primary and secondary data were used in the study. Primary data were collected on

diversity in TMT, firm innovation, leadership style and on non financial performance

indicators. These were mainly collected through the use of semi-structured questionnaire

(Appendix 1) adopted from strategic management studies that had studied similar

variables with modifications aimed at addressing the specific objectives.

To capture the primary data, the target respondents were senior managers in areas of

strategy and business, operations, customer service, and corporate affairs in each of the

banks as they were assumed to be knowledgeable in the areas under study. Through the

corporate affairs office, each organization was allowed to pick one senior manager from

any of the areas enumerated to respond to the questionnaire. To enhance the support

from the organizations, the researcher presented a letter of introduction to each

organization assuring them of confidentiality along with a summary of the study intent

stipulating the objectives of the study.

The data collection tool was subjected to a pilot test to managers in three banks to

establish validity and reliability. The result was particularly significant in the

construction of the final sample questionnaire for this study. The pre-testing of the

questionnaire reduced the banks eligible for the study to 40 out of which 29 banks

completed the questionnaire while 11 declined to fill the questionnaires. The results

presented in this study thus represent a 72.5% response rate which was considered

adequate.

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A five point type likert scale was used in this study and Kirkman and Rosenman (1999) had

used such perceptual measure of performance which was found to have a reliability

coefficient of 0.94. The measure of perceived leadership style was a modified version of

Bass (1990), which was presented as reliable and valid. This measure of leadership style has

been widely used in a variety of literature and is generally accepted as a good measure of

perceptions of leadership style (Kohli, 1989). For the purpose of comprehensively capturing

the aspects of firm innovation, this study built the construct for measuring service, process

and business model innovation on the basis of several criteria which are conceptualized and

used in previous empirical studies of innovation, such as Deshpande et al. (1993) and Miller

and Friesen (1982).

Zikmund (2003) points out that secondary data can be gathered by various sources including

books, periodicals, government sources, regional publications, company’s annual reports

and commercial sources. This study collected financial disclosure reports from the Central

Bank of Kenya annual reports. Secondary data was obtained on corporate financial

performance of the commercial banks in Kenya. This included data on Total Assets and

Profit before Tax.

3.6 Reliability Test Reliability is a measure of the degree to which a research instrument yields consistent

results or data after repeated trials. Reliability deals with how consistently similar

measures produce similar results (Crano & Brewer, 2002). A dependable indicator

provides information that does not vary as a result of the characteristics of the indicator,

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instrument, or measurement design itself. Neuman (2006) identified three types of

reliability: stability, representative, and equivalence. Stability reliability addresses the

question of whether or not a measure delivers the same answer across different time

periods. This is examined by the test-retest method.

Representative reliability concerns sub-populations and addresses the question of whether

a measure delivers the same answer across different sub-populations. Finally, equivalence

reliability concerns multiple indicators, that is, the question of whether different indicators

yield consistent results. This study addressed reliability by using Cronbach alpha statistical

test. The Cronbach alpha coefficient normally range from 0 to 1 and the higher the

coefficient, the more reliable the scale. The cronbach alpha coefficient was 0.84 and this

study used the cutoff point coefficient of 0.7 and above as a strong measure of reliability

which agrees with Nunnaly’s (1978) recommendation.

The questionnaire was piloted to three banks in order to establish whether the questions

therein measured the expected theorized variables in the conceptual framework.

Respondents were asked to comment on the clarity and the amount of time it would take to

fill one questionnaire. The questionnaire was then adjusted on the basis of the findings of the

pilot test and the final version was developed thereafter for use.

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3.7 Validity Test The validity of an instrument relates to it is ability to measure the constructs as purported.

It arises due to the fact that measurements in social sciences are indirect (Mugenda and

Mugenda, 2003). Validity concerns the accuracy and meaningfulness of inferences which

are based on the research results (Bryman & Cramer, 2005). Three kinds of validity were

considered relevant for this research: face validity, content validity and construct validity.

Face validity dealt with the researcher’s subjective evaluation of the validity of the

measuring instrument, and so the extent to which the researcher believed the instrument was

appropriate. The current research relied on instruments developed in other related studies, as

well as concepts generated from a broad range of appropriate literature.

Content validity was ensured by the questionnaire getting tested by subjecting it to double

check. This also ensured that the questionnaire covered all the four main areas of the study

which include TMT demographic diversity, firm innovation, leadership style and

performance. Finally, expert judgment was also employed to confirm if theoretical

dimensions emerge as conceptualized. Construct validity was ensured through the

operationalization of terms. The variables in the study were operationalized to reflect the

theoretical assumptions that underpinned the conceptual framework for the study.

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3.8 Data Analysis

Descriptive statistics such as mean scores, standard deviations, percentages, and frequency

distribution were computed to describe the characteristics of the variables of interest in the

study in order to explore the underlying features in the relationship between TMT diversity

and corporate performance (Appendix V to Appendix XIII). Descriptive statistics provided

the basic features of the data collected on the variables under study and provided the impetus

for conducting further analysis on the data (Mugenda, 2008).

To establish the nature and magnitude of the relationships between the variables and to test

the hypothesized relationships, the researcher used inferential statistics. The appropriate

tests applied were Pearson’s Product Moment Coefficient Correlation (r), simple regression

analysis and multiple regression analysis. Simple regression analysis were used to calculate

the independent effect of the independent variable, TMT diversity on organizations

performance, firm innovation on organization performance and leadership style on

organizations performance.

Multiple regression analysis was used to establish the moderating effects of firm innovation

and leadership style and the joint moderating effect on the relationship between top

management diversity and corporate performance. In order to facilitate multivariate analysis

including correlation and regression, a composite index for performance was computed.

Team diversity refers to the amount of variation found within a team (Pengel and Young,

2000).

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In this study, standard deviation was used to measure team diversity in respect to a specific

diversity attributes and later a composite index was computed to reflect the TMT diversity.

A Pearson’s product moment correlation (rxy) was computed to establish any linear

associations among the interval or ratio variables in the study, as well as their nature and

strength. This measure, usually symbolized by the letter (r), varies from ranging from -1 to

+1, with 0 indicating no linear association.

The square of the correlation coefficient, the coefficient of determination (R²) measures the

amount of variation in the dependent variable explained by the independent variables. The

closer R2 is to 1, the better the fit of the regression line to the actual data. A multiple linear

regression model was adopted in the study to establish the relationships among the various

study variables. A multiple linear regression analysis is a multivariate statistical technique to

estimate the model parameters and determine the effect of individual independent variables

(IVs) on the dependent variable (DV). Table 3.1 provides a summary of the various

hypotheses that were tested, the appropriate statistical test (s) and their corresponding

interpretations.

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Table 3.1 Summary of Statistical Tests of Hypothesis

Objective 1

H1

Analysis

To establish the relationship between TMT demographic diversity and

performance of commercial banks in Kenya.

There is a significant relationship between TMT demographic diversity

and corporate performance

Regression analysis

P=a +β11X1+ έ

Where: P=Corporate Performance

Β11 is beta coefficient

a=intercept

έ1=Error term

X1= TMT Diversity

Objective 2

H2

Analysis

To establish the relationship between firm innovation and performance

of commercial banks in Kenya.

There is a significant relationship between firm innovation and

corporate performance

Regression analysis

P= a+ β21X1+ έ1

Where: P=Corporate Performance

Β21= coefficient

a=intercept

έ1=Error term

X1= Firm Innovation

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Objective 3

H3

Analysis

To establish if the relationship between TMT demographic diversity

and performance of commercial banks in Kenya is influenced by firm

innovation.

The strength of the relationship between TMT demographic diversity

and corporate performance depends on firm innovation

Analysis: Multivariate Regression Analysis

P= a+ β3X1 +β3X2+ β33X1X2+ε

Where: a = intercept

P = Corporate Performance

β31,β32 and β33 are beta coefficients

X1 represents TMT Diversity

X2 represents Firm Innovation

X1 X2 represent the interaction term

ε is the error term

Objective 4

H4

Analysis

To establish the relationship between leadership style and performance

of commercial banks in Kenya.

There is a significant relationship between leadership style and

corporate performance

Regression analysis

P= a+ β41X 1+ έ1

Where: P=Corporate Performance

a=intercept

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Β41= coefficient

έ1=Error term

X1 = Leadership Style

Objective 5

H5

Analysis

To establish if the effect of TMT demographic diversity on

performance of Commercial Banks in Kenya is influenced by

leadership style.

The strength of the relationship between TMT demographic diversity

and corporate performance depends on leadership style.

Analysis: Multivariate Regression Analysis

Where: P =Corporate Performance

P= a+ β51X1 +β52X2+ β53X1X2+ε

Where: a = intercept

P = Corporate Performance

β51,β52 and β53 are beta coefficients

X1 represents TMT Diversity

X2 represents Leadership Style

X1 X2 represent the interaction term

ε is the error term

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Objective 6

H6

Analysis

To establish the joint effect of TMT demographic diversity, leadership

style and firm innovation on performance of Commercial Banks in

Kenya.

The joint effect of the moderating variables, firm innovation and

leadership style on the effect TMT demographic diversity on corporate

performance is greater than the independent moderating effects of the

same variables

P= a+ β61X1 +β62X2+β63X3 +β64 X1X2X3+ε

Where: a = intercept

P = Corporate Performance

β61, β62, β63 and β64 are beta coefficients

X1 represents TMT Diversity

X2 represents Leadership Style

X3 represents Firm Innovation

X1 X2 ,X3 represent the interaction term

ε is the error term

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3.9 Operationalization of Variables

This section provides operationalization of the variables under study which include the

independent variable, the moderating variables and the dependent variable. Table 3.2

outlines the relevant measures and various operational definitions used. The dependent

variable corporate performance was measured using financial measures which included

Total Assets and Profit before Tax, and also the non financial measures which included

customer satisfaction, corporate image, process improvements and employee development

adapted from the balance score card.

The independent variable was TMT diversity which included gender diversity, ethnic

diversity, age diversity, organizational tenure diversity, team tenure diversity, functional

diversity and academic diversity. The moderating variables were leadership styles

(transactional leadership style and transformational leadership style) and firm innovation

(service innovation, business model innovation and process innovation).

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Table 3.2: Operationalization of Variables CONSTRUCT OPERATIONALIZAT

ION OF VARIABLES MEASURE SECTION

NUMBER Diversity of Top Management Team (Independent Variable)

Individual Members age

Age in years Direct measure(exact number of years (such as 40 yrs)

Appendix 1 Part Three

Tenure - Average number of years the top management team has served in their current positions.

- Duration in which the individual member has been in the organization.

Direct measure(exact number of years (such as 1 yr)

Appendix 1 Part Three

Functional heterogeneity

- The degree to which experience / background of the TMT vary.

Direct measure (such as marketing)

Appendix 1 Part Three

Educational level - Highest level of academic qualification

- Highest level of professional qualification

Direct measure(Actual such as academic degree)

Appendix 1 Part Three

Gender Sex/male or female Direct measure (such as male or female)

Appendix 1 Part Three

Leadership Style (Moderating Variable) Transformational Leadership Style

-Visionary and enthusiastic leader with ability to motivate employees

5 Point Likert type Scale

Appendix 1 Part Eight

Transactional Leadership Style

-Contractual relationship between the leader and employees

5 Point Likert type Scale

Appendix 1 Part Eight

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Firm Innovation (Moderating Variable)

Process Innovation

Implementation of a new or significantly improved production or delivery method

5 point Likert type scale

Appendix 1 Part Five

Business Model Innovation

Creation, selling and delivery of value to customers

5 point Likert type scale

Appendix 1 Part Six

Service Innovation New developments in delivery of core service products to customers making them more attractive

5 point Likert scale Appendix 1 Part Seven

Corporate Performance (Dependent Variable) Financial Corporate performance measures

- Profit before Tax - Total Assets

Direct measure (actual figures from the financial statements)

(CBK ,2012)

Non Financial Corporate Measures

-Customer satisfaction -Corporate Image -Employee development -Value chain Activities

5 Point Likert type scale

Appendix 1 Part Four

3.10 Chapter Summary

This chapter introduced the philosophical foundation of the research. It described the research

design adopted for the study. The population of study was also provided. The chapter also

described the data collection method. The operationalization of the research variables has also

been presented. This chapter also presented a tabulated summary of the objectives,

corresponding hypotheses, and analytical models.

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CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION OF RESULTS

4.1 Introduction The broad objective of this study was to determine the relationship between TMT

diversity and corporate performance of commercial banks in Kenya. The research findings

of the study are presented in three chapters. The interpretation of the results is a l s o

given in all the three chapters. This chapter presents the findings and discussions on the

descriptive statistics which formed the basis of testing the six hypotheses of the study.

4.2 Response Rate

Data that was analyzed was obtained from twenty nine (29) out of the targeted forty (40)

commercial banks in Kenya. This is since though there are 43 commercial banks in Kenya,

three (3) of the commercial banks were used to pilot test the questionnaire and thus were not

included in the final study and the remaining eleven banks (11) declined to respond to the

questionnaire. Thus the response rate for this study was 72.5% which compares well with

past studies. Irungu (2007) and Ongore (2008) attained a response rate of 74 percent and

87.5 percent respectively.

From previous studies, it is well known that questionnaires are associated with low

response rates. Therefore, the questionnaire should be followed by a detailed cover letter

and cover page which will provide instructions regarding the research subject, the

researcher’s and supervisor’s details as this will increase the response rate (Balta, 2008).

The current study followed a similar process since this was needed to enhance response rate.

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While most scholars do not seem to agree on the acceptable level of response rate to form

the basis for data analysis, Nachmias and Nachmias (2004) have pointed that survey

researches face a challenge of low response rate that rarely goes above 50%. Accordingly

they suggest that a response rate of 50% and above is satisfactory and presents a good basis

for data analysis. Further, Mangione (1995) provided the following classification of

response rate: over 85% excellent, 70% - 85% very good and 60%-70% acceptable and

below 50% not acceptable.

The current study therefore falls under the very good range as it attained 72.5% response rate.

This is typical for research using senior managers as respondents and is not uncommon when

focusing on commercial banks. Geletkanycz (1997) points out that it is typical in the United

States to get response rates of 10%-12% for surveys that are mailed to CEOs. Indeed, the

attained response rate represented not only a better response rate than that suggested by

Geletkanycz (1997), but it also provided better results compared to similar studies that have

used smaller samples to draw conclusions on the relationship between TMT demographic

diversity and corporate performance.

4.3 Reliability and Validity Test

A pilot study was conducted to find out if the respondents could answer the questions

without difficulty. Respondents in the pretest were drawn from three commercial banks.

They were asked to evaluate the questions for relevance, comprehension, meaning and

clarity. The research instrument was modified on the basis of the pilot test before

administering it to the study respondents.

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Even though many of the scales were adopted or modified from previous researchers who

had studied the relationship between TMT diversity and corporate performance, leadership

style and firm innovation, it was necessary to assess the reliability of the research

instrument. Cronbanch Alpha was therefore used to test reliability of the instrument and the

cut off point of 0.7 was considered. The data collection instrument was subjected to an

examination by a panel of experts who were asked to review the instrument to ascertain its

validity.

4.4 Demographic Profile of the Banks Studied

The researcher sought to establish the year of incorporation of the commercial banks and

the number of branches the commercial banks own.

4.4.1 Age of Banks

The age of an organization has been used in many studies as a measure of an

organization’s maturity or level of structure stability or establishment. The study thus

sought to establish the year of incorporation of the commercial banks.

Table 4.1: Year of Incorporation of Bank

Period Frequency Percentage

Before 1900 2 6.8%

1900-1950 1 3.4%

1950-2000 23 79.4%

2001-to Date 3 10.4%

Total 29 100%

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From Table 4.1, the results indicate that 6.8% of the banks were incorporated before 1900,

3.4% were incorporated between 1900 and 1950, 79.4% were incorporated between 1950

and 2000 whereas 10.4% of the banks were incorporated after 2001. Thus most of the

banks that responded were incorporated between 1950 and 2000. This shows that most of

the responding banks have been in existence for many years and as such, the banking

industry in Kenya can be said to be relatively well-established hence suitable for

empirical study in strategic management research. This further means that the banks have

survived the different lifecycles of their businesses.

4.4.2 Number of Branches

Banks are essential for each country’s economic growth since no growth can be achieved

unless savings are channeled into investment. This can only be achieved by enhancing the

access to financial institution by the citizens. According to the CBK Report (2010), the

penetration level of commercial banks stood at 19%, which still provides a great opportunity

for commercial banks to exploit. The researcher thus sought to establish the number of

branches the commercial banks that participated in the study had.

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Table 4.2: Number of Branches for the Banks

Bank Branches Frequency Percentage

0-10 9 31.04%

11-20 10 34.49%

21-30 3 10.34%

31-40 3 10.34%

41+ 4 13.79%

Total 29 100%

From Table 4.2, the results indicate that nine (9) representing 31.04% of the banks had 0-10

branches, ten (10) representing 34.49% had 11-20 branches, three (3) representing 10.34%

had 21-30 branches, three (3) representing 10.34% had 31-40 branches, whereas four (4)

representing 13.79% had over 41 branches. Thus most of the commercial banks that

responded had few branches. The banking industry has however in an attempt to increase

their penetration level introduced agency banking and most of the commercial banks have

already adopted this concept.

4.5 Extent of TMT Involvement in the Decision Making Processes TMTs have been defined as dominant coalitions that exist within organizations, with

members of these coalitions working collectively to make strategic decisions (Hambrick and

Mason, 1984). However, arguments have been advanced as to whether the TMTs are

collectively involved in all strategic decisions (Pettigrew,1990). The current study thus

sought to establish the level of involvement of TMT in decision making.

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Table 4.3: TMT Nature of Involvement in Decision Making

Nature of Involvement in decision making

N Minimum

Maximum

Mean Std. Deviation

Statistic Statistic Statistic Statistic Std. Error

Statistic

All decision making 29

2 5 4.07 0.198 1.067

Some decisions 29

2 5 4.10 0.135 0.724

Depends on issue at hand

28

2 5

4.54 0.131 0.693 Depends on expertise required

29

2 5 4.41 0.127 0.682

Some are involved in all decisions while others not.

29

1

5 4.03 0.189 1.017

The results on whether the top level managers were involved in all decisions making as

shown in Table 4.3, indicate that TMT involvement in decision making is highly dependent

on issue at hand (mean score=4.54) and expertise required (mean score=4.41). This could

be explained by the fact that TMT are drawn from different functional areas such as

marketing, human resource, finance and thus at times when making decisions dealing with a

specific subject, then only the experts in the area will be consulted. In this way, decision-

makers can make fairly accurate interpretations and evaluations without having to examine

all available information in areas they are conversant with. Thus involving decision makers

in areas they are conversant with helps save time and improves the quality of the decisions

made.

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The results further indicate that in most banks , the TMT members were involved in all the

decision making while in others, TMT members were not involved in all decision making

processes (mean score= 4.03). This can be explained by the fact that there is a likelihood of

having TMT members with a wide range of experience in different areas thus, they will be

involved in all the decision making, whereas some are only conversant in one or a few areas.

TMT members with long organizational tenure are likely to be conversant with almost all

operations of the banks unlike TMT members with short organizational tenure.

4.6 Influence of Attributes on Involvement of TMT in Decision Making According to March and Simon’s (1958), managers bring their own set of givens, such as

values and cognitive bases, to a decision-making situation. This is likely to be influenced by

a number of attributes of the TMT members. The current study sought to establish the

influence of a number of attributes on inclusion of a TMT member in decision making.

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Table 4.4: Influence of Attributes on Involvement in Decision Making

Attribute N Minimum

Maximum

Mean Std. Deviatio

n Statistic Statistic Statistic Statistic Std.

Error Statistic

Attitude 29 4 5 4.24 .081 .435 Skills, knowledge and experience

29 2 5 4.69 .123 .660

Role played 29 2 5 4.41 .127 .682 Years of service in organization

29 1 5 3.76 .209 1.123

Ethnicity 29 1 5 1.24 .154 .830

Gender 29 1 5 1.90 .213 1.145

Communication skills

29 2 5 4.10 .103 .557

Education level 29 2 5 4.07 .131 .704

Interpersonal skills 29 2 5 4.28 .121 .649

As shown in Table 4.4, TMT involvement in decision making is highly dependent on skills,

knowledge and experience (mean score=4.69), role played (mean score=4.41) and

interpersonal skills (mean score=4.28). This can be explained by the fact that members of

the TMT in banks will definitely in their day to day activities be confronted by complex

situations and in solving complex, non routine problems, teams are likely to be more

effective when composed of individuals having a variety of skills, knowledge, abilities and

perspectives.

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The fact that role played is a key determinant in involvement in the decision making

process can be explained by the fact that creativity and ability to generate novel initiatives

and ideas in the commercial banks can only be enhanced by ensuring that TMT members

play key roles in the decision making process. Further, good interpersonal skills will play a

key role in reducing the negative effects of a heterogenous TMT.

The findings further indicate that gender (mean score =1.90) and ethnicity (mean score

1.24) have the lowest influence on determination of involvement of a TMT member in

decision making. This is a clear indication that in the Kenyan context and specifically in the

commercial banks, ethinicity is not a relevant determining factor on an individuals

involvement in decision making.

This means that TMT members are likely to be drawn from different ethinic groups making

the TMT diverse in respect to ethnicity. Further, the fact that gender is not a major

determinant in involvement in decision making, there is a likelyhood of TMT in

commercial Banks to be dominated by either gender. This however is bound to change with

time in the Kenyan context with the passing of the new constitution that emphasises on the

1/3 representation of either gender in all institutions.

112

4.7 Corporate Non Financial Performance Indicators

Scholars have expressed dissatisfaction with the exclusive use of financial dimension

arguing that it encourages “short termness” and “local optimization” and therefore overlooks

the long term improvement strategy, ignoring competitor information and interaction with

customers (Kaplan and Norton, 1992). Researchers in such circumstances recommend

multiple measures of firm performance including both financial as well as non financial

measures. The study sought to establish the level of achievement of different non financial

indicators of corporate performance.

Table 4.5 Non Financial Measures of Corporate Performance

N Minimum Maximum Mean Std. Deviation

Statistic Statistic Statistic Statistic Std. Error

Statistic

Has good reputation 29 4 5 4.69 .087 .471

Distinctively different

from others 29 3 5 4.83 .087 .468

Supports innovation 29 1 5 3.69 .180 .967

Firm protects the

business domain

aggressively

29 2 5 4.28 .156 .841

Responds to customers'

complaints in timely

manner

29 3 5 4.17 .141 .759

Conducts training for

employees 29 2 5 4.17 .165 .889

Aggressively introduces

new products 29 2 5 4.07 .198 1.067

Reacts to competitor

threats immediately 29 2 5 4.03 .175 .944

113

As shown in Table 4.5, it is clear that banks have engaged in differentiation strategies

(Mean Score= 4.83), have a good reputation (mean score=4.69), and protects the business

domain aggressively (mean score=4.28). Further the banks enhance customer satisfaction by

responding to their complaints (mean score=4.17) and further conducts employee training

(mean score=4.17). Its however clear that the respondents felt that the banks are not

spending as much as they would on supporting innovation (mean score=3.69).The results

thus clearly show that the banks have been performing well in the achievement of their non

financial indicators of performance.

114

CHAPTER FIVE

TESTS OF HYPOTHESES AND DISCUSSION OF FINDINGS

5.1 Introduction This chapter undertakes to perform appropriate statistical analyses to test the hypotheses

regarding the expected relationships and provides appropriate explanations to the findings of

each hypothesis. To test the hypotheses, several indices were computed for each of the

components of the variables the study investigated. The test of hypotheses required the use

of multiple regression analysis. This was performed using the field data and the results

interpreted according to the R2 values, the beta values and F ratio at the 95% level of

significance. The variables under study were regressed on financial and non financial

performance indicators and later a composite performance measure was computed to reflect

overall organizations performance.

5.2 Test of Hypothesis

The six research hypotheses that the study sought to test are addressed in this section. The first,

second and fourth hypotheses were aimed at establishing the relationships between the study

variables. The third and fifth hypotheses were concerned with establishing the effect of

individual moderating variables on the relationship between TMT demographic diversity and

corporate performance and finally the sixth hypothesis was aimed at establishing if the joint

effect of the two moderating variables (firm innovation and leadership style) on the relationship

between TMT demographic diversity and organizations performance is higher than individual

moderating effect.

115

5.2.1 Top Management Team Demographic Diversity and Corporate Performance Objective one of the study sought to determine the relationship between TMT demographic

diversity and corporate performance. This was achieved by testing the following hypothesis:

H1: There is a significant relationship between TMT demographic diversity and corporate

performance.

Diversity was measured in terms of age heterogeneity, organizational tenure heterogeneity,

education level heterogeneity, functional heterogeneity, ethnic heterogeneity, gender heterogeneity

and team tenure heterogeneity. Data on demographic variables was collected using a questionnaire

and verification of the same was done using published bank reports. Performance was measured

first using financial measures which were derived from published reports on banks performance

for the period ended June 2012 and later on non financial measures of performance adapted from

the balanced score card. Finally a composite performance measure was computed that reflected the

overall organizational performance.

In testing the first hypothesis it was deemed necessary first to test the effect of the TMT diversity

factors on performance measures as this would help establish if the different diversity factors have

the same or different effect on corporate performance. It was after this that the study tested the

effect of TMT demographic diversity on the overall organization performance. Regression

analysis was done to determine the effect of TMT diversity on organization performance. Table

5.1, Table 5.2 and Table 5.3 shows the effect of TMT diversity factors on financial performance,

non financial performance and overall organizational performance respectively. Further, Table 5.4

shows the effect of TMT demographic diversity on overall organizations performance.

116

Table 5.1: TMT Demographic Diversity Factors and Financial Performance

a)

Model Summary

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

1 .653a .427 .235 15658.804

a. Predictors: (Constant), Functional Diversity, Ethnic Diversity, Organizational

Tenure Diversity, Academic Diversity, Age Diversity, Team Tenure Diversity, Gender Diversity

b. Dependent Variable: Financial Performance

b) ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression 3830011465.129 7 547144495.018 2.231 .073b

Residual 5149160748.877 21 245198130.899

Total 8979172214.006 28

a. Dependent Variable: Composite Performance

b. Predictors: (Constant), Functional Diversity, Ethnic Diversity, Organizational Tenure Diversity, Academic Diversity, Age Diversity, Team Tenure Diversity, Gender Diversity

117

Coefficientsa c) Model Unstandardized

Coefficients

Standardized

Coefficients

T Sig.

B Std.

Error

Beta

(Constant) 12072.154 2907.767 4.152 .000

Gender

Diversity -1702.635 4791.421 -.130 -.355 .726

Age Diversity 1452.255 1041.961 .422 1.394 .178

Ethnic

Diversity -106.931 412.426 -.047 -.259 .798

Team Tenure

Diversity

-6700.005 2091.529 -1.023 -3.203 .004

Organizational

Tenure

Diversity

10078.425 2991.021 1.010 3.370 .003

Academic

Diversity 145.039 1957.349 .024 .074 .942

Functional

Diversity 86.226 500.527 .041 .172 .865

a. Dependent Variable: Financial Performance

From the regression results above, the R value was 0.653 indicating that there is a positive

relationship between TMT diversity factors and financial performance. The R squared (R2)

value of 0.427 shows that 42.7 percent of financial performance is explained by TMT

diversity factors. The remaining 57.3 percent is explained by other strategies put in place by

banks in order to enhance their performance. The model was not significant with the F ratio

118

= 2.231 at p > 0.05. This is an indication that TMT diversity factors have a positive effect on

financial performance, though the effect is not significant. The beta values show the degree

to which each predictor variable affects the outcome when all other predictors are held

constant.

Organizational tenure in the bank had the highest positive and significant effect on

organization performance at β = 1 . 010 at p < 0.05. This means that as organizational tenure

diversity increased, corporate financial performance improved. On the other hand, team tenure

diversity had the highest negative and significant effect on corporate financial performance

with β =-1.023 at p < 0.05. This meant that, as team tenure diversity increased, there was a

decrease in financial performance. These were the only two factors with significant effect on

financial performance.

Of the remaining diversity factors, two of them (gender diversity β=-.130 and ethnic

diversity β=-.047), had negative effect on financial performance, while the remaining three

factors (age diversity β=.422, academic diversity β=.024 and functional diversity β=.041)

had positive effect on financial performance. We can therefore conclude that TMT diversity

factors have an effect on corporate financial performance but the effect may be positive or

negative and further the effect may be significant or not significant. Further, the study

sought to determine the effect of TMT diversity factors on non financial performance and

the findings are depicted in Table 5.2 below:

119

Table 5.2: TMT Demographic Diversity Factors and Non Financial Performance

a) Model Summary

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

1 .431a .186 -.085 .370

a. Predictors: (Constant), Functional Diversity, Ethnic Diversity, Organizational

Tenure Diversity, Academic Diversity, Age Diversity, Team Tenure Diversity, Gender Diversity

b. Dependent Variable: Non-Financial indicators of performance b)

ANOVAa

Model Sum of Squares Df Mean Square F Sig.

1

Regression .659 7 .094 .686 .683b

Residual 2.882 21 .137

Total 3.541 28

a. Dependent Variable: Non-Financial indicators of performance

b. Predictors: (Constant), Functional Diversity, Ethnic Diversity, Organizational Tenure Diversity, Academic Diversity, Age Diversity, Team Tenure Diversity, Gender Diversity

120

c) Coefficients Model Unstandardized

Coefficients Standardized Coefficients

T Sig.

1

B Std. Error

Beta

(Constant) 4.017 .069 58.394 .000 Gender Diversity

.026 .113 .100 .231 .820

Age Diversity .010 .025 .149 .412 .684 Ethnic Diversity

-.007 .010 -.158 -.739 .468

Team Tenure Diversity -.035 .049 -.265 -.698 .493

Organizational Tenure Diversity

.073 .071 .367 1.028 .315

Academic Diversity -.030 .046 -.246 -.638 .530

Functional Diversity -.014 .012 -.329 -1.166 .257

a. Dependent Variable: Non-Financial indicators of performance

From the regression results above, the R value was 0.431 indicating that there is a positive

relationship between TMT diversity factors and corporate non financial performance. The R

squared (R2) value of 0.186 shows that 18.6 percent of non financial performance is

explained by TMT diversity factors. The remaining 81.4 percent is explained by other

strategies put in place by banks in order to enhance their performance. The model was not

significant with the F ratio = 0.686 at p > 0.05. This is an indication that though TMT

diversity factors have a positive effect on non financial performance, the effect is not

significant.

121

The beta values show the degree to which each predictor variable affects the outcome, when

all other predictors are held constant. Organizational tenure in the bank had the highest

positive but insignificant effect on organizations non financial performance at β =0.367 and p

> 0.05 while functional diversity had the highest negative and insignificant effect on non

financial performance with β =0.329.

Most of the other factors had negative effect on corporate non financial performance such as

ethnic diversity β =-0.158, team tenure diversity β =-0.265 and academic diversity β =-0.246.

The findings therefore clearly show that diversity factors can cause either positive or negative

effect on non financial performance. In addition, the study sought to determine the effect of

TMT diversity factors on overall organizational performance as shown in Table 5.3 below:

Table 5.3: TMT Demographic Diversity Factors and Organizational Performance

a) Model Summary

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

1 .412a .170 -.120 1.061

a. Predictors: (Constant), Functional Diversity, Ethnic Diversity, Organizational

Tenure Diversity, Academic Diversity, Age Diversity, Team Tenure Diversity, Gender Diversity

b. Dependent Variable: Overall Organizational Performance

122

b) ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression 4.608 7 .658 .585 .760b

Residual 22.495 20 1.125

Total 27.103 27

a. Dependent Variable: Overall Organizational Performance

b. Predictors: (Constant), Functional Diversity, Ethnic Diversity, Organizational Tenure Diversity, Academic Diversity, Age Diversity, Team Tenure Diversity, Gender Diversity

Coefficientsa c) Model Unstandardized

Coefficients

Standardized

Coefficients

T Sig.

1

B Std.

Error

Beta

(Constant) 3.387 .203 16.722 .000

Gender

Diversity -.171 .347 -.237 -.493 .627

Age Diversity .005 .086 .023 .053 .959

Ethnic

Diversity -.008 .028 -.064 -.290 .775

Team Tenure

Diversity -.068 .145 -.188 -.468 .645

Organizational

Tenure

Diversity

.293 .203 .533 1.446 .164

Academic

Diversity .058 .153 .176 .383 .706

Functional

Diversity .025 .038 .213 .660 .517

a. Dependent Variable: Overall Organizational Performance

123

From the regression results above, The R value was 0.412 indicating that there is a positive

relationship between TMT diversity factors and overall organizational performance. The R

squared (R2) value of 0.170 shows that 17.0 percent of overall organizations performance is

influenced by TMT diversity factors. The remaining 83 percent is explained by other

strategies put in place by banks in order to enhance their performance. The model was not

significant with the F ratio = 0.585 at p > 0.05. This is an indication that though TMT

diversity factors have a positive influence on overall organizational performance, the effect

is not significant.

The beta values show the degree to which each variable affects the outcome when all other

predictors are held constant. Organizational tenure diversity had the highest positive but

insignificant effect on organizations performance at β =0.533 and p > 0.05 while gender

diversity had the highest negative but insignificant effect on corporate organizations

performance with β =-0.237. The findings therefore show that different types of diversities

have different effects on organization performance and thus diversity cannot be

hypothesized to have uniform effects. Finally the study sought to determine the effect of

TMT diversity on overall organizational performance as shown in Table 5.4 below:

Table 5.4: TMT Demographic Diversity and Organizational Performance

a) Model Summary

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

1 .194a .037 .000 1.002

a. Predictors: (Constant), TMT Diversity

b. Dependent Variable: Overall Organizational Performance

124

b) ANOVAa

Model Sum of Squares Df Mean Square F Sig.

1

Regression 1.016 1 1.016 1.013 .324b

Residual 26.087 26 1.003

Total 27.103 27

a. Dependent Variable: Overall Organizational Performance

b. Predictors: (Constant), TMT Diversity

c) Coefficientsa Model Unstandardized

Coefficients

Standardized

Coefficients

T Sig.

(Constant)

TMT Diversity

B Std.

Error

Beta

3.371 .189 17.804 .000

.068 .068 .194 1.006 .324

a. Dependent Variable: Overall Organizational Performance From the regression results above, The R value was 0.194 indicating that there is a positive

relationship between TMT diversity and organizational performance. The R squared (R2)

value of 0.037 shows that 0.037 percent of organizational performance is explained by TMT

diversity. The remaining 96.3 percent is explained by other strategies put in place by banks

in order to enhance their performance. The model was not significant with the F ratio =

1.013 at p > 0.05. This is an indication that TMT diversity has a weak positive effect on

organizational performance, though the effect is not significant. Given that the p-value

>0.05, then the null hypothesis, which states that TMT diversity has no significant

relationship with corporate performance, is accepted.

125

5.2.2 Firm Innovation and Corporate Performance Objective two sought to determine the relationship between firm innovation and corporate

performance. This was achieved by testing the following hypothesis:

H2: There is a significant relationship between firm innovation and corporate

performance.

Firm innovation was measured in terms of business model innovation, process innovation

and service innovation. Performance was measured using financial and non financial

measures of performance. Financial measures were derived from published reports on banks

performance for the period ended June 2012 and non financial measures of performance

were adapted from the balanced score card. Finally a composite performance measure was

computed that reflected the overall organizational performance.

In testing the second hypothesis, it was deemed necessary first to test the effect of firm

innovation factors on performance measures as this would help establish if the different firm

innovation factors had the same or different effect on corporate performance. It was after

this that the study tested the effect of firm innovation on overall organization performance.

Regression analysis was done to determine the effect of firm innovation on organization

performance. Tables 5.5, Table 5.6 and Table 5.7 show the effects of firm innovation factors

on financial performance, non financial performance and overall organizational performance

respectively. Further, Table 5.8 shows the effect of firm innovation on overall organization

performance.

126

Table 5.5: Firm Innovation Factors and Financial Performance

a) Model Summary

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

1 .329a .108 .001 17897.671

a. Predictors: (Constant), Service Innovation, Business Model Innovation, Process Innovation

b. Dependent Variable: Financial Performance b)

ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression 971006736.120 3 323668912.040 1.010 .405b

Residual 8008165477.886 25 320326619.115

Total 8979172214.006 28

a. Dependent Variable: Financial Performance

b. Predictors: (Constant), Service Innovation, Business Model Innovation, Process Innovation

Coefficientsa c) Model Unstandardized

Coefficients

Standardized

Coefficients

T Sig.

1

B Std. Error Beta

(Constant) -

34180.583 39219.801

-.872 .392

Process

Innovation -3533.357 11732.004 -.077 -.301 .766

Business

Model

Innovation

4190.737 8897.243 .110 .471 .642

Service

Innovation 10662.944 7893.171 .313 1.351 .189

a. Dependent Variable: Financial Performance

127

The R value in Table 5.5 was 0.329 indicating that there is a positive relationship between

firm innovation factors and corporate financial performance. R squared value of 0.108

shows that 10.8% of corporate financial performance is explained by firm innovation

factors. The remaining 89.2 % is explained by other strategies put in place by the banks in

order to enhance their performance. As shown in Table 5.5 (b), the model was not

significant with F= 1.010 and p> 0.05.

This is an indication that firm innovation factors alone cannot steer a company to high

performance. Firm innovation factors must be tied up to other strategies to enhance a firm’s

financial performance. Notice that of the three beta coefficients, process innovation (β =-

0.077) was negative though not significant. Business model innovation and service

innovation had positive though non significant effect on corporate financial performance.

This therefore means that increase in business model and service innovation, resulted in

improved financial performance. Table 5.6 shows the effects of firm innovation factors on

non financial performance .

Table 5.6: Firm Innovation Factors and Non Financial Performance

a) Model Summary

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

1 .371a .138 .034 .349

a. Predictors: (Constant), Service Innovation, Business Model Innovation, Process Innovation

b. Dependent Variable: Non-Financial indicators of performance

128

b) ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression .488 3 .163 1.332 .286b

Residual 3.053 25 .122

Total 3.541 28

a. Dependent Variable: Non-Financial indicators of performance

b. Predictors: (Constant), Service Innovation, Business Model Innovation, Process Innovation

Coefficientsa c) Model Unstandardized

Coefficients

Standardized

Coefficients

T Sig.

1

B Std.

Error

Beta

(Constant) 3.478 .766 4.542 .000

Process

Innovation .074 .229 .082 .325 .748

Business

Model

Innovation

-.189 .174 -.250 -1.090 .286

Service

Innovation .249 .154 .369 1.616 .119

a. Dependent Variable: Non-Financial indicators of performance

129

The R value in Table 5.6 was 0.371 indicating that there is a positive relationship between

firm innovation and non financial performance. R squared value of 0.138 shows that only

13.8 % of non financial performance is explained by firm innovation factors. The

remaining 86.2 % is explained by other strategies put in place by the banks in order to

enhance their performance.

As shown in Table 5.6 (b), the model was not significant with F= 1.332 and p> 0.05. This is

an indication that firm innovation factors alone cannot steer a company to significantly high

non financial performance. Firm innovation factors must be tied up with other strategies to

enhance organizations non financial performance.

Notice that of the three beta coefficients, business model innovation (β =-.250) was

negative though not significant. Service innovation had the highest positive effect on non

financial performance (β =0.369). Table 5.7 shows the effects of firm innovation factors on

overall organizational performance.

Table 5.7: Firm Innovation Factors and Organizational Performance

a) Model Summary

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

1 .274a .075 -.041 1.022

a. Predictors: (Constant), Service Innovation, Business Model Innovation, Process Innovation

b. Dependent Variable: Overall Organizational Performance

130

b) ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression 2.035 3 .678 .650 .591b

Residual 25.068 24 1.044

Total 27.103 27

a. Dependent Variable: Overall Organizational Performance

b. Predictors: (Constant), Service Innovation, Business Model Innovation, Process Innovation

Coefficients c) Model Unstandardized

Coefficients

Standardized

Coefficients

T Sig.

1

B Std. Error Beta

(Constant) .969 2.387 .406 .688

Process

Innovation -.072 .751 -.027 -.096 .925

Business

Model

Innovation

.218 .526 .099 .414 .683

Service

Innovation .436 .534 .229 .817 .422

a. Dependent Variable: Overall Organizational Performance

From the regression results above, the R value was 0.274 indicating that there is a positive

relationship between firm innovation factors and overall organizational performance. The R

squared (R2) value of 0.075 shows that 0.075 percent of organizational performance is

explained by firm innovation factors. The remaining 92.5 percent is explained by other

strategies put in place by banks in order to enhance their performance.

131

The model was not significant with the F ratio = 0.650 at p > 0.05. This is an indication that

though firm innovation factors have an influence on overall organizational performance, the

effect is not significant. Notice that of the three beta coefficients, process innovation (β =-

0.027) was negative though not significant. This implies that as process innovation

increased, the overall organizations performance decreased. Table 5.8 shows the effect of

firm innovation on organizations performance.

Table 5.8: Firm Innovation and Organizational Performance

a) Model Summary

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

1 .260a .067 .032 .986

a. Predictors: (Constant), Firm Innovation

b. b. Dependent Variable: Overall Organizational Performance

b) ANOVAa

Model Sum of Squares Df Mean Square F Sig.

1

Regression 1.828 1 1.828 1.880 .182b

Residual 25.275 26 .972

Total 27.103 27

a. Dependent Variable: Overall Organizational Performance

b. Predictors: (Constant), Firm Innovation

132

c) Coefficientsa Model Unstandardized

Coefficients

Standardized

Coefficients

T Sig.

1

B Std.

Error

Beta

(Constant) .521 2.089 .250 .805

Firm

Innovation .679 .495 .260 1.371 .182

a. Dependent Variable: Overall Organizational Performance

From the regression results above, the R value was 0.260 indicating that there is a positive

relationship between firm innovation and organizational performance. The R squared (R2)

value of 0.067 shows that 0.067 percent of organizational performance is explained by firm

innovation. The remaining 93.3 percent is explained by other strategies put in place by

banks in order to enhance their performance.

The model was not significant with the F ratio = 1.880 at p > 0 .05. This is an indication that

though firm innovation has an influence on organizational performance, the effect is not

significant. Given that the p-value (0.182) is more than an alpha value of 0.05, then the null

hypothesis, which states that firm innovation has no significant relationship with corporate

performance is accepted.

133

5.2.3 TMT Demographic Diversity, Firm Innovation and Corporate Performance Objective three of the study sought to determine the moderating effect of firm innovation on

the relationship between TMT demographic diversity and corporate performance. This was

achieved by testing the following hypothesis:

H3: The strength of the relationship between TMT demographic diversity and corporate

performance depends on firm innovation.

Diversity was measured in terms of age heterogeneity, tenure heterogeneity, education level

heterogeneity, functional heterogeneity, ethnic heterogeneity, gender heterogeneity and team

tenure heterogeneity. Firm innovation was measured in terms of business model, process

and service innovation. Performance was measured using a composite measure of financial

and non financial performance measures. The research findings are presented below:

Table 5.9: Firm Innovation, TMT Diversity and Organizational Performance

Predictor R2 Change R

TMT Diversity 0.037 0.194

TMT*Firm

Innovation

0.097 0.312

Change in R2 =0.06 Change in R = 0.118

Hypothesis three tested the moderating effect of firm innovation on the relationship

between TMT diversity and organization performance. First, a regression analysis was

done to determine the effect of TMT diversity on organization performance (Table 5.4).

Then another regression analysis was done to determine the moderating effect of firm

innovation on the relationship between TMT diversity and organizations performance

(Appendix XIII) on organization performance.

134

According to Baron and Kenny (1986), a moderator variable specifies when or under

which conditions a predictor variable influences a dependent variable. A moderator

variable may reduce or enhance the direction of the relationship between a predictor and a

dependent variable, or it may even change the direction of the relationship between two

variables from positive to negative or visa versa (Lindley and Walker, 1993).

From Table 5.9 above, it is clear that firm innovation moderates the relationship between

TMT diversity and corporate performance since when TMT diversity is regressed against

corporate performance, R2 is 0.037 but when the moderating variable (firm innovation) is

introduced, R2 changes to 0.097. This indicates that the combined model can explain 9.7

percent of the outcome up from just 3.7 percent of corporate performance explained by

TMT diversity, an increase of 6 percent. Further the R value changes by 0.118.

The results of the regression analysis thus indicate a positive moderating effect of firm

innovation on the relationship between TMT diversity and organization performance.

Therefore, the findings show that firm innovation influences the relationship between

TMT diversity and organization performance. Given that there is a 6 percent increase in

R2, then the null hypothesis, which states that the strength of the relationship between

TMT demographic diversity and corporate performance does not depend on firm

innovation, is rejected.

135

5.2.4 Leadership Style and Corporate Performance

Objective four of the study sought to determine the relationship between leadership style and

corporate performance. This was achieved by testing the following hypothesis:

H4: There is a significant relationship between leadership style and corporate

performance.

In testing the fourth hypothesis, it was deemed necessary first to test the effect of the two

leadership styles considered on performance measures as this would help establish if the

different leadership styles considered had the same or different effect on corporate

performance. The leadership styles considered in this study were transformational and

transactional leadership styles. It was after this that the study tested the effect of leadership

styles on the overall organization performance. Regression analysis was done to determine

the effect of leadership style on organization performance. Tables 5.10, Tables 5.11 and

Table 5.12 show the effect of leadership styles on financial performance, non financial

performance and overall organizational performance respectively.

Table 5.10: Leadership Styles and Financial Performance

a) Model Summary

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

1 .341a .116 .049 17467.804 a. Predictors: (Constant), Transactional Leadership Style, Transformational

Leadership Style

b. Dependent Variable: Financial Performance

136

b) ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression 1045943928.607 2 522971964.304 1.714 .200b Residual 7933228285.399 26 305124164.823

Total 8979172214.006 28

a. Dependent Variable: Financial Performance

b. Predictors: (Constant), Transactional Leadership Style, Transformational Leadership Style

Coefficientsa c) Model Unstandardized

Coefficients

Standardized

Coefficients

T Sig.

B Std.

Error

Beta

(Constant) -74788.606 48465.462 -1.543 .135 Transformational Leadership Style

21494.895 11752.149 .353 1.829 .079

Transactional Leadership Style

-1074.582 1310.919 -.158 -.820 .420

a. Dependent Variable: Financial Performance

The R value in Table 5.10 was 0.341 indicating that there is a positive relationship between

leadership styles and corporate financial performance. R squared value of 0.116 shows that

only 11.6 % of corporate performance is explained by the leadership style. The remaining

88.4 % is explained by other strategies put in place by the banks in order to enhance their

performance. As shown in Table 5.10(b), model was not significant as depicted by an F

ratio of 1.714 and p value of 0.200. This is an indication that the CEO’s leadership style on

its own does not have significant effect on corporate financial performance.

137

The findings further indicate that transformational leadership style had a positive effect on

corporate financial performance (β =0.353) while transactional leadership style had a

negative effect on corporate financial performance (β =-.820), though both the leadership

styles had insignificant effect on financial performance. This in essence means that if a

leader uses transactional leadership style, performance is bound to decrease, whereas if a

leader uses transformational leadership, performance is bound to improve. Table 5.11 shows

the effect of leadership styles on non financial performance.

Table 5.11: Leadership Styles and Non Financial Performance

a) Model Summary

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

1 .361a .131 .064 .344 a. Predictors: (Constant), Transactional Leadership Style, Transformational

Leadership Style

b. Dependent Variable: Non-Profit indicators of performance

b) ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression .463 2 .231 1.953 .162b Residual 3.079 26 .118

Total 3.541 28

a. Dependent Variable: Non-Profit indicators of performance

b. Predictors: (Constant), Transactional Leadership Style, Transformational Leadership Style

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Coefficientsa c) Model Unstandardized

Coefficients

Standardized

Coefficients

T Sig.

1

B Std.

Error

Beta

(Constant) 2.250 .955 2.357 .026 Transformational Leadership Style

.442 .232 .366 1.908 .067

Transactional Leadership Style

-.027 .026 -.203 -

1.060 .299

a. Dependent Variable: Non-Profit indicators of performance

The R value in Table 5.11 was 0.361 indicating that there is a positive relationship between

leadership styles and non financial performance. R squared value of 0.131 shows that

13.1% of non financial performance is explained by the leadership styles. The remaining

86.9% is explained by other strategies put in place by the banks in order to enhance their

performance. As shown in Table 5.11 (b), model is not significant as depicted by an F ratio

of 1.953 and p>0.05. This is an indication that the CEO’s leadership style does not have

significant effect on non financial performance. The findings further indicate that

transformational leadership style has a positive effect on non financial performance (β =

0.366) while transactional leadership style has negative effect on non financial performance

(β =-.203). Table 5.12 shows the effect of Leadership styles on overall organizational

performance.

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Table 5.12: Leadership Styles and Organizational Performance

a) Model Summary

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

1 .329a .108 .037 .983 a. Predictors: (Constant), Transactional Leadership Style, Transformational

Leadership Style

b. Dependent Variable: Overall Organizational Performance b) ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression 2.928 2 1.464 1.514 .240b Residual 24.175 25 .967

Total 27.103 27

a. Dependent Variable: Overall Organizational Performance

b. Predictors: (Constant), Transactional Leadership Style, Transformational Leadership Style

Coefficientsa c) Model Unstandardized

Coefficients

Standardized

Coefficients

T Sig.

1

B Std.

Error

Beta

(Constant) -.738 2.753 -.268 .791 Transformational Leadership Style

1.050 .669 .311 1.569 .129

Transactional Leadership Style

-.088 .074 -.237 -

1.195 .243

a. Dependent Variable: Overall Organizational Performance

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The R value in Table 5.12 was 0.329 indicating that there is a positive relationship between

leadership style and overall organizational performance. R squared value of 0.108 shows

that 10.8% of organizational performance is explained by the leadership style. The

remaining 89.2% is explained by other strategies put in place by the banks in order to

enhance their performance. As shown in Table 5.12(b), model is not significant as depicted

by an F ratio of 1.514 and p>0.05.

This is an indication that the CEO’s leadership style does not have significant effect on

overall organizational performance. The findings further indicate that transformational

leadership style has a positive effect on performance (β =0.311) while transactional

leadership style has a negative effect on corporate performance (β =-.237) though both of

the leadership styles had insignificant effect on overall organizational performance.

According to Bass (1990), most leaders demonstrate a combination of both transactional and

transformational leadership styles. Table 5.13 shows the effect of the two leadership styles

on organizational performance.

Table 5.13: Leadership Style and Organizational Performances

Model Summary

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

1 .111a .012 -.026 1.015

a. Predictors: (Constant), Leadership style

b. Dependent Variable: Overall Organizational Performance

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ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression .335 1 .335 .325 .573b

Residual 26.768 26 1.030

Total 27.103 27

a. Dependent Variable: Overall Organizational Performance

b. Predictors: (Constant), Leadership Style

Coefficientsa Model Unstandardized

Coefficients

Standardized

Coefficients

T Sig.

1

B Std.

Error

Beta

(Constant) 3.679 .569 6.467 .000

Leadership -.080 .140 -.111 -.570 .573

a. Dependent Variable: Overall Organizational Performance

From the regression results above, the R value was 0.111 indicating that there is a positive

relationship between leadership style and organization performance. The R squared (R2)

value of 0.012 shows that 0.012 percent of organizational performance is explained by

leadership style. The remaining 98.8 percent is explained by other strategies put in place by

banks in order to enhance their performance. The model was not significant with the F ratio

= 1.015 at p > 0 .05. This is an indication that though leadership style have an influence on

organizational performance, the effect is not significant and thus the null hypothesis was

accepted.

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5.2.5 TMT Demographic Diversity, Leadership Style and Corporate Performance Objective five of the study sought to determine if the strength of the relationship between

TMT demographic diversity and corporate performance of commercial banks in Kenya is

influenced by the CEO’s leadership style. This was achieved by testing the following

hypothesis:

H5: The strength of the relationship between TMT demographic diversity and corporate

performance depends on CEO’s leadership style.

Diversity was measured in terms of age heterogeneity, tenure heterogeneity, education level

heterogeneity, functional heterogeneity, ethnic heterogeneity and team tenure heterogeneity.

The leadership styles considered in this study were transformational and transactional

leadership styles. Performance was measured using financial and non financial measures.

The study findings are presented in the table below:

Table 5.14 Leadership Style, TMT Demographic Diversity and Organizational

Performance

Predictor R2 Change Change in R

TMT Diversity 0.037 0.194

TMT*Leadership

Style

0.151 0.389

Change in R2 =0.114 Change in R = 0.195

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Hypothesis five tested the moderating effect of leadership style on the relationship

between TMT demographic diversity and organization performance. First, a regression

analysis was done to determine the effect of TMT diversity on organization

performance (Table 5.4). Then another regression analysis was done to determine the

moderating effect of leadership style on the relationship between TMT demographic

diversity and organizations performance (Appendix XIV).

According to Aldwin (1994), the moderation effect is typically expressed as an interaction

between predictor and moderator variable. According to Baron and Kenny (1986) a

moderator variable specifies when or under which conditions a predictor variable

influences a dependent variable. A moderator variable may reduce or enhance the direction

of the relationship between a predictor variable and a dependent variable, or it may even

change the direction of the relationship between two variables from positive to negative or

visa versa (Lindley and Walker, 1993).

From table 5.14, it is clear that leadership style moderates the relationship between TMT

diversity and corporate performance since when TMT diversity is regressed against

corporate performance R2 is 0.037, but when the moderating variable (leadership style) is

introduced, R2 changes to 0.151. This indicates that the combined model can explain 15.1

percent of the outcome up from just 3.7 percent given by the Top Management Team

diversity alone, an increase of 11.4 percent. Further, R (correlation coefficient) changes

from 0.194 to 0.389, an increase of 0.195.

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The results of the regression analysis thus indicate that leadership style moderates the

relationship between TMT diversity and organization performance. Therefore, the

hypothesis that states that the strength of the relationship between TMT diversity and

corporate performance depends on CEOs leadership style was accepted.

5.2.6 TMT Demographic Diversity, Leadership Style, Firm Innovation and Corporate Performance

Objective six of the study sought to determine the joint effect of TMT demographic

diversity, leadership style and firm innovation on corporate performance. This was

achieved by testing the following hypothesis:

H6: The joint effect of the moderating variables, firm innovation and leadership style on

the relationship between TMT demographic diversity and corporate performance is

greater than the independent moderating effect of the same variables.

Diversity was measured in terms of age heterogeneity, tenure heterogeneity, education level

heterogeneity, functional heterogeneity, ethnic heterogeneity and team tenure heterogeneity.

Firm innovation was measured in terms of business model innovation, process innovation

and service innovation. Leadership style was measured in terms of transactional and

transformational leadership styles. Performance was measured using financial and non

financial measures .The study findings are presented in the tables below:

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Table 5.15 TMT Demographic Diversity, Leadership Style, Firm Innovation and

Organizational Performance

Predictor R2 Change Change in R

TMT Diversity 0.037 0.194

TMT *Firm

Innovation

0.097 0.312

TMT *Leadership

Style

0.151 0.389

TMT *Firm

Innovation

*Leadership Style

0.116 0.341

Hypothesis six tested the joint moderating effect of firm innovation and leadership style

on the relationship between Top Management Team diversity and organization

performance. First, a regression analysis was done to determine the effect of TMT

diversity on organization performance (Table 5.4). Secondly, another regression analysis

was done to determine the moderating effect of firm innovation on the relationship between

TMT diversity and organizations performance (Appendix III). Thirdly, another regression

analysis was done to determine the moderating effect of leadership style on the relationship

between TMT diversity and organizations performance (Appendix IV). Finally another

regression analysis was done to determine the effect of the interaction between TMT

diversity, firm innovation and leadership style (Appendix XV) on organization

performance.

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From Table 5.15, it is clear that the joint effect of the moderating variables, firm

innovation and leadership style, on the relationship between TMT diversity and corporate

performance is lower than the moderating effect of leadership style but higher than the

moderating effect of firm innovation. Thus from the findings of this study, the null

hypothesis which states that the joint effect of the moderating variables on the

relationship between TMT demographic diversity and corporate performance is lower

than the individual moderating effect, is accepted.

5.3 Discussion of Findings

This section presents the discussion of the findings of this study. The main objective of this

study was to establish the relationship between TMT demographic diversity and

organizations performance. Top management team diversity was composed of age diversity,

gender diversity, ethnic diversity, team tenure diversity, organizational tenure diversity,

functional diversity and academic diversity. The moderating variables in the study were firm

innovation and leadership style.

The results of the study showed that TMT demographic diversity does not have a

significant effect on organizations performance. Further, firm innovation and leadership

style do not have significant effect on organizations performance. The findings however

showed that leadership style and firm innovation moderates the relationship between TMT

demographic diversity and organizations performance.

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5.3.1 Top Management Team Demographic Diversity and Corporate Performance Previous studies have indicated that salience of various demographic variables contributes to

social categorization which results in inter group bias (Van Knippenberg, et al., 2004)

discrimination and prejudice. Social psychology research supports the notion that people

form first impression and categorize one another based on easily observable characteristics

(Fiske and Neuberg, 1990). Further, similarity and attraction theory supports the notion that

similarity in attributes, particularly demographic variables, increases interpersonal attraction

and liking (Byrne et al., 1996).

Research has further shown that, in a situation where an individual has the opportunity to

interact with a number of different people, he or she is most likely to select a person who has

similar characteristic to them (Burt & Regans, 1997). The fact that one is likely to be most

attracted to those with similar attributes, yields clear predictions that high levels of diversity

in an organization are likely to lead to faulty work processes, leading to weaker performance

(Burt and Regans, 1997).

This study established that though diversity is hypothesized to have uniform effects

regardless of particular dimensions to which it’s empirically applied (Finkelstein and

Hambrick, 1996), different TMT demographic factors had different magnitudes and

direction of influence. From the results on the effects of TMT diversity factors on overall

organizational performance, it’s evident that as gender, ethnic and team tenure diversity

increased, the organizations performance decreased. This is perhaps explained by the fact

that people form first impressions and categorize one another based on easily observable

characteristics such as gender (Fiske & Neuberg, 1990). Individuals will deem the categories

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in which they belong as good (often called the in-group) and the categories in which others

belong as bad (the out-group). Moreover, empirical research has shown that individuals

often (falsely) attribute negative characteristics to out-group members as part of this process,

believing the out-group to be comprised of individuals who are less trustworthy, honest,

cooperative, or intelligent (Turner, 1987).

This is likely to cause heightened problems with trust and communication and as a result,

work processes will be made much more difficult, thus causing the final product, idea, or

solution to be weaker (Daft and Lengel, 1986) and hence negatively affecting performance.

The fact that ethnic diversity led to poor performance can be explained by the fact that

according to Alesina and La Ferrara (2000), individuals dislike mixing across ethnic lines.

This implies that all individuals would opt to sort into ethnically homogeneous organizations

to avoid the costs of mixing with individuals from other ethnic groups. There is more social

cohesion and social capital within ethnic groups than across groups. Further, organizations

divided by ethnicity are seen as less likely to reach co-operative solutions (Bisin and

Verdier, 2000) causing negative effects on organizations performance outcomes.

Further, the findings indicating that functional diversity has positive effect on performance

can be explained by the fact that functionally diverse TMT bring along specific knowledge

and experience from the different areas of a firm’s operations. A certain degree of variety

in managers’ knowledge of the different functional areas is a prerequisite for successfully

managing the complexity of firms operations (Hambrick and Mason ,1984).

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Finally, the findings that age diversity has positive effect on performance can be explained

by the fact that age cohorts are likely to differ in their attitudes, values and perspectives.

This is due to the fact that different age cohorts experience different social, political, and

economic environments and events, which have a fundamental role in shaping attitudes and

values. In addition, perspectives change as a function of the developmental process of aging

(Elder, 1975). Assuming that diversity of attitudes and values facilitates group creativity,

teams composed of members of diverse ages then have improved performance.

Further, the findings that team tenure diversity leads to low performance could be explained

by the fact that more tenured executives may have more psychological commitment to the

organizational status quo (Staw and Ross, 1980) and to organizational values (Schmidt and

Posner, 1983). Consequently, change, which is an inherent part of innovation, may be

resisted by the more tenured executives leading to poor organizations performance. This

could further be explained by the fact that tenure in the team could lead to social

stratification which could lower the productivity of the organization.

Furthermore, academic diversity will benefit the organization since different levels of

education among TMT members reflects their varying degrees of knowledge and skill,

thereby affecting the capacity of the team to generate more creative solutions in resolving

complex problems (Bantel and Jackson, 1989). Therefore, a high level of education in the

team will result in a greater awareness of the need to change and innovate (Wiersema and

Bantel, 1992), a greater understanding of information and a greater capacity to analyze

many-sided, complex problems thoroughly (Calori et al., 1994).

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Under Vision 2030, Kenya aims to increase annual GDP growth rates to 10% and to

maintain that average till 2030. To achieve that ambition, Kenya must continue with the

tradition of macro-economic stability that was established in 2002. It must also address other

key constraints notably a low savings ratio out of national income. Delivering the country’s

ambitious growth aspirations will require a rise in national savings. The financial sector has

been identified to help achieve the economic pillar.

The 2030 vision for financial services is to have a vibrant and globally competitive financial

sector driving high-levels of savings and financing Kenya’s investment needs (Ministry of

Planning and National development, 2007). This will be achieved through measures that

include increasing bank deposits and reducing the cost of borrowed capital. This can only be

achieved if the negative effects of diversity as reflected by this study are managed.

Commercial banks must come up with clear policy guidelines that must be followed to

achieve this economic pillar and amongst them is diversity management.

Importantly, since the findings of this study clearly show that academic and functional

diversity have positive effects on organizations performance, then commercial banks should

come up with policies that will enhance access to education in different functional areas by

their employees, especially having in mind the fact that bankers have a very busy working

schedule running from Monday to Saturday and indeed today some banks are operating even

on Sundays. Thus, this must be a deliberate plan by the commercial banks of enhancing

access to education.

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In addition, since the study findings show that age diversity has a positive effect on banks

performance, then banks should continuously encourage the recruitment of young people in

the TMT since this will bring divergent views in the decision making process. This has not

been the norm in most organizations today since many of them are dominated by older

people in the TMT but the findings of this study clearly show that banks will benefit by

having a diverse TMT in respect to age.

Overall, the results of the linear regression indicated a positive insignificant relationship

between TMT demographic diversity and corporate performance with R=.194 and the R

squared value was 0.037. These findings are in line with the findings of Ferrier, (2001) and

Marimuthu (2009) who found out that TMT diversity has insignificant effect on

organizations performance. Moreover, Aldrich (1979) viewed leaders as products of their

environments with little power to control structural and systemic factors that determine

organizational actions.

On the basis of the fact that the findings reflect a positive effect on corporate performance,

the results then are in line with strategic choice theorists (Child, 1972) who argued that top

management in a firm have discretion in determining the future strategic contour of the firm.

This is greatly supported by Jackson et al (1995), who found out that heterogeneity is

positively related to the creativity and the decision-making effectiveness of teams. With

enhanced creativity and innovation due to the generation of greater variance in decision-

making alternatives (Jackson et al., 1995) performance of the organization is bound to

improve.

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Further, the fact that the findings of the study showed that some diversity factors had

negative effect on organizational performance confirms the findings of O'Reilly, Snyder

(1993) who argued that higher levels of executive diversity result in less communication

among executives, less effective executive decision-making, and less positive organizational

outcomes. In addition, diversity has been shown to have negative effects on both group

cohesion (Caldwell, and Barnett, 1989) and the frequency or quantity of communication

(Smith et al., 1994).

The findings of the study however contradict some past studies. To start with is Weiner and

Mahoney (1981), who argued that leaders are powerful decision-makers who consciously

choose among diverse courses of action, and so determine the fate of their firms. Similarly,

Bantel and Jackson (1989) argued that higher level of diversity leads to executive creativity,

more effective executive decision-making, and more positive organizational outcomes

(Bantel and Jackson, 1989).

5.3.2 Firm Innovation and Corporate Performance The second objective sought to determine the effect of firm innovation on organizations

performance. The findings of the study clearly show that process innovation has a negative

effect on organization performance. This is perharps explained by the fact that process

innovation involves the implementation of new or significantly improved production or

delivery methods. This includes significant changes in techniques, equipment or software.

Process innovations can be intended to decrease unit costs of production or delivery, to

increase quality, or to produce or deliver new or significantly improved products (OECD

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Oslo Manual, 2005). However, while the introduction of new products is commonly

assumed to have a clear, positive effect on the growth of income and employment, process

innovation, due to it is cost-cutting nature, can have a more hazy effect (Fagerberg et al.

2004). The cost cutting aspect may further lead to the demotivation of staff leading to low

performance.

The study further showed that service innovation and business model innovation have

positive effects on organizations performance. According to Gadrey et al., (1995), service

innovations can be described as new developments in activities undertaken to deliver core

service products for various reasons, for example to make those core service products more

attractive to consumers. Such developments tend to involve interaction with customers and

can be associated with either new or existing service products. Banks are service giving

organization thus innovations in the way they deliver services to the customers is likely to

enhance their competitiveness. Johne and Storey (1997) argue that service suppliers must

develop the precise form of service product and the appropriate nature of interaction with

customers since the interaction process is typically an integral part of an offering and this is

likely to be a key success factor in service giving organizations enhancing the

competitiveness in the industry.

Business model innovation refers to how a company creates, sells, and delivers value to its

customers (Porter, 1985). Thus according to Porter (1985), business model replacement

improves performance since it involves business model replacements that provides product

or service offering to customers and end users that were not previously available. New

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business models provide alternative approaches to business practices for firms to consider,

not only in terms of what is done, but also in terms of how it is done. New business models

are business practices that result in greater efficiency by utilizing information technology

(Porter, 1985).

Commercial banks have been facing very low penetration level and according to the CBK

Report of 2011, the penetration level stood at 19%. The change in the business model

following the introduction of agency banking has helped enhance the penetration level of

commercial banks. However, the adoption rate of agency banking as a new business model

has been low. Thus commercial banks should engage in aggressive awareness creation

campaigns to enhance the usage of agency banking and demystify the notion held by people

of security threats posed by agency banking.

Further, the role of TMT decisions is very relevant in innovation (Ireland et al., 2001). This

is because innovation is an accumulative, collective and uncertain process, a fact that

management directs, promotes and encourages (O’Sullivan, 2000). The preferences of its

leaders can impose serious restrictions on a company’s innovation, compromising its ability

to identify and act on profitable opportunities (Penrose, 1959).

Thus the TMT in banks should create conducive organization culture as this will encourage

innovation in organizations which will consequently affect organizations performance as

previous studies have suggested. The findings of the study show that generally, firm

innovation does not have significant effect on corporate performance. These findings are

155

supported by Simpson et al. (2006) who noted that innovation is an expensive and risky

activity, with the potential to elicit both good and bad effects on the firm’s performance. It is

not surprising, then, that in some studies no direct or immediate effects have been found of

innovation on firm’s performance. Thus innovation on its own does not have a significant

effect on corporate financial performance and it has to be coupled with other strategies to

generate significant effects on organization’s performance.

Further, the popular notion that innovation is vital for the growth and survival of the firm

(Han et al., 1998) may not be applicable in certain situations, particularly environment,

where the circumstances faced by the firm do not reward this behavior (Manu, 1992). For

example, in a sample of small manufacturers, Covin and Slevin (1989) stated that in benign

environments, with low levels of competition, resources allocated for research and

development to support innovation might better be directed to increasing promotional efforts

or customer service.

These findings however contradict with previous research since innovation is often claimed

to be a cornerstone of competitiveness (Denton, 1999) and in some cases also profitability.

The role of innovation in a firm’s strategy is further said to contribute to competitive

advantage (Johannessen et al, 2001); organizational performance (Yamin et al, 1999) and

market share (Robinson, 1990).

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The positive effect of innovation on the firm’s performance has been explained by the fact

that through innovation, the company faces up to the changes in the firm’s environment

(Agarwal et al., 2003). Furthermore, innovation has also a positive effect on sales growth

and the occupation of the firm’s manufacturing capacity. Innovation is a way of adapting to

the environment (Cooper, 1984) and therefore, it can be expected that its effects on

performance will vary, precisely, according to the firm’s environment (Carbonell and

Rodrı´guez, 2006).

5.3.3 TMT Demographic Diversity, Firm Innovation and Corporate Performance

The third objective of this study was to establish if firm innovation moderates the

relationship between top management team diversity and corporate performance. According

to Baron and Kenny (1986) a moderator variable specifies when or under which conditions a

predictor variable influences a dependent variable. A moderator variable may reduce or

enhance the direction of the relationship between a predictor variable and a dependent

variable, or it may even change the direction of the relationship between two variables from

positive to negative or visa versa (Lindley and Walker, 1993).

From the findings of the study, it is clear that the introduction of the moderating variable,

firm innovation, leads to enhancement of the relationship between TMT demographic

diversity and organizations performance as reflected by changes in coefficient of

determination, R2. According to Bantel and Jackson (1989), innovation can be seen as an

attribute of organizations. Thus in such an instance, the negative effects of diversity are

likely to be moderated by firm innovation.

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Commercial banks in Kenya operate in a competitive environment and one of the drivers of

their competitiveness is technology developments. In essence, banks have no option but to

adapt to modern technology to remain relevant. Thus though diversity in the Top

Management as reflected in the study may have negative effects, innovation as an attribute

of an organization is likely to moderate this effect, enhancing an organizations performance.

These findings are supported by Jackson et al (1995), who observed that heterogeneity is

positively related to the creativity and the decision-making effectiveness of teams. With

enhanced creativity and innovation due to the generation of greater variance in decision-

making alternatives (Jackson et al., 1995), performance of organization is bound to improve.

Bantel & Jackson (1989) found that organizational innovations in the banking industry were

positively associated with heterogeneity of functional expertise among members of the TMT

of firms in that industry.

5.3.4 Leadership Style and Corporate Performance The fouth objective of the study sought to establish the effect of leadership style on

corporate performance. From the findings of this study its clear that transactional leadership

style had a negative effect on performance whereas transformational leadership style had a

positive effect on corporate performance. Managers, who exhibit transformational leadership

raise subordinates’ awareness of the importance and value of designated outcomes, get

employees to transcend their own self-interests for the sake of the group or organization, and

change or increase subordinates’ needs (Avolio and Bass,1988).

158

Through such means, employees’ motivation and self-confidence is enhanced leading to

improved employees’ performance. In todays environment, which is characterized by a lot

of dynamism, employees in commercial banks are likely to be comfronted with challenging

situations due to the unpredictable environment. This may cause employees to be

demotivated since at times the targets they set may not be attained based on unfavourable

business environments. Transformational leadership will thus play a key role in enhancing

the motivation level of the employees, making them envision a better future and

consequently resulting in improved performance.

Currently, the banking sector faces a lot of challenges of money laundering. With advanced

technology and a population which is enlightened, this challenge cannot be under-estimated.

It is thus imperative that the leadership in commercial banks enhances the motivation levels

of the employees so that they can develop creative solutions to address the perdemic

challenges they are facing, and this can only occur if there is ownership of the organization,

unlike the contractual relationship that transactional leadership provides.

The study findings further show that leadership style does not have significant effect on

organizations performance. This then means that CEO’s leadership style on it is own has

no significant effect on corporate performance but must be tied up with other strategies.

Fiedler (1996) argued that the effectiveness of a leader is a major determinant of the success

or failure of a group, organization, or even an entire country. Leadership effectiveness is

dependent on the leader’s diagnosis and understanding of situational factors, followed by the

adoption of the appropriate style to deal with each circumstance (Vroom and Yetton, 1974).

159

Thus leadership style on it is own may not have a significant effect on performance unless

the leader has the preliquisite skills to diagnose the environmental challenges adequately and

later apply the right skills. Leadership style must thus be tied up to other factors to enhance

an organizations performance. The findings of this study however contradict other previous

studies. To start with is Silns (2003) compared the leadership style with the leadership

performance in schools and enterprises, and showed that the leadership style has a

significantly positive correlation with the organizational performance in both schools and

enterprises.

Further, Campbell (1977) thought that when executives use their leadership style to show

concern, care and respect for employees, it would increase self-interests of employees in

work as well as organizational promises, enable them to make better performance in work

place and affect their job satisfaction. Bryman (2004) also presented that there is a strong

positive relation between the leadership style and the organizational performance.

5.3.5 TMT Demographic Diversity, Leadership Style and Corporate Performance The fifth objective of this study sought to establish if leadeship style moderates the

relationship between top management team diversity and corporate performance. As

earlier noted, a moderator variable may reduce or enhance the direction of the relationship

between a predictor variable and a dependent variable, or it may even change the direction

of the relationship between two variables from positive to negative or visa versa (Lindley

and Walker, 1993).

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From the findings of the study, it is clear that the introduction of the moderating variable,

leadership style, enhances the relationship between TMT demographic diversity and

organizations performance as reflected by changes in coefficient of determination, R2. The

findings of the study showed that the interaction between TMT demographic diversity and

leadership style explains more of firm performance than TMT diversity. The findings of

this study agree the findings of Canella & Holocomb (2005), who argued against the

dominant upper echelon reasoning, which is based on an assumption of equality of

individual effects of the TMT members.

According to them, aggregating individual characteristics to the team level without

paying due attention to the relative influence of each team member may be

problematic. Further, as noted by Jackson (1992), the degree of influence of individual

executives on firm choices depends on the power of the CEO, who as a group leader has

the “potential to neutralize both beneficial and debilitating TMT composition effects” as

well as the power distribution within the team itself.

The fact that leadership style will moderate the relationship between TMT diversity and

organizational performance could be explained by the fact that for example,

transformational leaders use intellectual stimulation as a strategy to influence their

subordinates. Through intellectual stimulation, leaders challenge existing assumptions and

explicitly encourage new ideas and innovative approaches to problem solving (Bass, 1985).

This stimulates followers to think outside the box, explore new alternatives and voice their

divergent views.

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The intellectual stimulation of team members encourages them to overcome pressures

towards convergent thinking and path dependence that operate in functional areas in

organizations (Teece and Pisano, 1998) and encourages novel interpretations of existing

information (Bhatt, 2000).

The extent to which group members are stimulated to consider opposing or conflicting ideas

positively affects the groups’ ability to resist conformity pressures (Nemeth and Nemeth-

Brown, 2003) and avoids the risk of premature movement to consensus. These empirical

results in the Kenyan context are supported by other empirical findings in TMT studies. Shin

and Zhou (2003) found that transformational leadership was positively related to the

manifestation of diverse ideas and creative approaches. Evidence has also supported the role

of transformational leadership in facilitating divergent thinking in teams (Jung, 2003).

The findings of this study are further in line with the findings of Drach-Zahavy & Somech

(2001) who noted that leadership style will moderate the impact of heterogeneity on team

reflection. Heterogeneity represents potential for a higher degree of reflection. Teammates

with different organizational roles possess different skills and expertise and, hence, avail

themselves of broader informational resources and knowledge. Moreover, heterogeneous

teams carry not only diverse knowledge and information but also different vocabularies,

cognitive patterns, and styles. These patterns of heterogeneity might potentially induce team

members to discuss, reanalyze, question, and debate. Without such intervention by the

superior, a team’s heterogeneity may remain an untapped resource, existing but never used

(Simons et al., 1999).

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Superiors can help reduce barriers between diverse professionals in functionally

heterogeneous teams by facilitating the open exchange of ideas and analytical perspective

across multiple functions (Lewis et al., 2002). Since diversity in commercial banks in Kenya

today has been seen to have negative effects, it is important to note that applying the right

leadership style will help change this situation.

These findings however contradict Hambrick and Mason (1989) argument that the chief

executive officer is only a member of dominant coalitions within organizations and as a

result, since organizations exist as coalitions of varying power and decision making is

interdependent as opposed to hierachical, individual leaders are unable to obtain requisite

power to enforce their will in decision making (Cyert and March,1992).

5.3.6 TMT Demographic Diversity, Leadership Style, Firm Innovation and Corporate Performance The sixth objective of this study was to establish if the joint moderating effect of

leadeship style and firm innovation on the relationship between top management team

diversity and corporate performance is higher than the individual variables moderating

effect. As earlier noted, a moderator variable may reduce or enhance the direction of the

relationship between a predictor variable and a dependent variable, or it may even change

the direction of the relationship between two variables from positive to negative or visa

versa (Lindley and Walker, 1993). Thus to confirm this hypothesis, the joint effect should

be higher than when each of the moderating variable is individually considered.

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From the findings of the study, it clear that the introduction of the joint moderating

variables, leadership style and firm innovation has a higher effect on the relationship

between TMT demographic diversity and organizations performance than the moderating

effect of firm innovation but its lower than the moderating effect of leadership style as

reflected by changes in coefficient of determination, R2. This is a major contribution of

this study in the field of strategic management since it is clear from the findings of the

study that though moderating variables will influence the relationship between TMT

diversity and corporate performance, having more than one moderating variables doesn’t

necessarily guarantee that the relationship will be enhanced.

The rationale for this study w a s the belief that previous inconclusive findings of

upper echelons diversity research might be due to the failure to theoretically

conceptualize and empirically investigate different dimensions of diversity and also

failure to consider the effect of moderating variables. Clearly from the findings, it is

evident that each of the moderating variables influences the relationship between TMT

demographic diversity and corporate performance but more importantly, is the fact that the

joint effect is lower than the moderating role played by leadership style.

However, since the dependent variable and the moderating variables do not fully explain

corporate performance in the commercial banks, it would be important for future researchers

to further explore this study to establish other moderating and intervening variables

influencing this relationship and further explore why the joint effect is not higher than the

independent moderating effect.

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From the findings of this study, banking industry needs to appreciate the fact that diversity

among the employees if properly managed can be a source of sustainable competitive

advantage to the industry. Given that all organizations, commercial banks not being an

exception, are environment dependent and environment serving, it is important for

commercial banks to come up with appropriate strategies to enhance their competitiveness.

One of the strategies that can enhance their competitiveness is coming up with appropriate

strategies that will enhance their ability to tap from the diverse human resources. Indeed

according to the resource based view of the firm, employees form the firm level resource,

that is difficult to imitate and consequently giving organizations sustainable competitive

advantage.

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CHAPTER SIX

SUMMARY, CONCLUSION AND RECOMMENDATION

6.1 Introduction This was an attempt to understand the relationship between TMT demographic diversity and

corporate performance and how firm innovation and leadership style influences this

relationship. The study was motivated by the growing concern over the effect of diversity on

organization’s performance. The inauguration of the new constitution has amongst other

things emphasized on the value of diversity and also following the post election crisis, there

has been growing debate on the advantages of encouraging inclusivity and exploiting the

benefits of diversity. This chapter serves to demonstrate the achievements of the objectives

set out at the initiation of the study and presents in brief the results of these efforts.

Thereafter the conclusion, recommendation, limitation of the study and suggestions for

future research are presented. The chapter finally discuses the implication of the study on

theory, policy and practice.

6.2. Summary The first objective of the study was to determine the relationship between TMT

demographic diversity and corporate performance. In order to ascertain the relationship

between diversity in TMT and corporate performance, the researcher tested the hypothesis

on the relationship between the two variables. Overall, the results of the linear regression

indicated a weak positive but insignificant relationship between demographic diversity in the

TMT and organizations performance with R=.194 and the R squared value was .037 at a

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confidence level of 95%. It is on the basis of these findings that H1 was rejected. The

findings of the study further indicated that gender, ethnic and team tenure diversity had

negative effects on organizations performance whereas age, organizational tenure, academic

and functional diversity had positive effects on organization performance.

The second objective of the study sought to determine the relationship between firm

innovation and organizations performance. The regression results indicated a positive

relationship between firm innovation and corporate performance with R=.260 and R

Squared .067 at confidence level of 95%. Since the p value was .182 which was more than

.05, then the null hypothesis was accepted. The findings of the study further indicated that

process innovation had negative effects on organizations performance whereas service

innovation and business model innovation had positive effects on organization performance.

The third objective of the study sought to establish if the strength of the relationship between

TMT demographic diversity and corporate performance of commercial banks in Kenya was

influenced by firm innovation. This was addressed by testing hypothesis H3. The results of

the linear regression results showed that the relationship was positive with the coefficient of

determination, R2changing from 0.037 when TMT diversity was regressed against corporate

performance to 0.097 when the moderating variable (firm innovation) was introduced. It is

on this basis that the third hypothesis that stated that the strength of the relationship between

TMT diversity and organizations performance depends on firm innovation was accepted.

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The fourth objective of the study sought to determine the relationship between leadership

style and corporate performance. Linear regression was used to test this hypothesis and the

findings of the study showed that the relationship was positive with R=.111 and R Squared

of .012. Since the p value was .573 which was more than .05, then the null hypothesis which

stated that there is no significant relationship between leadership style and corporate

performance was accepted. The findings of the study further indicated that transactional

leadership style had negative effects on organizations performance whereas transformational

leadership style had positive effects on organization performance.

The fifth objective of the sought to determine if the relationship between TMT demographic

diversity and corporate performance is influenced by the CEO’s leadership style. The results

of the linear regression results showed that the relationship was positive with and

R2changing from 0.037 when TMT diversity was regressed against corporate performance to

0.151 when the moderating variable (leadership style) was introduced. It is on this basis that

the fifth hypothesis that stated that the strength of the relationship between TMT diversity

and organizations performance depends on leadership style was accepted.

The sixth objective of the study was concerned with establishing the joint effect of TMT

demographic diversity, leadership style and firm innovation on performance of commercial

banks. This was addressed by hypothesis H6. It is clear that the joint effect of leadership

style and firm innovation is greater than the moderating effect of firm innovation but less

than the moderating effect of leadership style. It is on this basis that the sixth hypothesis was

rejected.

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6.3 Conclusion The general objective of the study was to determine the influence of TMT demographic

diversity on organizations performance. Researchers and practitioners have questioned the

effect of TMT diversity on organizations performance. The study findings revealed that

TMT demographic diversity had a positive but insignificant effect on corporate

performance. This reaffirms what other scholars have said that despite the large number of

studies on TMT diversity, research has yielded inconsistent results, and the question of

whether diversity in TMT is advantageous for companies still remains open (Canella et al.

2008). It is generally believed that diversity in TMT is advantageous to organizations since

it results in greater knowledge, creativity and innovation and thus, organizations tend to

become more competitive (Watson et al., 1993).

In addition, higher levels of diversity lead to executive creativity, more effective executive

decision-making, and more positive organizational outcomes (Bantel and Jackson, 1989).

The results of the study showed otherwise, which clearly indicates that the biases,

conflicts and communication barriers which come along in diverse teams contribute

negatively to the performance of banks in Kenya. However, from the findings of past

researchers, the results on the effect of TMT diversity on organization performance

will depend on the measures of performance under study.

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The study further established that though demographic diversity had an effect on corporate

performance, the magnitude and direction of the effect varied. For example gender and

ethnic diversity had negative and insignificant effect on organizations performance. This is

in line with the findings of Marimuthu and Kolandaisamy (2009) where it was established

that gender and ethnic diversity didn’t have significant effects on organizations

performance. This is similarly supported by Hambrick et al., (1996), who argues that

diversity can be disadvantageous to organizational performance. Knight et al. (1999) also

argues that team performance tends to deteriorate as diversity level increases.

The inclusion of the moderating variables (firm innovation and leadership style) gave a new

appreciation to the relationship between TMT demographic diversity and corporate

performance. The study further established that, firm innovation and leadership style on

their own, do not have significant effects on corporate financial performance but must be

tied up with other factors or strategies to generate significant effect on organization’s

performance.

In addition it is clear that joint effect of the moderating variables on the relationship between

TMT demographic diversity and organizations performance is not greater than the

independent moderating effect. We can thus in essence conclude that the people responsible

for making strategic decisions should ensure that they interrogate their choices to ensure

there is synergy in their organizations. Further, people responsible for sourcing of CEOs in

banks should get background information about their leadership skills before hiring them,

since appropriate leadership skills will moderate the negative effects of diversity.

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It is also important today for organizations to invest in training of their TMT members since

this will enhance the leadership skills in organizations and will moderate the negative effects

of diversity. In addition, the fact that past studies in the emerging economies have shown

that diversity in some contexts has positive effects, its paramount for banks to come up with

diversity management strategies since this may help tap into the great resource in the top

management team as advocated by the resource based view of the firm. This is due to the

fact that employees and management capabilities are firm-level resources that are among the

most sustainable and difficult for competitors to imitate due to the resource’s inherent causal

ambiguity, unique historical contexts, and social complexity (Barney, 2001).

6.4 Recommendation

Following the findings of this study, a number of recommendations can be made. To start

with, the study findings clearly show that the widely held notion that a mix of TMT

characteristics is good for organizations performance is not necessarily always the case. In

deed, the findings of this study have clearly shown that gender diversity, ethnic diversity and

team tenure diversity have negative effects on organizations performance.

This in essence means that diversity if not properly managed is likely to cause heightened

problems with trust, communication and cooperation and as a result, work processes will be

made much more difficult, thus causing the final product, idea, or solution to be weaker

(Daft and Lengel, 1986) and hence negatively affecting performance. Organizations should

therefore make a deliberate effort and invest in programmes and policies which reduce

stereotyping and instead encourage valuing diversity.

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In addition, the study findings also revealed that leadership style and firm innovation

moderates the relationship between TMT demographic diversity and organizations

performance. Following these findings, this study recommends that leaders’ competence in

organizations should be developed especially across the transformational strategies. Further,

leaders should develop expertise in engendering minority dissent at times when the team is

at risk of conformity or premature consensus, and facilitate decision-comprehensiveness and

debate at time when the team needs to evaluate, analyze and integrate its available

knowledge.

Further, innovation can only occur if the capacity to innovate exists in a company.

Innovation capacity refers to the availability of resources, collaborative structures, and

processes to solve problems. Since according to Mahoney and Weiner (1981) top

management team influence the decisions an organization is likely to take, then the study

recommends that the top management team should enhance the innovative capacity in

organizations.

Further, innovative orientation is a preliquisite for organizational innovation and innovative

companies have an innovative orientation, risk taking attitude, willingness to learn and an

innovative strategy s part of their overall business strategy. This study recommends that

organizations should incorporate young people in the TMT since unlike the old people,

young people have been found to have a risk taking attitude which will enhance the

innovativeness of a firm.

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Finally, since this study has also established that some diversity factors such as academic

diversity and functional diversity have positive effects on organizations performance, this

study recommends that organizations should encourage diversity in their recruitment

practices, but should also formulate and implement diversity management strategies to help

them tap from the great resources in their employees. However, firms should be careful not

to appoint members to the team whose combination with existing TMT members is likely to

create strong fault line settings, as this is likely to hamper organizations performance.

6.5 Limitations of the Study This study, just like any other study faced a number of limitations. To start with, the

researcher faced a major limitation in obtaining data. Bankers are very secretive people thus

it was very challenging to convince them to fill the questionnaires. However the

introductory letter from the university played a critical role in convincing the respondents to

fill the questionnaires. Though some of them didn’t respond, the response rate was good

enough and thus the quality of the research was not affected.

Secondly, this study was specific to the banking industry and therefore, results obtained may

not allow for generalization in industries in other sectors. Thirdly, self reporting documents

such as questionnaires may lead to bias. This may have led to biased results on issues such

educational level and age because they are subject to reporting inaccuracies. Despite this

limitation, the quality of the findings, their interpretation and reporting were not affected.

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The last limitation to this study was based on choice of regression and correlation models in

analysis. The assumption made on this study was that the relations between the data

variables were linear. Given that the interactions and dependencies of these relations are

causal, it could be possible that it is non-linear and, therefore, use of non-linear models

could have lead to different findings. In spite of these limitations, this current study

remained rigorous in its analysis and quality of reporting. It contributes to the understanding

of the strategic management processes and especially on the relationships among the key

constructs, TMT demographic diversity, firm innovation, leadership style and corporate

performance.

6.6 Suggestions for Further Research

This thesis makes an important contribution in our understanding of the effect of TMT

diversity on corporate performance. It further brings out some of the factors that influence

the relationship between TMT demographic diversity and corporate performance. Arising

from this study, the researcher makes a number of recommendations for further research. A

study focusing on the public sector where very high levels of diversity are likely to be

experienced would bring out a new dimension on the effect of TMT diversity on corporate

performance. Future studies may also adopt a case study research design for big firms such

as Safaricom which would further add value in understanding the relationship between TMT

diversity and corporate performance.

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Being an exhaustive study design it will enable future researchers understand fully how

TMT diversity affects corporate performance. This would further enable the researcher to

understand the effect of the moderating variables. Use of longitudinal research design in

regard to how TMT diversity affects performance would provide a more meaningful picture.

This is since one would be able to study the effect of diversity on performance over time.

Further, this study leaves many interesting questions unanswered. One question regards

generalizability and it is obvious that replicating this study in other industries would increase

our confidence in the results. Especially more desirable would be a study examining top

management teams in sectors that have more diversity with respect to education, race,

gender in the type of people chosen as members of the TMT.

More difficult than assessing the generalizability of the results from this study will be

clarifying the causal relationships among the variables and specifying the processes that

underlie the causal relationships. Longitudinal studies using large samples may be helpful in

identifying causal relationships, but intensive case studies may be required to inform us

about processes involved.

This study considered seven types of diversity namely gender, age, ethnic, team tenure,

organizational tenure, academic diversity and functional diversity. Future researchers should

consider other types of composition variables such as race, socio economic background,

career profiles amongst others. Finally, it would be interesting to establish other variables

likely to moderate or intervene the relationship between TMT diversity and corporate

performance.

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6.7 Implications on Theory This study attempts to make the following primary contributions to the literature on

demographic diversity and corporate performance. First, as Bantel and Jackson (1989)

suggest, although research on diversity in TMT has been extensively studied over the last

decade, the effect of different demographic diversity variables hasn’t been fully established.

This study has clearly shown that different diversity variables are likely to have either

positive or negative effect on corporate performance. In the Kenyan context, specifically in

the commercial banks, gender, ethnic and team tenure diversity had negative effects.

This study took a proactive approach to integrate research on leadership and research on

diversity to present a model to explain corporate performance. At a minimum, the proposed

model suggests an explanation for variation in the diverse team performance by showing the

moderating effect of leadership style on the relationship between TMT diversity and

corporate performance. By examining the model and the proposed relationship, the study

has shed new light on this issue for further investigations.

In addition, the study provides insights into the roles of different leadership styles in

impacting performance in diverse teams. Researchers have suggested that diversity operates

through two pathways; the first offers opportunity through the breadth and depth of available

knowledge and the second creates challenges due to the emergence of emotional conflict. To

date, ambiguous results surrounding these effects have remained unresolved.

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This study took the initiative by exploring the role of transformational and transactional

leadership styles as moderating variables in this relationship. By integrating leadership style

and firm innovation, in the area of diversity and performance relationship, the study offers a

new moderating dimension within the diversity perspectives.

Further from the findings of the study, leadership style and firm innovation had insignificant

effect on corporate performance in the commercial banks in Kenya. This is contrary to the

widely held notion that innovation and leadership style have significant effects on corporate

performance. This is a clear indication that context plays a key role in strategic management

research and that research findings are likely to differ based on the context in which the a

study is conducted.

6.8 Implications on Practice This study basically emphasizes on the importance of understanding TMT demographic

diversity and how it affects organizations performance. Literature has emphasized on the

effect of diversity on performance of organizations. The following recommendations have

been put forward on practice for managers, the government and other stakeholders such as

Federation of Kenyan Employers (FKE) and Central Organization of Trade Unions (COTU).

To start with, managers must understand how demographic diversity affects corporate

performance. This is since diversity management is becoming a major issue especially

following the inauguration of the new constitution. It is important to understand that

diversity has both positive and negative effects on organizations performance. Thus

diversity should be managed to enhance improved performance in organizations.

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The government is responsible for all workers through the Ministry of labour. It has the duty

to set regulations on who is to be employed amongst other things. It is therefore the duty of

the government in consultation with FKE and COTU to come up with regulations that will

enhance diversity in employment procedures. Introduction of policies such as diversity audit

should become part of organizations and this will help in promoting diversity in

organizations. Another practical implication is related to the emergence of affective conflict

in diverse teams. Affective conflict has been identified almost invariably associated with

diversity and has negative consequences that range from team dissolution to information

withholding.

Transformational leadership provides an active mechanism to minimize the likelihood that

affective conflict will emerge in diverse teams and overcome its effects. To date, this

presents one of very few practical options open to organizations endeavoring to employ

diverse teams. It appears to be essential that leaders learn how to engender positive

emotions, inhibit negative emotions, and inspire team members towards a shared goal. This

will minimize the adverse effects of social categorization and conflict and, in turn, enhance

corporate performance. Further, the current research bears significant implications for

practicing managers who are in the position of controlling the TMT composition.

Practicing managers should look for ways of addressing demographic diversity variables

that are likely to have negative effects on organizations performance to ensure their adverse

negative effects do not affect an organizations well being. Lastly, companies that need to

innovate strategically, for instance to enter new geographic areas or introduce new products

178

regularly need to add fresh blood to the TMT, in the form of new members. This provides

the team with fresh points of view and promotes constructive debate as newcomers have

different experiences, skills, networks, and views from members who have served much

longer on the team. This fosters strategic innovation, as long as members of the team have

not been overly socialized into the team. However, firms should be careful not to appoint

members to the team whose combination with existing TMT members is likely to create

strong fault line settings, as this is likely to hamper strategic innovation and consequently

organizations performance.

6.9 Implication on Policy

This study will enable the banking sector and other sectors to develop and implement

strategic management policies that are tailor-made to enhance performance. The results of

this study indicate that different variables that were under study (TMT demographic

diversity, firm innovation and leadership style) have different effects on corporate

performance depending on the industry and institutional attributes.

Therefore, each industry requires having policies that are specific to their needs and that no

blanket policy can be applied across all industries. In addition, from the fact that leadership

style has been found to be a key moderating variable in the relationship between TMT

demographic diversity and corporate performance, then organizations, whether in public or

private sector should come up with clear criteria of vetting the people to be part of the TMT

since their leadership history will have a bearing in their future posting.

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The Kenyan constitution stipulates that there should be 1/3 representation of either gender in

the recruitment exercises, promotions and appointments. The study however established that

gender diversity has negative effects on organizations performance. Thus its important today

not just to implement the constitution requirements, but its imperative that firms come up

with policies that will enable them manage diversity so that they can reap the benefits of

diversity.

Further, the findings of this study further showed that age diversity has positive effects on

organizations performance. It is thus important that age diversity is encouraged in

organizations. This is especially by reserving positions for the young people who for a long

time have felt left out of the critical decision making processes in organizations.

Age diversity will ensure divergent views are brought in the decision making process and

this will enhance the performance of organizations. In addition, since older people have

more commitment to status quo, recruitment of younger managers will enable organizations

adapt to changes in the environment since younger managers have been found to have more

favorable attitudes toward risk-taking. Further, younger managers are likely to have received

their education more recently than older managers, which means that their technical

knowledge is superior contributing positively to organizations performance.

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APPENDICES

Appendix I: University Introductory Cover Letter

207

Appendix II: Researcher’s Introductory Cover Letter

To Whom It May Concern

Dear Sir/Madam,

RE: Factors Influencing the Relationship between Management Team Diversity

and Performance of Commercial Banks in Kenya

I am a Doctor of Philosophy (PhD) candidate in the Department of Business Administration,

School of Business - University of Nairobi. As part of the requirement for the award of the

degree, I am expected to undertake a research study on the above topic whose purpose is to

investigate the Factors Influencing the Relationship between Top Management Team Diversity

and Performance of Commercial Banks.

To facilitate the completion of this thesis, I wish to humbly request for your assistance with

certain data from your bank. I have attached a copy of the questionnaire and introduction

letter from the University for your Quick Reference on the matter. Kindly answer all the

questions as completely as possible. The research results are intended for academic purposes

only and will be treated with utmost confidentiality. No specific reference will be made on

your bank and only the summary results will be made public.

I look forward to your utmost support and remain grateful.

Anne Muchemi Telephone: + 254 721353578 E-mail:buiann2002@yahoo.com

208

Appendix III: Questionnaire

This questionnaire is designed to obtain information for purely academic research purposes from

respondents in Top Management Team in Commercial Banks in Kenya. The accuracy of the

responses you provide will be crucial to the success of the research project. The questionnaire has

eight parts .You are kindly requested to respond to each of the questions in the various sections.

PART ONE: ORGANIZATIONAL BACKGROUND (Please indicate in the space provided).

i. Year of incorporation………………………………………………………

ii. Name of the bank………………………………………………………….

iii. Number of branches in Kenya……………………………………………..

PART TWO: DEMOGRAPHICS 1. To what extent are the top level managers involved in the decision making (Tick appropriately)

No. Involvement in decision making To a very great extent

To a great extent

Not Sure To a small extent

Not at all

a. Involvement in all decisions

b. Involved in some decisions

c. Involvement depends on the strength of the issue at hand

d. Involvement depends on the expertise required

e. Some are always involved whereas others are involved depending on the issue at hand.

2. In order to include an individual in team member in strategic decision making, how relevant are the following attributes:

No. ATTRIBUTE Very

relevant Relevant Not sure Slightly

relevant Not relevant

a. Attitude

b. Skills/Knowledge/Experience

c. Role played

209

d. Service period in organization

e. Ethnicity

f. Gender

g. Communication skills

h. Educational level

i. Interpersonal skills

j. Others(Please Specify)

PART THREE: DEMOGRAPHIC CHARACTERISTICS OF THE TOP MANAGEMENT TEAM With reference to the Top Management Team members involved in the strategic decision making please provide the following details as outlined in the following table:

Position (Kindly insert)such as Finance Manager

Gender/M/F

Age(Actual)such as 50yrs

Ethnicity (Actual). Such as Kikuyu, Luo

Service in current position(actual years) such as 2 yrs

Total service in organization(Actual) such as 3 yrs

Highest academic qualification (Actual) such as MBA, Degree

Functional Field(such as Marketing, Engineering, Accounting

210

PART FOUR: CORPORATE NON FINANCIAL PERFORMANCE

To what extent do you agree with the following statements concerning your banks achievement of non financial performance measures? Kindly tick appropriately

No.

Non-Financial Measure

Strongly Disagree

Disagree Neutral Agree Strongly Agree

a. Has a good reputation

b. Distinctive different from others

c. Supports innovation

d. Firm protects the business domain aggressively

e. Responds to customers complains in timely manner

f. Conducts training for employees

g. Aggressively introduces new products

h. Reacts to competitor threats immediately

i. Studies the value chain addressing non value adding activities.

j. Continuously assesses customer satisfaction

PART FIVE: PROCESS INNOVATION Please indicate how strongly you agree or disagree with the following statements as they relate to your firm No. PARAMETER Strongly

Agree

Moderately Agree

No Opinion

Moderately Disagree

Strongly Disagree

a. Our bank determines and

eliminates non value adding

activities in service /product

production processes.

b. Our bank increases output

211

quality in service/product

processes, techniques,

and software.

c. Our bank determines and

eliminates non value adding

activities in service /product

delivery related processes.

d. Our bank has high delivery

speed in delivery related

logistics processes.

e. Our bank has a high speed in adoption of the latest technological innovations in it is processes

f. Our bank has the highest rate of change in updating it is processes.

g. Our bank continuously improves it is processes to create value to the customer.

PART SIX: BUSINESS MODEL INNOVATION Please indicate how strongly you agree or disagree with the following statements as they relate to your firm No. PARAMETER Strongly

Agree

Moderately Agree

No Opinion

Moderately Disagree

Strongly Disagree

a. Our bank continuously

improves quality of services

b. Our bank has research and

development cost efficiency

c. Our bank has reduced transaction cost

d. Our bank has reduced

production lead time

e. Our bank has increased customization capability

212

PART SEVEN: SERVICE INNOVATION Please indicate how strongly you agree or disagree with the following statements as they relate to your firm

No. PARAMETER To a

very

great

extent

To a

great

extent

Not Sure To a

small

extent

Not at

all

a. There is improvement in the quality of

the current products/services.

b. There is improvement in newness of

current products/services leading to

improved ease of use for customers.

c. Our bank is developing new

products/services with technical

specifications and functionalities totally

differing from the current ones

d. Our bank has new or improved

investment products for different

clients

e. Our bank has new or improved types of

loans for different clients

f. Our bank has a high speed of new

product development

g. Our bank has a high number of new

products that are first-to- enter the

market

PART EIGHT: LEADERSHIP STYLE To what extent do you agree on the following statements that pertain to the leadership style? (Tick appropriately).

No. PARAMETER

To a very great extent

To a great extent

Not sure

To a little extent

Not at all

a. My boss is always seeking new opportunities for the unit/department/organization

b. My boss has a clear understanding of

213

where we are going

c. My boss paints an interesting picture of the future for us

d. My boss inspires others with his/her plans for the future

e. My boss is able to get others committed to his/her dream of the future.

f. My boss leads by doing ‘rather than simply by telling

g. My boss provides a good model to follow

h. My boss leads by example

i. My boss fosters collaboration among work groups

j. My boss encourages employees to be team players

k. My boss gets the group to work together for the same goals

l. My boss develops a team attitude and spirit among his/her employees.

m. My boss shows us that he/she expects a lot from us

n. My boss insists on only the best performance

o. My boss will not settle for second best.

p. My boss acts without considering my feelings

q. My boss shows respect for my personal feelings

r. My boss behaves in a manner that is thoughtful for my personal needs

s. My boss treats me without considering my personal feelings.

THANK YOU FOR YOUR TIME

214

Appendix IV: Commercial Banks in Kenya

1. African Banking Corporation Ltd.

2. Bank of Africa Kenya Ltd.

3. Bank of Baroda (K) Ltd.

4. Bank of India

5. Barclays Bank of Kenya Ltd.

6. CFC Stanbic Bank Ltd.

7. Charterhouse Bank Ltd

UNDER - STATUTORY MANAGEMENT

8. Chase Bank (K) Ltd.

9. Citibank N.A Kenya

10. Commercial Bank of Africa Ltd.

11. Consolidated Bank of Kenya Ltd.

12. Co-operative Bank of Kenya Ltd.

13. Credit Bank Ltd.

14. Development Bank of Kenya Ltd

15. Diamond Trust Bank (K) Ltd.

16. Dubai Bank Kenya Ltd.

17. Ecobank Kenya Ltd

18. Equatorial Commercial Bank Ltd.

19. Equity Bank Ltd

20. Family Bank Ltd

21. Fidelity Commercial Bank Ltd

22. Fina Bank Ltd

23. First community Bank Limited

24. Giro Commercial Bank Ltd.

25. Guardian Bank Ltd

26. Gulf African Bank Limited

27. Habib Bank A.G Zurich

28. Habib Bank Ltd.

215

29. Imperial Bank Ltd

30. I & M Bank Ltd

31. Jamii Bora Bank Ltd.

32. Kenya Commercial Bank Ltd

33. K-Rep Bank Ltd

34. Middle East Bank (K) Ltd

35. National Bank of Kenya Ltd

36. NIC Bank Ltd

37. Oriental Commercial Bank Ltd

38. Paramount Universal Bank Ltd

39. Prime Bank Ltd

40. Standard Chartered Bank (K) Ltd

41. Trans-National Bank Ltd

42. Victoria Commercial Bank Ltd

43. UBA Kenya Bank Ltd

(Source: CBK, 2011)

216

Appendix V: Summary of Findings on Level of Involvement in Decision-Making

Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

Statistic Statistic Statistic Statistic Std. Error Statistic

Involvement in all

decision making 29 2 5 4.07 .198 1.067

Involvement in some

decisions 29 2 5 4.10 .135 .724

Involvement depends on

issue at hand 28 2 5 4.54 .131 .693

Involvement depends on

expertise required 29 2 5 4.41 .127 .682

Some are involved

whereas others it depends

on issue at hand

29 1 5 4.03 .189 1.017

Appendix VI: Summary of Findings on Role of Attributes in Decision-Making

Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

Statistic Statistic Statistic Statistic Std. Error Statistic

Attitude 29 4 5 4.24 .081 .435

Skills, knowledge and

experience 29 2 5 4.69 .123 .660

Role played 29 2 5 4.41 .127 .682

Years of service in

organization 29 1 5 3.76 .209 1.123

Ethnicity 29 1 5 1.24 .154 .830

Gender 29 1 5 1.90 .213 1.145

Communication skills 29 2 5 4.10 .103 .557

Education level 29 2 5 4.07 .131 .704

Interpersonal skills 29 2 5 4.28 .121 .649

217

Appendix VII: Summary of Findings on Achievement of Corporate Non-Financial Performance Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

Statistic Statistic Statistic Statistic Std. Error Statistic

Has good reputation 29 4 5 4.69 .087 .471

Distinctively different

from others 29 3 5 4.83 .087 .468

Supports innovation 29 1 5 3.69 .180 .967

Firm protects the business

domain aggressively 29 2 5 4.28 .156 .841

Responds to customers'

complaints in timely

manner

29 3 5 4.17 .141 .759

Conducts training for

employees 29 2 5 4.17 .165 .889

Aggressively introduces

new products 29 2 5 4.07 .198 1.067

Reacts to competitor

threats immediately 29 2 5 4.03 .175 .944

Studies the value chain

addressing non-value

adding activities

29 1 5 2.17 .217 1.167

Continuously assesses

customer satisfaction 29 1 5 4.07 .243 1.307

218

Appendix VIII: Summary of Findings on Level of Achievement of Process Innovation Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

Statistic Statistic Statistic Statistic Std. Error Statistic

Removal of non-value

adding activities in

production process

29 3 5 4.34 .103 .553

Increase of output quality 29 4 5 4.52 .094 .509

Elimination of non-value

adding activities in

service/product delivery

29 4 5 4.48 .094 .509

High speed in delivery

related logistics 29 3 5 4.38 .126 .677

High speed in adoption of

latest technology 29 3 5 4.24 .128 .689

High rate of change in

process updating 29 2 5 3.97 .153 .823

Continuous process

improvement to create

customer value

29 2 5 4.17 .141 .759

Appendix IX: Summary of Findings on Level of Achievement of Business Model

Innovation Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

Statistic Statistic Statistic Statistic Std. Error Statistic

Continuous service quality

improvement 29 2 5 4.62 .126 .677

Research and development

cost efficiency 29 2 5 4.28 .130 .702

Reduced transaction cost 29 2 5 4.07 .121 .651

Reduced production lead

time 29 3 5 4.14 .082 .441

Increased customization

capability 29 2 5 4.17 .132 .711

219

Appendix X: Summary of Findings on Level of Achievement of Service Innovation Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

Statistic Statistic Statistic Statistic Std. Error Statistic

Improved quality of

current products and

services

29 2 5 4.21 .125 .675

Improved newness of

current products and

services

29 2 5 4.28 .121 .649

Development of new

products different from

current ones

29 1 5 4.17 .179 .966

New or improved

investment products for

different customers

29 2 5 4.38 .126 .677

New or improved loans for

various customers 29 2 5 3.97 .161 .865

High speed product

development 29 2 5 3.93 .156 .842

High number of new

products first to enter

market

29 1 5 3.76 .190 1.023

220

Appendix XI: Summary of Findings on the Level of Manifestation of Transformational Leadership

Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

Statistic Statistic Statistic Statistic Std. Error Statistic

My boss is always seeking

new opportunities for the

unity/department/organizat

ion

29 4 5 4.28 .084 .455

My boss has a clear an

interesting picture of the

future for us

29 3 5 4.62 .104 .561

My boss paints an

interesting picture of the

future for us

29 3 5 4.31 .101 .541

My boss inspires others

with his/her plans for the

future

29 3 5 4.28 .098 .528

Able to get others

committed to his/her

dream of the future

29 2 5 3.90 .160 .860

My boss leads by doing

'rather than simply by

telling

29 2 5 4.14 .138 .743

My boss provides a good

model to follow 29 2 5 4.17 .122 .658

My boss leads by example 29 3 5 4.24 .095 .511

My boss fosters

collaboration among work

groups

29 3 5 4.17 .087 .468

My boss encourages

employees to be team

players

29 4 5 4.14 .065 .351

My boss gets the group to

work together for the same

goals

29 3 5 4.10 .115 .618

My boss develops a team

attitude and spirit among

his/her employees

29 3 5 4.21 .104 .559

221

Appendix XII: Summary of Findings on the Level of Manifestation of Transactional Leadership

Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

My boss shows us that

he/she expects alot from

us

29 4 5 4.28 .455

My boss insists on only

the best performance 29 1 5 2.83 1.338

My boss will not settle

for second best 29 1 5 2.83 1.227

My boss acts without

considering my feelings 29 1 4 1.93 .884

My boss shows respect

for my personal feelings 29 2 5 3.34 .814

My boss behaves in a

manner that is thoughtful

for my personal needs

29 2 99 6.79 17.745

My boss treats me

without considering my

personal feelings

29 1 4 2.03 .865

Valid N (listwise) 29

222

Appendix XIII: Regression Analysis Results for the Moderating Effect of Firm Innovation on the Relationship between TMT Diversity and Organizations Performance

Model Summaryb

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

Durbin-Watson

1 .312a .097 -.016 1.010 1.828

a. Predictors: (Constant), Firm Innovation, TMT-Firm Innovation, TMT Diversity

b. Dependent Variable: Overall Organizational Performance

ANOVA a

Model Sum of

Squares

Df Mean Square F Sig.

1

Regression 2.631 3 .877 .860 .475b

Residual 24.472 24 1.020

Total 27.103 27

a. Dependent Variable: Overall Organizational Performance

b. Predictors: (Constant), Firm Innovation, TMT-Firm Innovation, TMT Diversity

Coefficientsa

Model Unstandardized Coefficients Standardized

Coefficients

t Sig.

B Std. Error Beta

1

(Constant) .925 2.188 .423 .676

TMT Diversity .436 .905 1.233 .481 .635

TMT-Firm

Innovation -.095 .226 -1.081 -.423 .676

Firm Innovation .587 .518 .224 1.133 .269

a. Dependent Variable: Overall Organizational Performance

223

Appendix XIV: Regression Analysis Results for the Moderating Effect of Leadership Style on the Relationship between TMT Diversity and Organizations Performance

Model Summaryb

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

Durbin-Watson

1 .389a .151 .045 .979 1.623

a. Predictors: (Constant), Composite Leadership, TMT Diversity, TMT-Leadership

Style

b. Dependent Variable: Overall Organizational Performance

ANOVA a

Model Sum of

Squares

Df Mean Square F Sig.

1

Regression 4.097 3 1.366 1.425 .260b

Residual 23.006 24 .959

Total 27.103 27

a. Dependent Variable: Overall Organizational Performance

b. Predictors: (Constant), Composite Leadership, TMT Diversity, TMT-Leadership Style

Coefficientsa

Model Unstandardized Coefficients Standardized

Coefficients

t Sig.

B Std. Error Beta

1

(Constant) -1.291 2.773 -.466 .646

TMT Diversity -1.142 .683 -3.231 -1.672 .107

TMT-Leadership Style .339 .191 4.429 1.773 .089

Composite Leadership 1.329 .784 1.850 1.694 .103

a. Dependent Variable: Overall Organizational Performance

224

Appendix XV: Regression Analysis Results for the Joint Moderating Effect of Leadership Style and Firm Innovation on the Relationship between TMT Diversity

and Organizations Performance

Model Summaryb

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

Durbin-Watson

1 .341a .116 -.038 1.021 1.811

a. Predictors: (Constant), TMT-Leadership-Innovation, Firm Innovation, Composite

Leadership, TMT Diversity

b. Dependent Variable: Overall Organizational Performance

ANOVA a

Model Sum of

Squares

Df Mean Square F Sig.

1

Regression 3.142 4 .786 .754 .566b

Residual 23.961 23 1.042

Total 27.103 27

a. Dependent Variable: Overall Organizational Performance

b. Predictors: (Constant), TMT-Leadership-Innovation, Firm Innovation, Composite

Leadership, TMT Diversity

Coefficientsa

Model Unstandardized Coefficients Standardized

Coefficients

t Sig.

B Std. Error Beta

1

(Constant) -.482 2.939 -.164 .871

TMT Diversity -.357 .537 -1.009 -.664 .513

Composite Leadership .439 .655 .611 .670 .510

Firm Innovation .548 .529 .209 1.037 .311

TMT-Leadership-

Innovation .029 .038 1.516 .758 .456

a. Dependent Variable: Overall Organizational Performance