The Notions of Trust and Leadership in the Banking Industry - Case Study Example

? Banking industry Industry The industry which this essay is going to be based on is banking the industry. Brief description of issues affecting banking Technological advancement and globalization has exposed banks to numerous challenges. Among the challenges that require attention on the part of leaders are high labor turnover, recession and lastly loss of trust; however, this paper is going to focus on the loss of trust as the greatest challenge in the banking industry. Corporate corruption such as insider trading is one of the events that have made customers lose trust in banks. This is as far as the investigation carried by Stephen A. Cohen and some of his employees at SAC Capital Partners on the same is concerned (Fisher et al.1992, p56). They found out that Goldman Sachs moved aluminum around from one warehouse to another so that they can improve their market position and at the same time increase their prices to consumers. Such kind of events imposes a major impact on peoples’ trust in financial institutions. The survey indicates that nearly eighty percent of Americans has a great mistrust for the big banks and that close to two-thirds of the Americans think that the corporate corruption is much widespread among the banks in the US as well as across the globe. There has been a significant increase in both the figures in the level of mistrust for the banking industry exhibited by Americans a few years ago (Yukl,2001,p65). This loss of trust is very costly on the part of banks because it is normally expensive and wasteful to regulate and monitor system when there is no trust among the stakeholders. This is so because market competition cannot easily be an efficient substitute for integrity and trustworthiness. Another event that has led to the loss of trust is the disappearance of banking proper goal. At first banks main goal was to maximize stakeholders’ welfare but the banks have greatly transformed and are now only interested in maximizing the shareholders wealth by just concentrating on accumulation of profit and personal wealth. Loss of trust among customers was largely brought about by leadership styles adopted by the banks. The main reason is the agency problem whereby the Conflict of interest between the management and the shareholders exists. And management, therefore, engages in activities that pose a high financial gain to them as in the case of insider trading. They enter into agreements that increase the shareholders’ wealth at the expense of other stakeholders (Kotter,1996, p34). To maximize the profits, they charge exorbitant interest rates to customers. These autocratic leaders formulate policies on their own and then tell the employees what need to be done without involving them at all. This kind of leadership does not put leaders to task and therefore they cannot easily be monitored or commented upon (Isaksen & Tidd, 2006, p52). Staff, on the other hand performs the tasks as assigned to them which may perhaps even be poor and unsatisfactory services to bank customers. These poor services rendered to customers make them develop a negative image and even mistrust to bank. In addition, lack of employee involvement in the formulation of objectives leads to low motivation and commitment. This in turn lowers the returns for banks and therefore huge layoffs of personnel may occur to help reduce the operational costs. Leadership styles adopted to restore trust In order to solve the problem and maximize the potential of the organization and its employees, the banks should use transformational leadership. A transformational leader is that who motivates the employees, enhances their morale and performance through a variety of mechanisms such as connecting the employee’s sense of identity and self to the project and the collective identity of the organization (Northouse, 2010, p53). He challenges the employees to take greater ownership and responsibility for their work and understands their weaknesses and strengths. This allows the leader to align the employees with tasks which enhances their level of performance (Cooper & Sawaf, 1998, p61). In addition, the leader acts as a role model and therefore inspires the employees and makes them interested in undertaking their tasks, as well. Transformational leadership, therefore, influences employee behavior once the lost trust has been restored. They will, therefore, become motivated, interested and hence demonstrate a higher level of commitment to their tasks and thus resulting to better performance. These leaders achieve this desirable behavior and trustworthy from their employees by using charisma, effective communication that encourages the exchange of ideas with employees and their power to influence them. It is, therefore, justified for management to change the structure of the industry from autocratic kind of leadership to the transformational one which encourages working in cohesive teams rather than the individualistic manner as in the hierarchical structure. In order to create these cohesive teams, the managers must endeavor at all means to empower the employees by incorporating them in the formulation of the objectives. The set goals should be clearly communicated to the individual employees and the respective teams, as well (Boonstra, 2013, p81). This will enable them to remain on course to achieve the goals which are tailor made to satisfy the customers and hence rebuild the lost trust. Goals set for each team must be in line with the overall organizational goal, satisfaction of customers. Staff appraisal and team rewards and recognition are the main ways of enhancing and motivating performance for the achievement of the overall organizational goals. To complement transformational leadership, managers are advised to also use Charismatic leadership. Under this method, leaders use their ability to converse in order to reach their employees in a moving way and thus motivate and inspire them towards high performance. Charismatic leaders are good orators hence speak on a very commanding emotional level and are, therefore, able to influence employees to be committed to organizational goals. How leadership process informs the situation To make restoration of lost trust in the banking happen, bankers need to undertake the following. First, there should have a single minded focus on the right goal. Banks should focus on adding value to customers and in the process they will add value to shareholders. Shareholder wealth maximization must be seen, as a result and not as a goal. Every employee should, therefore, have a clear line of sight how their tasks add value to the customers and those that deviate from this should be avoided. Secondly, managers should adopt management practices that encourage continuous innovation in the customer services. They need to follow the examples of Apple Inc. CEO Steve Jobs and Marc Benioff and became agile organizations which are capable of continuous innovations (Bass et al.1994, p68). They should, therefore, allow group employees in teams as seen above, coordinate tasks through agile practices, communicate both vertically and horizontally and embrace core values such as sustainability, continuous improvement and transparency. And lastly banks should refocus top talents that are currently working on risky self-interested activities into creating value for customers and not just shareholders by innovating for customers and reinvest how the banks make money. Limitations Change is normally restricted by employees especially due to the fear of unknown, financial implication, failure to familiarize employees with change and comfort in tradition. To make the change in organizational structure successful, change initiators should, therefore, communicate the intended change to employees in good time to ensure transparency: reassure employees: and also be in a position to compensate those who are likely to lose in order to help reduce and even eliminate this resistance. Secondly, transformational leadership relies too much on leaders’ skills. Employees normally believe that the leader has an exceptional ability in their field of specialization and is, therefore, able to motivate and win their confidence. However, the leader may not be in a position to instill the proper values to them. To reduce this overreliance, action groups should be initiated within the organization based on their capability and tasks delegated to them. Thirdly, this kind of leadership assumes that employees will willingly and readily follow the leader who advocates change. However, this may not be the case because most employees normally want to exercise their democracy and experiment their own ideas. A transformational leader formulates the vision of what is to be done and then relays it to the followers who then implement it. Followers who have different visions may not implement the already formulated one but may implement their own. This conflict of visions affects this kind of leadership. To eliminate this, there should be a close leader-follower relationship. In addition followers must be incorporated in the formulation of visions to be done. The leader formulates the vision of what must be done, communicates this vision to followers and then works on trust and commitment. This may not always work well with followers who have different opinions about the vision formulated. Conclusion Trust is a very vital determinant of the performance of organizations and those who have been entrusted with the management should try at all cost to maintain it. And if lost they should employ the above listed recommendations to restore it. References Bass, B. M., & Avolio, B. J. (1994). Improving organizational effectiveness through transformational leadership. Thousand Oaks, Sage Publications. Boonstra, J. J. (2013). Cultural change and leadership in organizations a practical guide to successful organizational change. Chichester, John Wiley & Sons. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=531362. Cooper, R. K., & Sawaf, A. (1998). Executive EQ: emotional intelligence in leadership and organizations. New York, Berkley Pub. Group. Fisher, R., Ury, W., & Patton, B. (1992). Getting to yes: negotiating agreement without giving in. Boston, Houghton Mifflin. Isaksen, S. G., & Tidd, J. (2006). Meeting the innovation challenge leadership for transformation and growth. Chichester, England, John Wiley. Kotter, J. P. (1996). Leading change. Boston, Harvard Business School Press. http://www.lib.sfu.ca/cgi-bin/validate/books24x7.cgi?isbn=0875847471. Northouse, P. G. (2010). Leadership: theory and practice. Thousand Oaks, Sage Publications. Yukl, G. A. (2001). Leadership in organizations. Englewood Cliffs, N.J.: Prentice-Hall. Read More