Shared Transformational Leadership and …leadership training performed better then the control...
Transcript of Shared Transformational Leadership and …leadership training performed better then the control...
Shared Transformational Leadership and
Organization Culture as Predictors of a
Bank’s Financial Performance
Arno Boevink
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Title: Shared Transformational Leadership and Organization Culture as Predictors of a Bank’s Financial
Performance
Author: Arno Boevink
Student no.: s0047880
Supervisory committee:
Prof. dr. C.P.M Wilderom
Dr. P.A.T.M. Geurts
Dr. P.T. van den Berg
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Shared transformational leadership and organization culture as predictors of a bank’s
financial performance
Abstract
Do both shared transformational leadership and organizational culture affect a firm’s bottom line
directly? We answer this question with a representative sample of 58 autonomous local banks of a Dutch
financial institution; 1509 employees completed a questionnaire on shared transformational leadership and
organizational culture, covering five organizational-culture dimensions: external orientation;
interdepartmental cooperation; human-resource orientation; empowerment; and improvement orientation.
Bank-level financial performance data were available: in the same year and two years later. Results of
structural equation modeling, in which we control for time-1 performance, showed that shared
transformational leadership at the top increase a bank’s financial performance, while organizational culture
does not. Both leadership and culture appear significantly related to perceived firm performance and
shared transformational leadership significantly linked to each culture dimension; these results were
controlled for common-source bias. We conclude that shared transformational leadership significantly
affects a firm’s short-term financial performance while longer time intervals are needed for empirical
reports on the possible financial effects of (investing in) organizational culture.
Keywords: Shared Transformational Leadership; Organization Culture; Firm Performance
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Shared transformational leadership and organization culture as predictors of a bank’s financial
performance
Are both transformational leadership and organizational culture predictive of firm performance?
Although performance is the key to the survival of many organizations and many authors assume that
transformational leadership and organizational culture contribute to it, few researchers have examined both
factors in combination (for empirical examples, see: Koene, Vogelaar, & Soeters, 2002; Ogbonna & Harris,
2000). Our study is inspired by the resource-based theory of the firm, regarding the firm as a collection of
productive resources or attributes. Also Hansen & Wernerfelt (1989: 399-409) laid a foundation for this
study with their results, showing that “organizational factors explain about twice as much variance in profit
rates as economic factors.” They conclude that intangible attributes of a firm (i.e., “…the building of an
effective, directed human organization…”) are crucial for its performance. The utility of the resource-based
theory has been demonstrated also by Mills, Platts, & Bourne (2003). Exactly what intangible resources -
and their content - matter and how they are connected are still unknown. Of the various internal intangible
resources that have been put forward by resource-based theorists to explain sustainable firm success, two
types can be viewed as most important: “organizational” and “human” resources (Barney & Hesterly, 1996:
133). Several authors argue that leadership (as an example of human capital) and organizational culture (as
an example of social/organizational capital/organizational capability) are two different “complex,
interconnected resources” that are predictive of organizational success (Hunt, 1997: 688; see also Tomer,
1987, 1999). It was our aim to empirically examine this thesis.
Shared transformational leadership and firm performance
In the leadership literature there is ample evidence of a link between transformational leadership
and perceived firm performance (e.g., Agle, Nagarajan, Sonnenfeld, & Srinivasan, 2006; Elenkov, 2002;
Lowe, Kroeck, & Sivasubramaniam, 1996). The link between objective firm performance and
transformational leadership is less well established. Lowe et al’s meta-analysis (1996) noted a significant
link between objective performance and transformational leadership. Their finding is based on 14 empirical
studies. While inspecting those studies, it appears that only one is a published field study with objective
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firm performance measures (see item # 1 in Table 1); in a Canadian financial institution, Howell & Avolio
(1993) found that transformational leadership predicts objective business-unit performance. Especially
charisma predicted objective performance. Table 1 provides an overview of all published studies relating
transformational leadership to objective firm performance. Because charisma constitutes a large part of
transformational leadership (Rowold & Heinitz, 2007), we include in Table 1 studies that link
charismatic leadership to objective firm performance. The 2004 meta-analysis of Judge & Piccolo
included two additional published empirical studies with objective performance measures (Items # 2 and 3
in Table 1). Beyond these three published studies, we detected 8 more empirical studies on the
transformational leadership - objective firm performance link (Items # 4-11 in Table 1).
Out of these 11 studies only 3 show unambiguous evidence of the transformational leadership –
objective firm performance link (see Table 1: items #1, 2 and 11). These three studies have in common
that they used the MLQ, and in terms of their dependent variable, they used situationally defined and
internally used performance indicators that differ greatly from each other. Across these 11 studies, we
counted a total of 14 different measures of objective firm performance; mostly in terms of financial firm
performance. This variety in utilized firm performance measures is typical to the area (e.g., Bhargava,
Dubelaar, & Ramaswami, 1994). Moreover, the amount of evidence in support of a significant link
between transformational/charismatic leadership and objective firm performance is not abundant.
In terms of the causal order of both variables, most literature assumes that leadership affects
performance (e.g., Koene et al., 2002; Ogbonna & Harris, 2000). Only four of the studies in Table 1
explicitly address the direction of this leadership – objective performance link. Howell & Avolio (1993), for
instance, measured leadership first and performance at a later date. Barling, Weber, & Kelloway (1996),
using pre- and post-test measures, found that groups in which the leaders had received transformational
leadership training performed better then the control groups. Both studies of Waldman and colleagues
(2001, 2004) did use multiple firm performance measures over time, just like we did in our current study.
Since we took in the current study firm performance measurements at two points in time, we also aim to
contribute to the causal-order question. Most literature dealing with this perennial leadership issue is based
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Table 1
Published empirical evidence of the link between objective firm performance and
transformational/charismatic leadership
# Year Authors Measures of
objective firm
performance
Relevant findings
1 1993 Howell &
Avolio
% of goals
achieved
Transformational leadership predicts unit
performance.
2 1996 Barling,
Weber &
Kelloway
# of personal loan
sales
# of credit card
sales
Transformational leadership training positively
influences both the sales of personal loans and
marginally credit card sales.
3 1998 Geyer &
Steyrer
Long and short
term adjusted
performance
indicators
Transformational leadership relates positively to both
performance measures. Most aspects of
transformational leadership are related to long-term
performance. Individual consideration predicts short-
term performance and is negatively related to long
term performance.
4 2001 Waldman,
Ramírez,
House &
Puranam
Profit margin CEO charisma predicts performance only in
conditions of uncertainty and not in conditions of
certainty.
5 2002 Koene,
Vogelaar &
Soeters
Profit
Controllable costs
Charisma correlates with both profit and controllable
costs but only in small firms and not in large firms.
6 2004 Tosi,
Misangyi,
Waldman
&
Yammarino
Stock return
ROA
Charismatic leadership has a positive relationship
with Stock Return in conditions of high uncertainty.
$o relation is found with ROA.
7 2004 Waldman,
Javidan &
Varella
Profit margin
ROE
Sales growth
Charismatic CEO leadership predicts firm
performance in terms of profit margin and ROE. With
sales growth no significant relation is found.
8 2005 Zhu, Chew
& Spangler
Sales Transformational leadership has no significant
relationship with sales performance.
9 2006 Agle,
Nagarajan,
Sonnenfeld
&
Srinivasan
Stock return
ROA
Sales growth
Profit margin
ROE
CEO charisma is related to past objective
performance only in terms of stock return, ROA and
sales growth but not for profit margin and ROE. $o
evidence is found between charisma and subsequent
performance,
10 2006 Ensley,
Pearce &
Hmieleski
Sales growth
Revenue
Transformational leadership has a negative
relationship with (new venture) performance,
although environmental dynamism has a positive
moderating effect.
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on perceived performance variables (e.g., Bass, Avolio, Jung, & Berson, 2003; Elenkov, 2002). Hence,
there are only few systematic empirical studies of transformational leadership that has shown it to be
predictive of objective firm performance.
Based on previous studies we do expect that transformational leadership displayed at the top of a
firm positively affects the firm’s performance; transformational leaders at the top of an organization
articulate the specific, unique purposes of the firm and its various roles, goals and ambition levels. Hence,
transformational leadership has been shown to have a positive effect on followers’ commitment, inspiring
them to exert extra effort (e.g., Avolio, Zhu, Koh, & Bhatia, 2004; Dvir, Eden, Avolio, & Shamir, 2002;
Rafferty & Griffin, 2004; Sosik, 2005; Walumbwa, Wang, Lawler, & Shi, 2005). Transformational leaders
tend to increase employees’ willingness to focus on the firm with relatively more cooperative and
organizational citizenship behaviors (Piccolo & Colquitt 2006; Sosik 2005). In other words,
transformational leadership at the top is seen to promote a close alignment of a shared vision or goal
orientation to employees’ behaviors and concerns.
Transformational leadership is generally assumed to be an attribute of individuals. However, the
MLQ can be applied at the collective level. In that case we may speak of shared leadership. Various
definitions of shared leadership exist (Carson, Tesluk, & Marrone, 2007). We chose to focus on shared
leadership in the following terms: “a shared, distributed phenomenon in which there can be several
(formally appointed and/or emergent) leaders” (Mehra, Smith, Dixon, & Robertson, 2006: 233). Ensley,
Hmieleski, & Pearce (2006) found a positive relationship between a similar definition of shared leadership
at the top of the organization and objective firm performance in new ventures. Sivasubramaniam, Murry,
Avolio, & Jung (2002) used a version of the MLQ that was customized for measuring team leadership, the
TMLQ (see also Bass & Avolio, 1994). With the TMLQ they assessed leadership provided by the whole
team instead of the more customary one individual leader. Similarly, in our present study we asked each
respondent to rate “the leadership” of the bank and not “the leader.” Hence we asked our respondents not to
rate the hyper-individual, one “boss” of the firm but to focus on the top layer or top management team of
their firm: hence “shared leadership.” Our study, situated in the Netherlands, took thereby serious the fact
that most decisions in a large Dutch firm are made in a relatively consensual manner. Based on foregoing,
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we formulated our first hypothesis:
Hypothesis 1: Shared transformational leadership (a) positively affects a firm’s performance and (b) is
positively related to perceived firm performance.
Shared transformational leadership and organizational culture
It is generally assumed that transformational leadership is related to organizational culture. Also
according to most leadership scholars, leadership and organizational culture do affect each other (e.g., Bass
& Avolio, 1993; Barnett & McCormick, 2004; Corrigan, Diwan, Campion, & Rashid, 2002). Schein
(1985: 314) warns that organizational culture control the leader more than the leader controls the culture.
Yet, leaders can have a great impact on organizational culture, especially through role-modeling (e.g.,
Aitken, 2007). Systematic study of the impact of founders or subsequent leaders on organizational culture is
rare (Bass, 1990; Staw & Sutton, 1993; O’Reilly, Chatman, & Caldwell, 1991; Athanassiou, Crittenden,
Kelly, & Marquez, 2002). However, we do know that founders of firms as well as extraordinary leaders
imprint their organizations’ characteristics (e.g., Ford, Wilderom, & Caparella, 2008; Ogbonna & Harris,
2001; Schein, 1983; Siehl, 1985). Transformational leaders are assumed to instill values, norms, and
practices, using their idealized influence, i.e., role modeling while generally individual employees do feel to
some extent dependent on leaders/managers. To the best of our knowledge, no systematic qualitative,
longitudinal or quasi-experimental study exists in which the effects of organizational culture are traced as an
explicit consequence of leadership. Such studies would offer a more solid foundation for the insights
derived from the relatively few yet predominantly consulting- or survey-type studies at hand.
Transformational leaders in established firms tend to change culture by first understanding it and
then realigning it with a new vision and a revision of its shared assumptions, values, norms, and practices
(Bass, 1995). Also according to Schein (1985) vision and the ability to express it are needed for instilling an
organizational culture. Organizational culture may even be one of the mechanisms through which
transformational leadership affects (perceived and objective) firm performance. Accordingly, some recent
studies have shown that transformational leadership is related to organizational culture (Barnett &
McCormick 2004, Corrigan et al. 2002). In a sample of Australian schools, Barnett & McCormick (2004),
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for instance, showed that transformational leadership is significantly related to certain aspects of a school’s
learning culture. And Corrigan et al. (2002) found a positive relation between a cohesive organization
culture and transformational leadership in mental health teams.
Conceptually, leadership and organizational culture do have elements in common. At least two
aspects of leadership are communal with culture: ‘a social process defined through interaction’ and ‘a
process of defining reality’ (Smircich & Morgan, 1982: 259). And the most important conceptual
difference between both constructs is that leadership denotes the behavior of one or a few individuals, while
culture is a collective or organization-wide phenomenon; it contains a characterization of an organizing
setting and not of an organizing ‘committee.’ Further conceptual work is needed before a clearer,
potentially reciprocal causal link between both constructs can be hypothesized. We are assuming that in
some organizational cultures people take great care in issues of leadership succession: the new leaders will
be well matched with the existing or the desired culture, thus producing a significantly productive relation
between both intangible resources. In other words, we see an organization's culture as an organizational
resource that shapes employees' perceptions of events that, in turn, affect the execution of top leadership
(see Pettigrew, 1990). At the same time, leaders do influence the ways or styles in which employees go
about carrying out their tasks.
Due in part to the large domain of organizational culture, we noted there are very few oft-used
measures of organizational culture Most of the previous organizational culture studies focused on shared
values and attitudes; they paid little attention to carefully defined practices. According to Hofstede,
Neuijen, Ohayv, & Sanders (1990), the largest part of a firm’s culture is ‘organizational practices.’
Organizational practices reflect the collective wisdom within an organization about how things can best be
done. They may, because of their practicality, be more strongly related to organizational performance than
values. Practices are a key visible part of culture (Hofstede et al., 1990). Hofstede (2001: 394) also showed
that organizations differed more in practices than in values. Therefore, in line with several other authors
(see also, Calori & Sarnin, 1991; Marcoulides & Heck, 1993; Petty, Lowery, Chapman, & Connell, 1995;
Rousseau, 1990), we define organizational culture here as organizational practices. Organizational practices
can be described as “particular ways of conducting organizational functions that have evolved over time…”
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(Kostova, 1999: 309). These “practices reflect the shared knowledge and competence of the organization ...
they tend to be … viewed as the taken-for-granted way of doing certain tasks.” Moreover, according to
Lehman, Chiu, & Schaller (2004: 689), “cultural norms and practices influence the thoughts and actions of
individuals.” Our assessment of organizational culture is carried out exclusively on the level of practices.
Very few other quantitative empirical studies of organizational culture define their specific focus so clear-
cut (Van den Berg & Wilderom, 2004).
On the basis of a review of the literature, we chose for the purpose of our empirical study,
organizational work practice dimensions that varied greatly and that, collectively, covered the cultural
content found important in other organization-culture studies (see, e.g., Detert, Schroeder, & Mauriel,
2000; Van den Berg & Wilderom, 2004): external orientation, interdepartmental cooperation, human-
resource orientation, empowerment, and improvement orientation. Together, this set of 5 organizational
practices may serve as an indicator of organizational culture. The five dimensions can be found, under
different labels, in most organizational-culture survey measures (Detert et al. 2000, Van den Berg &
Wilderom, 2004) and utilized also by Ghobadian & O’Regan (2006).
We propose that all of our organizational-culture practice dimensions are related to shared
transformational leadership. The first organization-culture dimension, external orientation, was selected
because firms operate in an external environment with customers, markets, and competitors. Open-systems
theory and many other writings on culture have made it clear that an organization’s external orientation
reflects its internal functioning (e.g., Howard-Grenville, 2006). Menguc, Auh, & Shih (2007) show that
transformational leadership affects a firm’s external orientation: through positively influencing the market
orientation among employees within an organization. Hence, top transformational leadership can be linked
to the external orientation of their employees.
We included interdepartmental cooperation because horizontal differentiation is a well-known
barrier to productive inter-group communication which may hinder organizational functioning. By
emphasizing the common, integrative purposes of the organization, transformational top leaders often
stimulate cooperation between units within their organizations.
In many writings, human-resource content is considered an explicit part of the organizational-
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culture construct (e.g. Gordon, 1990; Gordon & DiTomaso, 1992; Marcoulides & Heck, 1993; Quinn,
1988). And, like the other dimensions, human-resource orientation touches every employee as in, for
instance, performance appraisals. Furthermore, Bass & Avolio (1993) found that transformational leaders
take responsibility for the development of their followers. Therefore, employees’ orientation toward
human resources must be related to shared transformational leadership. Also Zhu, Chew, & Spangler
(2005) found that HRM mediates the relation between transformational leadership and perceived
performance.
The fourth organizational-culture dimension, empowerment, pertains to employees’ core tasks. We
assessed the degree to which employees have decision latitude in their jobs. This dimension is included in
several organizational-culture studies, and is also much studied by itself. Transformational leaders tend to
empower employees to take greater personal responsibility for achieving their vision (Bass & Avolio,
1993).
Finally, the degree of improvement orientation among personnel reflects a firm’s high level of
ambition or at least a positive inclination toward organizational change (see also Rousseau, 1990). This fifth
dimension was chosen in order to tap the degree of employee involvement in incremental changes within
the organization. Transformational leaders, through their emphasis on a vision, foster a culture of creative
change and growth (Bass & Avolio, 1993). Thus, we formulated our second hypothesis as follows:
Hypothesis 2: Shared transformational leadership is positively related to the organizational-culture
dimensions of external orientation, interdepartmental cooperation, human-resource orientation,
empowerment, and improvement orientation.
Organizational culture and firm performance
Denison’s (1984) study is one of the first in a body of empirical literature, in which a performance
effect of organizational culture was claimed. Recent empirical evidence supports both an indirect and a
direct effect of culture on a firm’s performance. Wei & Morgan (2004) showed that the supportiveness of
a firm’s organizational culture had an indirect positive effect on new product performance (via ‘market
orientation’) in Chinese firms. Hult, Cavusgil, Delingonul, Kiyak, & Lagerström (2007) found that culture
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affects performance through a complex interplay of organizational leadership, strategy, structure and
process. Also, the outcomes of the Lisrel study conducted by Marcoulides & Heck (1993: 222) suggest
that “an organization’s value system affects organizational performance indirectly,” through organizational
climate, task organization and individual attitudes of employees. In terms of the direct effect of
organizational culture on firm performance, three more recent empirical studies are of interest. Carmeli &
Tishler (2004) showed that organizational culture is among the intangible organizational elements that can
explain organizational performance. Also Chan, Shaffer, & Snape (2004: 17) --found within a sample of
Asian McDonalds units-- that “organizational culture can be a valuable resource”. Nahm, Vonderembse, &
Koufteros (2004) showed that organizational cultures in which time-based manufacturing practices take
place high performance is an outcome. Wilderom, Glunk, & Maslowski (2000) had analyzed ten earlier
published empirical studies that examined the organizational culture – performance link. None of them has
established a solid direct performance effect of organizational culture (see also Rouse & Daellenbach,
1999). Recent empirical studies are inconclusive regarding any direct or indirect performance effects.
Evidence of a direct link between organizational culture and firm performance is scarce
(Wilderom et al., 2000). Yet individual factors that typically make up the organizational construct have
been shown to be predictive of firm performance. We will now define and review the literature of the 5
delineated organizational practices insofar they show to be related to firm performance.
Ellis (2006) showed firmly in his meta-analysis, containing 56 empirical studies, that market
orientation, which covers a part of external orientation, is a determinant of firm performance. Also later
studies found market orientation to be related to organizational performance (Alpkan, Yilmaz, & Kaya,
2007; Ellinger, Ketchen Jr., Hult, Elmadağ, & Richey Jr., 2008).
Recent positive performance effects of interdepartmental integration have been shown by Ellinger
(2000), Kahn (2001, 2005) and Lascu, Manrai, & Kleczek (2006). Good collaboration and effective
relations between logistics and marketing help to improve the logistics performance (Ellinger, 2000).
Interdepartmental integration, termed interdepartmental coordination in the present study, allows for the
bringing together of company capabilities to develop a product that meets customer needs, is technically
feasible, and can be effectively delivered by the company (Kahn, 2001). In 2005 he showed again that
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interdepartmental cooperation has a positive effect on product development performance (Kahn, 2005).
Lascu et al. (2006) finds support that there is a link between interdepartmental connectedness and firm
performance.
There is empirical evidence of a relation between human-resource orientation and performance.
For example Long and Louis (1998) concluded that organizations with a strong human-resource
orientation outperformed organizations with a weak human-resource orientation. Recently, Akhtar, Ding,
& Ge (2008) showed that a HRM focus on training, participation, results-oriented appraisal, and giving
internal career opportunities led to better financial performance in China. Also Sels, De Winne, Maes,
Delmotte, Faems, & Forrier (2006) found that HRM-intensity affects productivity and profitability.
Although the extra costs associated with a higher HRM-intensity seemed to cancel out the productivity
gains, an overall profitability effect was shown by a more intense HRM system.
For the empowerment dimension Logan & Ganster (2007) showed that the business units that
received empowerment interventions performed better then those without the intervention. According to
Tsai (2006), for instance, empowerment helps technological and innovative organizations perform better,
because in those types of organizations “encouraging [employees] to pursue technological initiatives are
regarded as essential elements” (p. 1526). In addition, Logan & Ganster (2007) showed that an
empowerment intervention among unit managers of a large trucking company improved unit performance.
In various recent studies the amount of improvement orientation has shown to have an effect on
firm performance. Corso & Giacobbe (2007), Hyland, Mellor, & Sloan (2007), and Middel, Op de Weegh,
& Gieskes (2007) all found a positive relationship between different continuous improvement aspects and
firm performance. Total Quality Management, which is concerned with the continuous improvement of all
processes within the organization, has been shown to result in lower production costs and higher
organizational performance (Kenichiro, 2002). On the basis of the foregoing, we formulate our third
hypothesis as follows:
Hypothesis 3: An organizational culture that emphasizes a high degree of external orientation,
interdepartmental cooperation, human-resource orientation, empowerment, and improvement orientation
(a) predicts objective financial performance of the firm and (b) is related to perceived firm performance.
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Present Study
We employed in 58 similar Dutch firms an employee survey and we obtained objective firm
performance data at two points in time. By comparison, only one of the 39 studies in the meta-analysis by
Lowe et al. (1996) used financial firm performance as the dependent variable. Only one other study in their
set used longitudinal data. With the exception of that by Elenkov (2002), most similar studies to the present
one were carried out in North America. One other advantage of the present study is that we controlled for
common source variance and the attribution of financial success to management. This last advantage is
especially important, because Puffer (1990), Awamleh & Gardner (1999) showed that knowledge of
organizational performance could affect the attribution of charisma to the leader. Meindl & Erhlich (1987)
established that people in general tend to address the positive outcomes in an organization to the leaders
instead of other possible sources.
Methods
Sample and Data Collection
One of the biggest financial institutions in the Netherlands was involved in this study. In terms of
assets, it belongs to the top 30 largest banks in the world (Wall Street Journal Europe, 1999), and it is not
severely affected by the Fall 2008 bank crisis; it still maintains --since 1981-- its relatively rare triple-A
rating. Within this institution, associated local banking firms operate more or less independently. They
retain their original European-style cooperative company charter under which their clients (historically:
farmers) collectively own their local banking firms. Throughout the Netherlands representatives from local
‘elites’ or opinion leaders form these firms’ local boards of governors. Thus, in line with Thomas’ (1988)
recommendations, we sampled firms belonging to the same industry, and moreover, in this case also to the
same, internationally operating, national bank.
Pilot study. In order to construct an own organizational-culture questionnaire we performed a pilot
study. After reviewing and reformulating the initial questionnaire items, based on the culture literature, we
drew a systematic sample. This pilot sample consisted of the employees of four local banking firms. Four
size categories of local banking firms are commonly distinguished in the Netherlands: small,
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small-to-medium, medium, and large firms (up to 30 employees; 31 to 60 employees; 61 to 100 employees;
and more than 100 employees, respectively). One banking firm of each type was asked to participate (in
return for a feedback report); all four firms agreed to take part. The employees received the questionnaire at
their place of work. Anonymity was guaranteed. The total number of respondents was 282, yielding a
response rate of 59%. Their mean age was 35.7 (SD= 10.1). Forty percent of the respondents were men;
2.3% belonged to the management team, and 18.5% worked in other managerial or supervisory positions.
The mean number of years of employment was 14.6 (SD = 10.2). The proportion of employees with a
Bachelor's degree or higher was 31.6%. The rest of the respondents held lower-level jobs.
Main study. Out of the population of 596 local banking firms, some were excluded from
participation: very small firms (with fewer than 12 employees), recently merged firms, and the firms that
had participated in the pilot study. In all, 535 banking firms remained. The random selection of 61 firms
was stratified on the basis of the same four size categories identified in the pilot study (20, 23, 13, and 5
firms, respectively). All employees of each of the firms selected (a total of 3258 employees) received a
questionnaire and a prepaid return envelope at their home addresses. This amounted to almost 10% of the
entire group of employees of all associated local banking firms. The questionnaires were filled in and
returned in a two-month period. The response rate was 47%. Three small firms with fewer than five
respondents were eliminated. This was done because the standard errors of the means on the main variables
were too large to allow aggregation at the organizational level. The resulting sample consisted of 1509
respondents from 58 local banking firms. The number of respondents per firm ranged from 5 to 75 with a
mean of 26 and a median of 21.
In the final sample, 50% of the respondents were men. The mean number of years of employment
was 9.8 (SD = 2.1). Twelve percent belonged to the management team, 27% worked in other managerial or
supervisory positions, and 61% held lower-level jobs. The proportion of employees with a Bachelor's
degree or higher was 41%. The firms in the main sample proved representative of the local banking firms
within the entire financial institution. For instance, the mean age in the main sample was 35.2 (SD = 9.6)
and in the total organization it was 34.4. The mean financial firm performance score in the main sample (the
objective measure will be described below) was the same as in the population.
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Measures
Shared transformational leadership. The degree to which the top management within each firm
was seen as transformational is measured using a short version of the Multifactor Leadership Questionnaire
(MLQ 8Y; Bass & Avolio, 1989). We used the valid translations by Den Hartog, van Muijen, & Koopman
(1994); the translators were involved in the field of organizational psychology. Bass and Avolio
distinguished four sub-dimensions of transformational leadership: charisma, inspiration, intellectual
stimulation, and individual consideration.
In the present study, we focus on the role of leadership at the top of the organizations, as perceived
by the entire personnel. Hence in terms of the MLQ, it is fair to focus only charisma and inspirational
motivation. First because they represent leadership behaviors oriented toward the entire organization,
whereas intellectual stimulation and individualized consideration are more dyadic in nature; if one assesses
the style of shared leadership at the top of a firm among a cross-section of the entire personnel, like we did
in this empirical study, only a small segment of the responding employees are directly interacting with the
top leadership (Lowe et al., 1996). Also, charisma and inspiration are in other studies often collapsed into
one dimension (Bass, 1995, 1996; Lowe et al., 1996). Thus, we used the two -charisma and inspiration-
clusters of transformational leadership. Second, Kirkpatrick & Locke (1996) found in an experimental study
that the core components of transformational leadership, vision and vision implementation through task
cues, affected performance, while the core components of communication style did not. Communication
style is for a large part composed of intellectual stimulation and individual consideration. The first two
components (vision and vision implementation through task cues) are associated with charisma and
inspiration. We assume, therefore, that top leadership viewed by the employees as both charismatic and
inspirational can be labeled legitimately ‘transformational’ and affects the effectiveness of the firm or
organizational units involved. Hence, we excluded the supervisory-leadership items, intellectual stimulation
and individual consideration. Examples of the excluded items are: The leadership ‘… listens to my
concerns’ and ‘… makes me back up my opinions with good reasoning.’ The leadership items were phrased
for measuring at the organizational level, i.e., ‘I’ and ‘me’ were changed into ‘employees’ and ‘he/she’ into
‘top management.’ Employees were asked, ‘To what extent does the top management of your local banking
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firm exhibit this behavior?’ The answer categories ranged from 1 (very rarely) to 5 (very often). We asked
to rate the general leadership of their bank, because in modern, decentralized organizations as in the present
study the leadership is more or less shared among several managers (Bligh, Pearce & Kohles, 2006). In
order to determine whether the items belonged to one single dimension, we performed exploratory factor
analysis (principal-axis factoring) on the scores aggregated at the organizational level. The results presented
in Table 2 show that the ten items did indeed form one factor.
As shown in Table 3, the internal consistency of the scale was .95. At the individual level, the
Cronbach’s alpha of shared transformational leadership was .89. In an entirely different sample of 46 small
Dutch and German ICT service firms, the Cronbach’s alpha of the shared transformational leadership scale
with nine identical items was .93 at the organizational level. We also checked the reliabilities at the
individual level in two additional samples. In a large Dutch electronics factory, the Cronbach’s alpha of this
scale was .92; in the sample representative of the entire Dutch working population, the alpha was .83.
Table 3 shows that the ICC(1) and ICC(2) were relatively high, indicating a high level of
agreement among the employees on the shared transformational leadership within the firm. ‘Local firm’
explained nearly a quarter of the variance of the individual scores for shared transformational leadership
(.24). Analysis of variance showed that the firms differed significantly in the degree of shared
transformational leadership. No meaningful differences were found in this scale between managerial and
non-managerial employees or between employees serving different types of clients.
Firm culture. Because we did not know of an organizational-culture questionnaire that could be
used to measure highly valued organizational work practices with a wide range of dimensions, we
developed new sets of items based on the relevant literature (Van den Berg & Wilderom, 2004). The items
were designed to cover the whole spectrum of organizational culture as described in the literature. In the
pilot, each employee was asked, ‘How often is this applicable to your organization?’ followed by the survey
items. We developed the following five scales using exploratory factor analysis at the individual level: 1.
Autonomy (5 items), 2. External orientation (8 items), 3. Interdepartmental cooperation (5 items), 4.
Human-resource orientation (5 items) and 5. Improvement orientation (5 items). The Cronbach’s alphas of
these scales were .77, .83, 86, .82, and .81, respectively. For a comparison between these dimensions and
18
the dimensions found in other studies we refer to Van den Berg & Wilderom (2004).
Table 2
Results of Factor Analysis on Aggregated Shared Transformational Leadership Itemsa
Item Factor 1
1. Engages in words and deeds which enhances its image of competence .96
2. Displays extraordinary talent and competence in whatever management decides .94
3. Employees are ready to trust management to overcome any obstacle .93
4. Projects a powerful, dynamic, and magnetic presence .91
5. Mobilizes a collective sense of mission .89
6. Articulates a vision of future opportunities .84
7. Employees have complete confidence in management .83
8. Makes employees aware of strongly held values, ideals, and aspirations
which are shared in common .81
9. Talks optimistically about the future .60
10. Demonstrates a strong conviction in its beliefs and values .51
Eigenvalue 6.96
% Variance Explained 70%
a N = 58
19
Table 3
Internal Consistencies, ICC(1)s, ICC(2)s, and F-values of Perceptual Variables
Variable � a ICC(1)
b ICC(2)
b F
b
Shared transformational leadership .95 .25 .89 8.44**
External orientation .91 .22 .80 7.08**
Interdepartmental cooperation .86 .14 .67 4.22**
Human-resource orientation .83 .16 .72 4.75**
Job Autonomy .93 .16 .72 4.74**
Improvement orientation .81 .07 .51 1.76**
Perceived firm performance .93 .23 .82 7.33**
a Based on aggregated scores; N = 58.
b Based on individual scores; N = 1509.
** p < .01 (two-tailed)
In the main study, we kept the 5 dimensions and, following another round of interviews, we added
seven new items, resulting in a list of 35 items. The question in the final questionnaire heading was, ‘To
what extent does the following occur in your organization...?’ (= the ‘is-items’). In order to assess the
degree to which an organizational work practice was ‘highly valued,’ we also asked:’ To what extent should
the following occur in your organization…?’ (= the ‘should-items’). The answer categories ranged from 1
(very rarely) to 5 (very often).
In order to construct organization-level scales that were as independent as possible, a principal-
axis factor analysis using the ‘is-items’ was carried out. Because the items were formulated to measure
organizational characteristics, we performed the factor analysis at the organizational level. Because the
aggregated scores of the 58 organizations were based on the mean scores of many individuals, these scores
were very stable and, therefore, fewer cases were required than for individual scores (Hofstede et al. 1990).
In a five-factor solution, each factor represents one of the preconceived organizational-culture dimensions.
20
The items loading higher than .50 on the intended factor were reanalyzed, yielding the factor structure
presented in Table 4. For the purpose of this paper the Dutch items were translated into English. We
concluded that these culture dimensions could be distinguished from each other. Factor analysis at the
individual level showed that all the items described in Table 4 had the highest loadings on the intended
factor. To save space we do not present those results. The organizational-culture dimensions thus existed at
both the individual and the organizational level.
Table 4
Results of Factor Analysis on Aggregated Firm-Culture Itemsa
Factor
Items 1 2 3 4 5
Empowerment
1. Room for non-managerial employees to make their own decisions .89 .11 .09 .07 .23
2. Freedom for employees to depart from rules .84 .06 .06 .04 .11
3. Freedom for employees to implement decisions according to their
own views .82 .14 .18 -.07 .17
4. Employees influence important decisions concerning work .71 .35 .12 .28 .11
5. Freedom for employees to plan their own work .70 -.07 .12 .15 .25
6. The opportunity for employees to bring forward ideas before
decisions are made .68 .28 .07 .34 .23
External orientation
1. Quick reaction to developments in the market .19 .80 .16 .24 .03
2. Investigation of the wishes and needs of customers .13 .80 .12 .11 .19
3. Active canvassing of new customers -.01 .79 .14 .05 .16
4. Working to improve the local market position .13 .78 .05 .19 .10
5. Thorough training of employees in systematically gathering
information on what customers want to see improved .05 .70 .14 .23 .39
6. Having an edge over local competitors .29 .58 .35 .03 .13
21
Interdepartmental cooperation
1. Useful cooperation between departments .24 .13 .84 .13 .14
2. Exchange of useful information between departments -.04 .19 .75 .15 .00
3. Departments support one another in the resolution of problems .22 .19 .75 -.08 .36
4. Mutual communication between heads of departments .37 .18 .56 .36 .01
Human-resource orientation
1. Performance appraisals are taken seriously .06 .15 -.05 .94 .04
2. Employees obtain useful information about their own functioning .13 .33 .14 .71 .25
3. Careful selection of new personnel .20 .15 .28 .65 .04
Improvement orientation
1. Employees closely monitor their own way of working .25 .14 .09 .07 .71
2. Employees' search for possibilities to improve the organization .35 .26 .17 .09 .63
3. Initiatives taken by employees to improve the way in which
the work is done .41 .16 .08 .15 .56
Eigenvalue 4.43 3.98 2.49 2.40 1.89
Percentage of variance explained 20% 18% 11% 11% 9%
a N = 58.
The Cronbach’s alphas of the aggregated scales are shown in Table 3, and indicate that the internal
consistencies of all five organizational-culture scales were high. Because the final scales were constructed
in the main study, the alphas may have been inflated by capitalization. The values were so high, however,
that it was unlikely that reliabilities in other samples would be low (< .70). In fact, we examined the same
firm-culture scales in other organizational settings. For a group of 275 employees of a large Dutch
electronics factory, the Cronbach’s alphas of the five scales, at the individual level, ranged from .72 to .84.
In a sample of 560 respondents, representative of the entire Dutch working population, employed in vastly
different organizations, the Cronbach’s alphas of these scales ranged from .76 to .88. These results show
that at the individual level these scales are also reliable in other Dutch samples. .Because aggregated item
scores tend to be very stable, high firm-level reliabilities are likely.
22
A precondition for aggregating data is perceptual agreement within units. The appropriate statistics
for perceptual agreement are the ICC(1) and the ICC(2) (James, 1982). The ICC(1) is a form of intraclass
correlation. This statistic indicates the part of the variance of the individual perceptual scores explained by
classes (firms) and may be interpreted as the reliability of a single rating. James reported a median of
approximately .12 in climate studies. The ICC(2) is an estimate of the reliability of the aggregated means
scores. We followed the guidelines developed by McGraw & Wong (1996) for calculating and evaluating
the ICCs. The results presented in Table 3 show that the percentages of variance explained by the scales of
autonomy, external orientation, interdepartmental cooperation, and human-resource orientation were
acceptable and that the reliabilities of their mean scores within local banking firms were high. However, the
ICC(1) and ICC(2) of improvement orientation were rather low. We concluded that the perceptual
agreement on four of the five organizational-culture scales was high and that the improvement orientation
scale needed to be improved.
In order to find out if the organizational practices were desired or valued by the respondents, we
added the scores for the ‘should-items’ corresponding with the ‘is-items’ of the organizational- culture
dimensions. We divided this by the number of items. These scores indicate the degree to which the
organizational practices belonging to a culture dimension should occur in the view of the employees. The
mean scores for the ‘should-scales’ were 3.82 for autonomy, 4.31 for interdepartmental cooperation, 4.27
for human-resource orientation, 4.27 for external orientation, and 4.13 for improvement orientation. These
results show that the organizational work practices were indeed valued by the employees. This gave us
added confidence about the relevance of the organizational practices forming the actual organizational-
culture dimensions.
Finally, we examined differences in the dimensions between managerial and non-managerial
personnel and between three categories of employees serving different types of clients (private, industrial,
and internal). Analyses of variance showed that, although some mean differences were significant, they
were all small (< .22). Therefore, we did not take these differences into account.
Financial firm performance. Financial performance was expressed using one ratio. This ratio is
the most widely used ratio within this financial institution and is also used by the Dutch Central Bank,
23
which regularly examines and compares all Dutch banking firms. A firm’s total profits in a specific year
-minus the return on capital- is divided by the total operating costs plus depreciation. Both corrections (on
profits and operating costs) are necessary because return on capital is not the result of banking activities in
the year concerned, and the depreciation of the firm’s assets constitutes costs in that year which were paid
earlier. This ratio is widely considered to be the only reliable financial performance measure of the local
banking firms. In the main study, we obtained the performance data of the 57 local banking firms for the
year in which the questionnaire data were collected (time 1) and the performance data of 46 of the same
local banking firms two years later (time 2). The absence of performance ratios for 12 of the firms at time 2
was due to the fact that they were in the process of being merged with another local banking firm in that
period. For time 1 and time 2, the firms’ performance ratios ranged from .97 to 1.50. A ratio of 1 would
mean that a firm had no profit through its regular banking activities in that year. This measure has the
advantage that it is objective and independent on human perception. The disadvantage is that it is dependent
on factors outside the scope of this study such as the market.
Perceived firm performance. We used perceived firm performance, because this measure is rather
independent on the market and includes other elements of firm performance than financial performance. A
scale was developed (by the authors: in Dutch) for the purpose of measuring perceived firm performance.
The participants were asked, In your opinion, to what degree does your organization need to improve on the
following performance criteria: (a) efficiency, (b) customer satisfaction, (c) managerial behavior, (d)
professional behavior, (e) service quality, (f) contact with clients, (g) position on the market, and (h)
reputation. The answer categories ranged from 1 (very little) to 5 (very much). The heading was phrased in
this way to reduce the effect of social desirability: while respondents may like to think that their
organization scored high on the performance criteria mentioned, they know that an organization always
needs to improve. This phrasing was also in accordance with the language used within this organization.
Managers do not tend to communicate that the organization has weaknesses, but rather say that the
organization needs improvement. Inversion of the item scores resulted in a general measure of perceived
firm performance. The Cronbach’s alpha of the scale at the organizational level was .93.
24
Analyses
All the three hypotheses were tested using structural equation modeling (LISREL8). An advantage
of this method is that, because latent variables are defined, the relationships are controlled for some
unreliability within the measures. Another advantage is that factor analysis and path analysis can be
combined. Also, structural equation modeling provides statistics for the whole model. Based on the
recommendations of Browne & Cudeck (1993) and Fan, Thompson, & Wang (1999), the following fit
indices were selected: RMSEA, SRMR, and CFI. Following Browne & Cudeck (1993), values of the
RMSEA and the SRMR up to .05 indicate a close fit and values up to .08 represent a reasonable model fit.
The CFI should be higher than .95.
As Granger (1969) indicated, a causal effect can be tested by relating the independent variable
measured at time 1 to the dependent variable measured at time 2, controlled for the same dependent variable
measured at time 1. In order to test the effects on financial performance, a path from financial performance
at time 1 to financial performance at time 2 was added in the model of Figure 1. Meindl & Ehrlich (1987)
showed that knowledge of financial performance might affect the perception of transformational leadership
To control for this effect, paths from financial firm performance at time 1 to perceived firm performance
were included in the models of Figures 2 and 3.
Because the data on the perceptual variables were collected using only one sort of source, these
analyses required a correction for common source variance. The respondents from each local banking firm
were randomly divided into two equal or nearly equal groups which were labeled sub-samples A and B
(mean n’s in both samples were 13.8). Shamir, Zakay, Breinin, & Popper (1998) used a similar method.
The scores for the four organizational-culture dimensions in Figure 1 were calculated in sample A, while
shared transformational leadership was based on the scores in sample B. Four local firms with three or
fewer respondents in one of these sub-samples were eliminated. We also used this method to investigate
the relations between shared transformational leadership, organizational culture, and perceived firm
performance. Because of a lack of respondents in several local banks, the sample could not be divided into
three sub-samples. Therefore, the relation of shared transformational leadership and organizational culture
with perceived firm performance was tested in two separate analyses (see Figures 2 and 3).
25
2
Figure 1
Eff
ects
of
Shar
ed T
ransf
orm
atio
nal
Lea
der
ship
and O
rgan
izat
ional
Cult
ure
on F
inan
cial
Fir
m P
erfo
rman
ce (
N=
46).
T1 =
tim
e 1, T
2 =
tim
e 2.
.97**
.40*
.4
0*
1.0
0**
.60**
-.
18
.3
7**
.67**
.62**
1.0
0**
.73**
* p
< .05; **p <
.01 (
one-
tail
ed)
Tra
nsf
orm
atio
nal
lead
ersh
ip
Fin
anci
al f
irm
per
form
ance
T2
Fin
anci
al f
irm
per
form
ance
T2
Tra
nsf
orm
atio
nal
lead
ersh
ip
Org
aniz
atio
nal
cult
ure
Fin
anci
al f
irm
per
form
ance
T1
Em
pow
erm
ent
Exte
rnal
ori
enta
tion
Inte
rdep
artm
enta
l
cooper
atio
n
Hum
an-r
esourc
e
ori
enta
tion
Fin
anci
al f
irm
per
form
ance
T1
26
2
Figure 2
Rel
atio
nsh
ip B
etw
een S
har
ed T
ransf
orm
atio
nal
Lea
der
ship
and P
erce
ived
Fir
m P
erfo
rman
ce C
ontr
oll
ed f
or
Fin
anci
al F
irm
Per
form
ance
(N
=57).
.97** .4
1**
.96**
.2
9*
1
.00**
* p
< .05; ** p
< .01 (
one-
tail
ed)
T1 =
ti
me
1.
Tra
nsf
orm
atio
nal
lead
ersh
ip
Per
ceiv
ed f
irm
per
form
ance
Fin
anci
al f
irm
per
form
ance
T1
Per
ceiv
ed f
irm
per
form
ance
Fin
anci
al f
irm
per
form
ance
T1
Tra
nsf
orm
atio
nal
lead
ersh
ip
27
2
Figure 3
Rel
atio
nsh
ip b
etw
een O
rgan
izat
ional
Cult
ure
and P
erce
ived
Per
form
ance
Contr
oll
ed f
or
Fin
anci
al F
irm
per
form
ance
(N
=57).
.
.64**
** p
< .01 (
one-
tail
ed)
T1 =
ti
me
1
Org
aniz
atio
nal
cult
ure
P
erce
ived
fir
m
per
form
ance
Em
pow
erem
ent
Exte
rnal
ori
enta
tion
Inte
rdep
artm
enta
l
cooper
atio
n
Hum
an r
esourc
e
ori
enta
tion
Fin
anci
al f
irm
per
form
ance
T1
Fin
anci
al f
irm
per
form
ance
T1
Per
ceiv
ed f
irm
per
form
ance
.6
7** .7
1**
.29**
.69**
.67**
1.0
0**
1.0
0**
282
Results
The correlations among all measures are presented in Table 5. The correlations between the same
measures from sub-samples A and B represent inter-group reliabilities and are presented between parentheses
on the diagonal of this table. The inter-group reliabilities of the scales, except for that of the improvement-
orientation scale, were acceptable. Because the within-firm agreement on this last scale was also low, the
improvement-orientation dimension was not used in further analyses. The inter-group reliabilities of
organizational culture and shared transformational leadership were high. Shared transformational leadership
correlated significantly with firms’ financial performance at time 1 and at time 2, but the organizational-
culture dimensions did not correlate significantly with the firms’ financial performance measure in both years.
The low correlation between perceived and objective firm performance at time 1 means that the perception
was not strongly affected by the objective performance of the last year and can be explained by the fact that
employees did not know their firms’ results well.
The positive results of the test of Hypothesis 1a, which states that shared transformational leadership
affects financial performance, are presented in Figure 1. The organizational-culture dimensions were used as
observed variables for the construction of the latent variable of organizational culture. The latent variables of
shared transformational leadership, financial performance at time 1, and financial performance at time 2 were
constructed by fixing them to the corresponding observed variables, and setting the error variance of the
observed variables to 1 minus the reliability of the measure. The reliabilities used were .05, 0, and 0,
respectively. Because organizational culture and shared transformational leadership were used in the same
model, their effects on each other were controlled for. To control for common source bias, we used the split-
sample method. The test of the model fit yielded the following results: χ² (11) = 11.02, p = .44, RMSEA =
.007, SRMR = .048, and CFI = 1.00. The results show that the model did not differ significantly from the data
and that the model fit was good. Because the coefficient of the path from shared transformational leadership to
financial performance at time 2 was significantly positive, Hypothesis 1a was confirmed.
The model in Figure 2 represents Hypothesis 1b, which stated that shared transformational leadership
is related to perceived firm performance. In order to control for response tendencies, different respondents were
used for measuring shared transformational leadership and perceived firm performance. The coefficient of the
29
2
Table 5
Corr
elat
ions
Am
ong V
aria
ble
s an
d D
escr
ipti
ves
V
aria
ble
M
ean
s.d.
1
2
3
4
5
6
7
8
1.
Em
pow
erm
enta
2.7
6
.29
(.71)
2.
Exte
rnal
ori
enta
tion
a 3.0
3
.31
.38**
(.80)
3.
Inte
rdep
artm
enta
l co
oper
atio
n a
2
.97
.27
.43**
.44**
(.60)
4.
Hum
an-r
esourc
e ori
enta
tion
a 3.0
8
.37
.35**
.39**
.34**
(.63)
5.
Impro
vem
ent ori
enta
tion
a
2.8
2
.19
.58**
.42**
.39**
.31*
(.26)
6.
Shar
ed tra
nsf
orm
atio
nal
lea
der
ship
a 3.0
6
.37
.56**
.65**
.44**
.58**
.36**
(.82)
7.
Per
ceiv
ed f
irm
per
form
ance
a 2.7
2
.32
.48**
.62**
.41**
.24
.45**
.44**
(.72)
8.
Fin
anci
al f
irm
per
form
ance
at ti
me
1b
1.2
0
.09
.02
.17
.16
.15
.00
.30*
.35**
9.
Fin
anci
al f
irm
per
form
ance
at ti
me
2c
1.2
1
.12
.21
.19
.21
.12
-.01
.33*
.24
.44**
a N =
58.
b N
= 5
7.
c N =
46.
* p
< .05. ** p
< .01. (t
wo-t
aile
d)
Note
: W
ithin
par
enth
eses
are
corr
elat
ions
bet
wee
n v
aria
ble
s in
spli
t gro
ups.
30
path from shared transformational leadership to perceived firm performance was significant and positive. This
result shows that shared transformational leadership was related to perceived firm performance, which was
controlled for financial performance, and that Hypothesis 1b was confirmed. Because this model had no degrees
of freedom, the fit of the model as a whole with the data could not be tested.
In order to test Hypothesis 2, which state that shared transformational leadership is positively related to
the organizational-culture dimensions, the culture dimensions within one split sample were correlated with
shared transformational leadership measured within the other split sample. The results presented in Table 6 show
that shared transformational leadership was significantly related to autonomy, external orientation,
interdepartmental cooperation, and human-resource orientation. Because the scores were derived from different
groups of respondents, these correlations could not have been affected by individual response style, the most
important source of common method variance. Thus, all four reliable organizational-culture scales were
significantly related to our measure of shared transformational leadership, confirming the largest part of
Hypothesis 2.
Table 6
Correlations between Shared transformational Leadership and Organizational-Culture Dimensions in Split
Samples (N=54)
Shared transformational
leadership
Empowerement .52**
External orientation .61**
Interdepartmental cooperation .36**
Human-resource orientation .50**
** p < .01 (one-tailed)
Hypothesis 3a, which states that the extent of emphasis in the organizational culture on job autonomy,
external orientation, interdepartmental cooperation, human-resource orientation, and improvement orientation
predicts improvements in firms’ financial performance, was also tested using the model presented in Figure 1.
31
Because improvement orientation was not reliable, this measure was deleted from the model. The coefficient of
the path from organizational culture to financial performance at time 2 was not significant. Hypothesis 3a was
therefore not confirmed.
Hypothesis 3b stated that the extent of emphasis in the organizational culture on job autonomy,
external orientation, interdepartmental cooperation, human-resource orientation, and improvement orientation
is related to perceived firm performance. In order to test the model presented in Figure 3 (necessarily without
improvement orientation) we used again the split-sample method. The results of the fit test were χ² (8) = 7.78, p
= .46, RMSEA = .00, SRMR = .05, and CFI = 1.00. As shown in Figure 3, the coefficient of the path from
organizational culture to perceived performance was significant and strongly positive. The results show that the
model had a close fit and that the relationship between organizational culture and perceived performance was
strong, even after financial performance was controlled for. In the main Hypothesis 3b was confirmed.
The relationship between shared transformational leadership and firm performance may depend on
organizational culture and the relations between organizational culture and firm performance may depend on
shared transformational leadership. In order to verify this, the interaction effects of shared transformational
leadership and the four culture dimensions were investigated using hierarchical regression analyses. In the first
step, leadership and one of the culture dimensions were entered into the regression and, in the second step, the
cross product of their standardized scores was entered. Standardization was performed before multiplication to
reduce the danger of multicollinearity. Financial performance (at time 1 and at time 2) and perceived firm
performance were the dependent variables. In none of the twelve analyses did the entering of the cross product
significantly increase the percentage of variance explained in the objective performance measure. These results
show that the relationship of shared transformational leadership with firm performance did not depend on
organizational culture and vice versa.
It may be argued that the high correlations between the leadership and culture scores resulted from
conceptual overlap between the two measures. Therefore, we performed a factor analysis (with varimax
rotation, $ = 57) using all aggregated culture and leadership items. In a 6-factor solution, one leadership factor
and five culture factors emerged. All the culture items had the highest loadings on culture factors and all the
leadership items loaded highest on the one leadership factor. These results show that our valid shared
32
transformational leadership assessment is distinguishable from the way we measured organizational-culture
dimensions. This is important since in some other survey measures of organizational culture one may find
explicit leadership content.
Discussion
In this study we show that one specific, intangible intra-firm resource, shared transformational
leadership, predicts firms’ financial performance, after controlling for present financial performance. This result
denotes a causal link between shared transformational performance and financial performance. Our research
design allowed for such causal inference (although they are not equally strong as in experimental settings); we
had available objective firm-performance data with a time-span of two years. This result shows that even in the
Dutch context, which is known for detracting from charismatic and transformational leadership (see Den Hartog
et al., 1997), a transformational leadership style has a positive effect on firm performance (see also Koene et al.,
2002). Thus even in organizations such as banks, not the traditional contexts of transformational leadership,
leadership styles characterized by charisma and inspiration, appeared positively related to both objective and
perceived firm performance. These results are in accordance with the finding that charisma is considered
important in nearly all countries (House et al., 1999; House, Javidan, Hanges, & Dorfman, 2002).
We found, furthermore, that both shared transformational leadership and organizational culture are
related to perceived firm performance. Because we used split samples, these results were controlled for
common source bias. Also, perceived firm performance was controlled for financial performance, which
excluded the idea that financial performance is attributable to organizational leadership and practices. These
results indicate that employees in an organization with transformational leadership and a culture characterized by
highly-valued organizational practices (see under Methods, Measures, Organizational Culture) view firm
performance as high.
We found also that our organizational-culture dimensions (consisting of organizational work practices)
correlated significantly with shared transformational leadership in split samples. These results show that
transformational leadership relate significantly to the prevalence of highly valued organizational practices. These
findings are also in accordance with the idea that, in a firm with highly valued work practices, transformational
33
leadership emerges. The appointment of a leader with a transformational style in organizational cultures
characterized by organizational work practices that are not highly valued by its personnel is less likely or less
likely to be successful. These suggestions are in line with Barney’s insight that especially top management
should create firm value (Barney, 1991). We found that the style of such management must be transformational
(i.e., both charismatic and inspiring). Clearly, this involves more than working long hours or acting ‘hard’ and
‘smart’ (Bennis, 1999). Because the content of our notion of leadership and of organizational culture differs
from that of Barney, the normative implications of our results differ from his (see also Mosakowski, 1998).
Our data show that firm culture is not directly related to firm financial performance. The costs
involved in investing in high-quality organizational work practices may explain the remarkable lack of a
relationship between firms’ financial performance and organizational culture. For all we know, there may be
both a negative (culture costs money) and a positive (culture makes money) relation between organizational
culture and objective or financial firm performance. Improving organizational culture (if done well) may turn
out to be a profitable firm investment in the long run. Accordingly, the positive relationship between
organizational culture and perceived firm performance suggests that culture affects performance criteria, such
as customer satisfaction and professional behavior, which may take more time to be expressed in financial
performance. Our interpretation is in accordance with the studies by Denison (1984; 1990), which show the
time dependence of the impact of culture on performance. This notion of organizational culture as an
investment opportunity requires future longitudinal investigation. The lack of a relationship between
organizational culture and objective financial performance also indicates that, in the short time interval covered
by the study, the effect of shared transformational leadership on financial performance was not mediated by
culture. If carried out well, cultural interventions are more likely to pay off in the longer term. The findings of
the present study are in accordance with this piece of conventional wisdom.
Perceived firm performance appeared to be only modestly related to objective or financial firm
performance. This finding can be explained by the fact that financial performance is dependent on many factors
within and outside the organization. We used financial performance and perceived firm performance because
both measures have advantages. Financial performance is the main criterion for most organizations. However,
it is a narrow manifestation of firm performance, neglecting factors like investments, relationships with clients
34
and providers, and opportunities for the future. Perceived firm performance is a broader outcome concept, but it
is in essence a subjective measure, subject to rater biases.
The study was performed within a single industry and within the historically determined corporate
governance structure of the Dutch banking firm involved. The advantage of this design is that the firms had
similar environments, while they were independent enough to show differences in the variables measured. Our
relatively homogenous sample of firms offsets the limited number of control variables used. Because the firms
were sampled from the same sector, the survey items were applicable to the situations in all the firms.
However, because the local banks were part of a large banking firm, the cultures of the local (semi-
autonomous) banks may have shown smaller differences than would the cultures of firms that are completely
independent. This may explain in part the weak association between organizational culture and financial
performance.
A practical implication of the study is that organizations may need to select top managers who are
transformational leaders. Such leaders appear to have positive effects on an organization’s (financial and
perceived) performance, and most likely on its organizational culture as well. For the same reasons, top-
management training should focus on transformational behaviors such as showing charisma and providing
inspiration. Additionally, the findings of this study show that shared transformational leadership is strongly
related to organizational culture, which, in turn, appeared strongly related to perceived firm performance.
Therefore, we suggest that firm managers may use organizational culture/practices for the purpose of achieving
higher levels of employee-perceived performance. Also, with the results of our study we pose that
organizational culture is not related to short-term financial success, because of the investments needed. This
implies thus that organizations engaged in the improvement of organizational culture (as defined by improving a
set of organizational practices) cannot expect increased profitability in the short run. No wonder thus that most
short-term-oriented top managers do not ‘burn their fingers’ on culture change. Harris & Ogbonna (2002) even
warn quite explicitly for the unintended consequences of culture interventions.
One limitation of the present study is that perceived firm performance was only investigated at one point
in time. Therefore, we cannot draw conclusions about causality with respect to this variable. In future studies,
perceived performance should be examined in longitudinal designs. Also, studies focusing on the relationship
35
between organizational culture and financial performance should comprise a longer time frame. Additional
performance or outcome measures, such as customer satisfaction (Montes, del Mar, & Fernandez, 2003), should
be included in future studies. Another limitation is that the improvement-orientation culture scale was not
reliable and should be improved. However, in a cross-cultural study in both the Netherlands and Romania
(Kunzler, 2007), the scale was reliable.
More progress is not only needed in further developing valid quantitative measures of organizational
culture/climate (see Detert et al., 2000; Lehman et al., 2004; Van den Berg and Wilderom, 2004). One definite
challenge in this respect is the incorporation of organizational values in quantitative assessments of
organizational practices. Moreover, additional conceptual distinctions between valid operationalizations of
leadership style, processes and culture (both at the organizational and cross-national levels, see e.g. Chemers,
1997) need close examination for possible overlap and distinction (Carmeli & Tishler, 2004). Also further
‘evidence of network effects on…charismatic leadership attributions…’ will help unravel the cultural
complexity involved in leadership (Pastor, Meindl, & Mayo, 2002: 418). Such study would surely help to make
the needed shift: ‘from a static to a dynamic conceptualization of the role’ of leadership (Druskat & Wheeler,
2003: 453).
This study’s three key variables (firm performance, leadership, and organizational culture) have
typically been investigated separately by scholars from three different sub-disciplines: Strategy, Organizational
Behavior, and Organizational Theory. In contrast to the typical mono-disciplinary approach to these variables,
our study was interdisciplinary and, hopefully, many more will follow. We found evidence for the idea that
leadership and/or social organizational capital --in whatever form labeled or captured-- (see also, for instance,
Bolino, Turnley, & Bloodgood, 2002; Inkpen & Tsang, 2005; Kaplan & Norton, 2004) matters.
36
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