Transformational Leadership and Innovative Climates in Organisations: A Literature Review

Developing Business Knowledge UMSCMD-40-3 24th March 2011

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Student Number08009258I present a review of the empirical literature on transformational leadership to date in research and development organisations. The studies suggest that transformational leadership has a direct positive relationship with organisational innovation in respect of the performance of project groups. As well as this direct relationship, moderators have emerged out of the literature that suggest that team identity and the source of knowledge indirectly affect project group performance. Path-goal and strategic leadership theories have been brought into analysis as a context tool for the reader. Directions for future research have been suggested.

1. INTRODUCTION

Leadership has been empirically studied in relation to innovation with findings that suggest innovation and leadership have a strong relationship. There is a vast amount of literature that focuses on various leadership theories; however only a fraction has been tested within research and development (R&D) contexts. This encourages the question whether generalised studies on leadership are applicable to R&D settings, or is the R&D context as conceptually distant from existing research and their situational characteristics as possible? The answer to that question has driven this review into existence; the R&D context for leadership is fundamentally different and existing literature cannot be used to examine leadership in R&D organisations.

Existing studies have found that transformational leadership has a more positive relationship with innovation than other theories. This observation forms the basis of the current literature review; which that studies the relationship between transformational leadership and innovation in an R&D context. Other important theories will be called upon to demystify areas of potential confusion.

Innovation for firms is important and a priority for those that are in growing markets. The nature of the global market results in an increasing number of competitors, all of whom are competing for a larger share in the market. The need for flexibility is apparent because today’s technologies and markets are unpredictable, all of these factors mean that companies in today’s market must rapidly develop new products in an environment that is plagued with shortening product life cycles. Thus, a premium is being placed on creativity and innovation in the current global market (Mumford & Gustafson, 1988). To keep a level playing ground with competitors there is also a need for leadership that is primarily geared toward change and development (Arvonen & Pettersson, 2002) and effective usage of human resources and efficient knowledge management (Dess & Picken, 2000).

It is embedded in our culture that innovation is a process that must happen, and is happening at sporadic rates in recent years. It is how this innovation occurs and what processes are needed that the majority of managers are unaware of and can therefore not replicate to become a leader. Recent works, like that of Tornatzky & Fleischer (1990) suggests that innovation is an interpersonal process where members work in project groups with project leaders. Keller (1995) further examined these project groups and identified two categories; research groups that focus on radical innovations; and development groups that concentrate on upgrades of an incremental sort on existing products. It is through project groups where innovative behaviour is conducted, and where we are interested in how the leadership style affects innovation and performance outcomes.

In reference to the management and leaders of project groups, Narayanan (2001) states that leaders are chosen on the basis of their technical expertise as well as leadership skills. Formal training in handling interpersonal conflicts is not generally one of the requirements for leaders, resulting in less than adequate control. It is therefore recommended that in recruiting an individual to lead a project group it is necessary to ascertain whether they possess skills other than their technical expertise (Mumford, Scott, Gaddis & Strange, 2002).

The structure of the literature review will be as follows; first a brief overview of the literature on the theories of path-goal and strategic leadership. This will serve as a context tool and allow the reader to

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Student Number08009258get a perspective of how project groups are led in an R&D context. A detailed section about transformational leadership will follow which consults a wider array of literature and themes that are central to the effectiveness of transformational leadership. A review of the methodology has been carried out which will follow the main review of the theories; which will analyse the methodologies that the authors have used in their studies and look at their limitations and strengths. From this literature review a number of directions for future research have been found that can be used by anyone that wishes to undertake a deeper study into the effect of transformational leadership in an R&D organisation, these are included in the general discussion.

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Student Number080092582. PATH-GOAL THEORY AND INNOVATION

The path-goal theory of leadership is rooted in the expectancy theory of motivation (Vroom, 1964; Graen, 1969), which states that an individual’s desire to engage in a specific action depends on their expectations that it will result in a valued outcome, and how valued that outcome is. According to House (1971) a successful leader, who is a disciple of the path-goal theory, endeavours to facilitate the achievement of goals by making the path as accessible and fulfilling as possible, and to maximise the value of that achievement, which in turn affects the group member’s performance, motivation and expectancy. There are few path-goal studies in the R&D context and these display inconsistent results.

Schreisheim, J & Schreisheim C (1980) raise the question as to what the most appropriate measure of job satisfaction is among the “myriad of different conceptualizations... and operationalisations of this construct”. Mitchell (1974) and Heneman & Schwab (1972) have previously indicated that these differing measures of key variables in various studies are responsible for discordant results among the literature.

House (1971) explains that the psychology based studies of leadership have determined two dimensions that categorise a leader’s behaviour; initiating structure and consideration. Initiating structure refers to the degree a leader initiates a psychological structure for subordinates by means of assignment of tasks, procedural requirements, and the illustration of his expectations. Consideration refers to the degree to which the leader creates a supportive environment by being friendly and approachable. In Keller’s (1989) study of 477 employees from four R&D organisations, he found that it was the subordinate’s need for clarity that moderated the relationship between initiating structure and performance for all four organisations. In Schreisheim, J & Schreisheim C’s (1980) study that involved 290 employees within a large Eastern public utility company, none of the hypotheses that were tested for correlations between the path-goal variables were supported. These inconsistent results however were reported to have very limited use for the theory; consideration by the leader steadily showed strong relationships with all other variables for the public utility organisation which in turn provided evidence for the theory’s predictions.

A meta-analysis that was conducted by Wofford & Liska (1993) that was without the constraints of an R&D context, found support of only a fraction of the hypotheses that were tested. Of the 19 hypotheses that tested for variable moderation, only 6 of them were supported; task structure moderated the relationship between consideration and subordinate expectancy, role clarity and satisfaction; task structure moderated the relationship between initiating structure and subordinate expectancy; job scope moderated the relationship between consideration and performance; and finally ability moderated the relationship between initiating structure and performance. Due to it being outside an R&D setting, it poses the question as to whether path-goal leadership is more effective within an R&D context.

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Student Number080092583. STRATEGIC LEADERSHIP AND INNOVATION

Top management support and the actions they take that ultimately affect how the firm operates and the performance of that firm is defined as strategic leadership (Hambrick, 1989; Yukl, 1989; Rafael & Rubenstein, 1984; Cooper & Kleinschmidt, 1987). This theory has been included into the present study because much of the research concerning leadership in the R&D context has concentrated primarily on project leaders rather than leadership at a higher level such as top management. Of the small number of strategic leadership studies that are conducted in the R&D context, links have been found between top management actions and R&D project performance (Green, 1995; Hitt, Hoskisson, Johnson & Moesel, 1996; Graves, 1988; Hitt, Hoskisson, Ireland & Harisson, 1991).

There is little by way of research into which projects are most likely to be the focus of top management support (Green, 1995), however if hypothetically there is a large amount of ongoing R&D projects in an organisation, top management cannot be involved in all projects due to their time restrictions, thus providing evidence that top managers are making choices about which projects to support. Whether or not these choices of projects are correct, is another question. Said top management support is defined by Pinto & Slevin (1987) as the extent that top management are involved in decisions in project issues, simplify information channels and display generally supportive behaviour.

Top management decisions and actions that affect the whole organisation can have a detrimental effect on innovation; Hitt et al(1996) found that decisions in reference to acquisitions and divestitures were positively correlated to the implementation of financial controls which in turn had a significantly negative effect on internal innovation. However financial controls were also positively related to external innovation in the same study, which gave way to the realisation that firms who are more actively pursuing a portfolio based organisation are more interested in the way that operational tweaks for higher efficiency and acquiring organisations that have just introduced a new product to the market (instead of innovating internally), can lead to competitive advantages.

It was Green (1995) that proposed a model of top management support that gave four characteristics that initiate strategic support; expected contribution, size of investment, innovativeness and business advocacy. Green tested these characteristics with a series of hypotheses, and found that all characteristics had significant relationships with perceived top management support. It was also predicted and proven that the larger the investment, the more likely it was to be terminated; however the more support that the project had from top management the less likely it was to be terminated. It appears that top management have the influence to keep projects alive, and this influence is a requirement for those projects that need larger investments.

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Student Number080092584. TRANSFORMATIONAL LEADERSHIP AND INNOVATION

Burns (1978) was the first theorist to study transformational leadership, a term coined by Bass (1985) for the leadership style that encourages subordinates to transcend their own self interest for the betterment of the group. There are various other definitions for transformational leadership; however the most useful is Bass’s (1985) which states that a transformational leader primarily has four characteristics; intellectual stimulation, which refers to the way that leaders are able to get subordinates to view problems from an original angle; inspirational motivation, which refers to the ability for a leader to communicate a vision to their subordinates; individualised consideration, which is related to the attribute of a path-goal leader and refers to the customised support for each subordinate; and charisma, to instil emotions and a sense of identification into subordinates. Another definition is that of House’s (1991) that states that a transformational leader is one who motivates followers to make personal sacrifices and to exert significant effort to “perform above and beyond the call of duty”.

This section of the literature review will be split into three different areas where transformational leadership is related to innovation. Initially, I will study the existing research into how transformational leadership affects the performance of project groups in an R&D context. This will not be restricted to solely the performance of project groups, but will also look at relationships between subordinates and leaders (Keller, 1992), team identity (Paulsen, Maldonado, Callan & Ayoko, 2009), how the source of the knowledge used for innovation affects results (Gumusluoglue & Ilsev, 2009), and it also touches briefly on an area that relates to strategic leadership; how top management’s charisma can affect subordinates (Agle, Nagarajan, Sonnenfeld & Srinivasan, 2006).

The second section will mainly discuss how transformational leaders can become disillusioned by their positive effect on subordinates which results in adverse affects to innovation (Sankowsky, 1995). This is a section that will go over more psychological aspects of transformational leadership and how leaders can start to abuse their status as a leader.

Lastly, there are other ways that transformational leadership can affect innovation; for example, in organisations that are not directly creating innovations, the implementation of other innovations to increase efficiency and other aspects to achieve corporate objectives, can be linked to transformational leadership and its effects in this area (Michaelis, 2009).

4.1. Transformational leadership and its effect on project group performance

Transformational leadership has a definite effect on innovation and project group performance. Being able to precipitate new product development times could potentially result in the market share of an organisation growing, employee motivation could flourish due to the greater responsibility and a possible quality increase due to the fact that speed entails accuracy (Barczak & McDonough, 1991). All these factors are evident in organisations striving to make sure that they are leading their R&D departments in the best way possible. There has been an abundance of transformational leadership research within this context; research by Bass and many of his associates have found transformational leadership in such contrasting situations such as industry, the military and students in laboratories (Avolio & Bass, 1995; Bass, Avolio & Goodheim, 1987; Waldman, Bass & Einstein, 1987).

It was Keller’s (1992) study of group performance and the effect that transformational leadership has on groups of research and development that was one of the first studies to promote the use of a longitudinal method of measuring leadership and performance at two distinct times. This significant paper recognised that a transformational style predicted higher performance for research groups rather than development groups; a transformational leader’s intellectual stimulation and inspiration of group members is more potent in the major innovations involved in research groups rather than the more transactional initiating structure attribute that is involved in development.

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Student Number08009258Another interesting find within this paper is that the results displayed evidence for the performance of the project at the time “1” influenced and the perception of the charisma of the leader during time “2”. Keller found that subordinates felt the leader was increasingly transformational because of the success of the last project, the perceptions of the leader were based on previous experiences that the followers had with them. To be an effective transformational leader, experience is essential, one cannot jump into the role with just the trained knowledge and expect to succeed; a relationship must be built with the followers.

In reference to the way a subordinate perceives their belonging to a group, or in other words team identity, Paulsen et al (2009) found through their study of 34 project groups that team identity did not directly have a relationship with innovation. What they actually found was that the cooperative behaviours of followers and leaders led to much higher performance and through further examinations of the pathways for their proposed innovation-influence model, they found that team identity and cooperative behaviours had a strong positive relationship. Followers with a strong sense of team identity are more likely to be involved in shared decision making and to find answers that benefit the group rather than vying for promotions; this is evidence that the strong correlation between innovation and team identity is heavily mediated by cooperative behaviour.

For leaders to succeed in creating a sense of team identity among their subordinates, Paulsen et al (2009) and Shamir, House & Arthur (1993) provide evidence that transformational leadership substantially influences the development of said team identity. All things considered, the positive relationship between transformational leadership and innovation is mediated by a sense of belonging and cooperation.

Gumusluoglue & Ilsev (2009) looked at the idea of where the knowledge utilised in innovation comes from and how the source of the knowledge mediates the relationship between transformational leadership and organisational innovation in their study that involved 43 Turkish companies. Findings revealed that when the source of knowledge was internal - knowledge obtained from subordinates that are in the project groups - the mediating role of internal support was not apparent. On the other hand, the role of external sources of support - where knowledge is brought into the project groups from outside - did mediate the relationship substantially.

What this shows is that external support is not directly related to performance but can act as a catalyst for innovation when transformational leadership is employed; when a transformational leader obtains knowledge from universities and other experts they are avoiding the confusion that can arise from conflicts between subordinates. The fact that the hypotheses for the mediating role of internal support was not supported gives evidence that conflicts can and do happen and affect the performance of the project groups.

4.2. The dark side of charisma and leadership

The majority of published studies have praised transformational leadership and its effectiveness as a leadership style. However, there is a stream of existing research that focuses on how the very act of becoming a transformational leader and the way that subordinates can begin to have a religious like faith in that leader (Sankowsky, 1995) can have negative results. Disillusioned leaders can have a detrimental effect on an organisation’s ability to innovate due to their unrecognised transformation into a mis-leader. Other evidence suggests research has overestimated the variance in performance outcomes that are the result of leadership (Lieberson & O’Connor, 1972) which implies that leadership is not as important as one has initially thought.

In order to avoid the pitfall of developing into a mis-leader, Drucker (1988) explains three activities that a leader must partake in. In his concise article on leadership Drucker states that on its own charisma is not enough to ensure effectiveness as a leader; a leader that solely relies on their charisma becomes inflexible and convinced that they are infallible.

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Student Number08009258The three processes that are a requirement for any leader are; to work hard, a solid foundation for leadership is to have extensive knowledge about the organisation’s mission and to make compromises that reflect his own beliefs; to accept responsibility, Drucker realises that being a leader is not a privilege but a responsibility where a leader must take blame for failures instead of blaming his subordinates; and to earn the trust of his followers; without trust subordinates would not be followers.

Psychologically, leadership is a complex subject. In order to remain a positive leader, that leader must learn the basics of the leader-member relationship and its psychological aspects. In Sankowsky’s (1995) study on the symbolic power that a leader has he explains that in the leader-follower relationship, the followers symbolise their leader as a parent; this is called transference. This results in followers being highly motivated to gain the personal approval of their leader which also leads to the leader being able to fundamentally transpose the follower’s thoughts and emotions. It is the abuse of this symbolic power that Sankowsky states can turn a leader into a mis-leader.

Sankowsky also explains that the abuse of this power reveals itself mainly in communication; once a leader begins to withhold information and conceal results in order to reveal half truths that promote themselves, the abuse has started. Throughout a charismatic leader’s leadership, it is the very attribute of being charismatic and their ability to earn the trust of their followers through being omnipotent and paternalistic, that charisma and a natural narcissistic personality can disguise a leader’s personal needs and quests and present them as a vision of their own grandiosity and self belief which exploit subordinate’s values.

Existing research has also touched upon the topic of whether a leader is actually needed or if the whole attribute of a leader is an imagined excuse for an extreme of performance. Meindl, Ehrlich & Dukerich (1985) created a study on how leadership is a “romanticised” concept based on studies that evaluated newspaper articles, dissertations and undergraduate courses. Meindl et al’s term “romanticised” leadership refers to the practise of subordinates bestowing the credit of being a leader to an individual in certain situations such as in times of extreme positive or negative organisational outcomes (Meindl et al, 1985) and when there is a need for subordinates to find causes among human actors (Pfeffer & Salancik, 1978). Therefore it is put forward that leaders are only needed and used ad hoc; rather than having a leader in the traditional sense, a leader is used to be blamed and celebrated in certain situations and for the influence that leaders have over subordinates.

4.3. Innovation implementation and the effect of transformational leadership

Another aspect that transformational leadership can affect in terms of an organisation’s innovative climate is their ability to adopt innovations for use in the workplace instead of creating new products within an R&D department. This ability refers to the process that employees partake in, in order to gain the knowledge needed to be able to use, for a prolonged time, a particular innovation (Michaelis, Stegmaier & Sonntag, 2009). Klein & Sorra (1996) states that this process requires a top management decision that subordinates will use that innovation in their work; it is not a decision for the subordinate’s that are lower down in the organisational hierarchy to make (Yukl, 1999).

The reasons why an organisation may not have received the benefits that the adopted innovation was potentially offering are twofold; a failure in the innovation itself would mean the innovation would not work as intended; and failure in the actual implementation of the innovation would result in the advantages of the adopted innovation becoming void. It is the social exchange theory that states that leader’s transformational behaviours such as displaying confidence in subordinate’s abilities and emphasising subordinate’s ties to the collective (Shamir et al, 1993) are likely to result in substantially higher levels of commitment to change due to followers being motivated by their desire to repay their leader for their support and encouragement (Homans, 1961).

There are few studies that examine the relationship between transformational leadership and innovation implementation, just as there are for actual innovation in an R&D context, which is strange

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Student Number08009258given the many complaints of the paucity of research on the relationships between leadership and innovation implementation (Beyer & Trice, 1978; Tornatzky & Klein, 1982).

In Michaelis et al’s (2009) study that was based on a survey completed by 194 employees from a German car company, it was hypothesised that there would be a positive relationship between charismatic leadership and employee’s innovation implementation behaviour. Through the common use of Avolio & Bass’ (1995) multifactor leadership questionnaire it was found that this hypothesis was correct; the more charismatic attributes that the leader showed, the more the employees participated in innovation implementation behaviour. Michaelis also suggests that leadership training is incredibly important when it comes to adopting an innovation, and points the reader towards research undertaken by Barling, Weber & Kelloway, (1996) that studied to what extent charismatic leadership qualities are trainable. Selecting leaders that are trained in this way would substantially speed up the adoption process.

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Student Number080092585. DISCUSSION OF METHODOLOGY

One of the main characteristics of the methodologies in the majority of the research that I have reviewed is that they make use of Bass and Avolio’s multi-factor leadership questionnaire (MLQ). The MLQ was created in order to effectively measure leadership styles in any situation through questions that are designed to analyse the actions and effects of leadership. There are however disadvantages in solely relying on this method of measurement. According to McNamara’s fallacy (Handy, 1994), McNamara states that if something is ignored or not detected then it doesn’t mean that it isn’t occurring. If the MLQ misses something in its measurement of the situation, then the results of the analysis will not completely represent the context. The variables that the methodologies in the literature measure are also fundamentally subjective, and based entirely on opinions; this means that we must consult qualitative methods in order to get a better grasp on the situation.

Every study that has been used in this review has involved questioning the leaders and followers. This does pose a problem however; because the variables are opinion based, one might not mean the same thing that someone else does in answering a question, and people could view the question as ambiguous and not give a justified answer; leading to results that do not entirely represent the context. Large sample sizes have been continuously used in the existing literature leading to much higher reliability in that sense, the more project groups and leader-followers examined the more chance one has of finding evidence for relationships, either positive or negative.

Throughout the various methodologies in the literature, numerous biases are evident; such as the common method bias and the halo effect. These will skew the results and leave them unreliable if they are not eradicated. The majority of the literature has contingencies for these biases mathematically in order to blunt the effect that these biases have on the outcomes. However a truly representative study would not need to as it would have been assured that no biases are evident.

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Student Number080092586. GENERAL DISCUSSION AND DIRECTIONS FOR FUTURE

RESEARCH

From the literature examined, the reader can see that transformational leadership has many effects on innovative climates, from the actual performance of the project groups to how innovations are implemented in the workplace. Keller, as one of the top authors on the relations of innovative performance, has found direct as well as indirect links between different facets of transformational leadership and innovation. What is most interesting however, are the pitfalls that leaders can unwittingly fall into by being charismatic; symbolic abuse of the paternalistic nature of a leader can result in a negative environment for all those in the leader-member relationship. It is this abuse of power that leaders must be aware of and continue to self evaluate, like that of therapists, so as to assure no abuse occurs.

Throughout the existing path-goal studies, despite the discrepancies, the results do offer a limited backing for the theory. One of the commonalities between the literature discussed is the admission of the fact that that the variables do moderate the relationships, however not as significantly as hypothesised. Perhaps further studies are needed where geographic limitations are not apparent and as in House’s (1971) study, biases such as the halo effect are ensured to have been evicted from the study. Strategic leadership has more evidence that links it to innovative behaviour.

Strategic leadership has been studied in less than other leadership theories within the R&D context, it has however been unanimously discovered that support from top management has positive relationships with the performance of project groups in reference to innovation. Actions that promote the use of financial controls rather than longer term strategic controls adversely affect innovation however, as they restrict risk taking (Green, 1995) and other innovative behaviours in order to reach short term monetary objectives.

6.1 Directions for future research

By conducting this literature review, numerous directions for future research have been identified. These propositions for research will help guide the transformational leadership theory through the areas that are disorganised and need clarification such as measurement issues. Firstly, and most importantly, research on leadership, significantly transformational, theories is substantially lacking studies that are directly within the R&D context; in order to fully understand the leadership issues within an R&D setting, more research is required that delves primarily into innovative organisation. This accompanies the fact that the R&D context is essentially different to that of situational contexts that have been studied in reference to leadership.

Secondly, future researchers would do well to seek out another method of measuring leadership. Presently measurements are based on subjective opinions and are therefore not completely accurate; to find an alternative method that measures follower’s perceptions that is not likely to be affected by biases would mean that deeper analyses could be conducted without relying on possible incorrect data. One method that doesn’t bypass the subjective opinions, but does however reduce the effect of subjective opinions, is that of the longitudinal study. More studies that follow an organisation over longer periods of time allow the researcher to account for unreliability’s in the study.

Instead of focusing on how R&D leadership differs between industries, researching the differences between countries is also a potential area of future study. Bass (1999) discussed that the collectivist cultures of Asia can breed successful transformational leadership. Leaders in collectivist cultures are more likely to take care of their followers because of their culture; followers then have a moral obligation to reciprocate this care and in turn stay loyal. This could be an interesting area that researchers could explore; which countries or culture transformational leadership flourishes in.

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Student Number08009258The effect that training has on the ability of leaders is also under researched. Directing one’s research into whether transformational leadership can be trained will be useful to determine if leaders are bred or bought; it is useful to determine if leaders can be bred by an organisation or they always have to be bought in from outside, or are the fundamentals of a transformational leader cemented into the fabric of their upbringing and their personality? This would have many practical implications; the search for the perfect leader would be more about searching for an individual who has a significant learning capacity.

I have amalgamated many sources of literature for this review and have synergised the findings to create an analysis that gives the reader a breakdown of the main themes that run through the transformational leadership style. I have also given directions for research that will help advance the knowledge of leadership, specifically in the R&D context. The knowledge that I have summarised here is for those that wish to get a complete understanding of the subject without having to extensively read the literature on the subject, I have written it so that the main points are expressed without delving too deeply into the data and technicalities that many of the studies discuss. Advancement of transformational leadership theory is slow, however effective leadership in an R&D context is becoming increasingly likely as the importance of the literature studied magnifies and knowledge workers begin to utilise the vast amounts of research that are to hand.

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