The relationship between transformational leadership and innovation in the Bahraini banking system - Literature review Example

?The Relationship between Transformational Leadership and Innovation in the Bahraini Banking System. Introduction. The chief executive or senior manager of any commercial organisation has to face many challenges in the fast-paced and globalised world of today. Everyone realises that leadership skills are a key to business success, but there is a lot of debate about exactly which skills are needed, and what style of leadership is best suited for success in the modern environment. There is a huge amount of literature, including many different theories, and this can be bewildering for busy leaders who have to keep their eye on the day to day performance of their organisation as well as look out for the needs it is likely to have in the future. This study explores leadership requirements of one particular context: the Bahraini banking sector. It starts out with the premise that what has worked in the past for this sector may not necessarily be the best strategy for the future. When the world is changing so fast through technology and greater interconnectedness, then innovation becomes a key quality that organisations need if they are to survive and stay competitive. This study explores the importance of innovation, and the kinds of organisational leadership that are required to ensure that innovation is encouraged. It examines the role that emotional intelligence plays, and the role that transformational leadership can play in ensuring that innovation is given more prominence at every level of the banking sector in Bahrain, with a particular emphasis on the importance of psychological empowerment in ensuring that the benefits of transformational leadership move from attitude change into behavioural change with concrete positive outcomes. The literature review traces these themes through past studies and draws out the deep level theories behind the concepts of innovation, emotional intelligence, psychological empowerment and transformational leadership. It also reports on a number of empirical studies that have traced the effects of empowerment under transformational leadership on a range of organisations. In the course of this analysis, key questions are asked about the potential relevance of generic ideas, based largely on secular Western Capitalist ideologies, when applied to the on the particular cultural context of Bahrain. Literature Review. Innovation. Innovation is a quality which has become increasingly important to the survival of all kinds of companies in the fast changing and globalised world of today. The many articles in the media following the death of Steve Jobs in late 2011 have reminded businesses of the competitive advantage that innovation brings to a company, but at the same time there is much discussion about the type of leadership style that this innovator inflicted upon his colleagues. Some theorists claim that there is such a thing as an “innovation leader”: “Innovation leaders are senior executives –whatever their functions or positions – who spontaneously instigate, sponsor and steer innovation in their organizations.” (Deschamps, 2003, p. 815). This view suggests that the job of innovation one that belongs at the top of the organisational hierarchy. Other theorists, leaning on the earlier work of Weber, stress the importance of charisma, theorizing that some individuals have personal traits that mark them out as special, and allow them to play a particularly dynamic and effective leadership role, athough there have been some debates about how to define this elusive quality. (Bryman, 1992, p. 23). Charismatic leadership engages the emotions in a positive way, making the members of the organisation feel that they belong, and in a best case scenario also increasing their motivation and efforts towards the corporate aims. It does this by building trust, creating shared beliefs, engendering positive feelings about the leader, and getting workers and managers alike to feel involved in the project. (Yukl, 1981) It has been pointed out that there is also a downside to the theory of the charismatic leader: “Over the long term, a dilemma naturally occurs for many followers. As the subordinates’ self-worth is increasingly defined in their relationship with the leader, a precarious dependence is built.” (Conger and Kanungo, 1998, p. 21) Perhaps because of this danger, and some connotations to do with religion and show business, the term “charismatic leadership” or related terms like “heroic leadership” (McCrimmon, 2010) or various kinds of organisational “champions” Howell and Higgins, 1990) have become less popular, and scholars often integrate these ideas into other theories, as we shall see below. Scholars seem to agree that there is both an individual, leadership related dimension and an organisation-wide dimension of innovation. Organisational innovation has many different aspects. Three main types of innovation are: technological, administrative and ancillary. (Damanpour, 1987) Many innovations come out of the collective interactions of people in all three of these areas, and ideally an innovative organisation has some core characteristics which Deschamps identifies as: In-depth customer insight Leading edge technical awareness Inspirational leadership Motivational organizational rewards Sharing knowledge (Deschamps, 2003, p. 816) Clearly it is imperative that the organisation as a whole should embody these characteristics, but the question which needs to be answered is how to encourage these elements in the first place and then ensure that the organisation does not get tired of seeking new ideas. The role of culture. The culture of an organisation, arising from the marketplace where an organisation is located, and from within the organisation itself, has come to be seen as a very important factor. According to Schein, the leader has a unique role in this: “organizational cultures are created in part by leaders, and one of the most decisive functions of the leadership is the creation, the management, and sometimes even the destruction of culture” (Schein, 1992, p. 5). An empirical study covering six countries (the United States, United Kingdom, Germany, Austria, Russia and the Ukraine) looked at two dimensions of organisational innovation: Product-Market and Administrative, and came to a significant conclusion: “Our data suggests that product-market innovations transcend socio-cultural differences, but that administrative innovations might be contingent on specific cultural characteristics.” (Elenkov, Judge and Peters, 2005, p. 678) This study spanned a rather narrow cultural range, however, and so it would be interesting to explore these ideas with Arab or Asian cultures and see if the same is true for them. Clearly there is no consensus view on how organisations and their leaders should foster innovation and therefore we turn to two specific elements in that puzzle: emotional intelligence and transformational leadership. Emotional Intelligence. Emotional intelligence can be defined as a trait which individuals possess which allows them to deal with other people in a way that embraces both intellectual and emotional aspects. It takes place in social interaction and is critical in avoiding conflict, building consensus, and motivating others to act in certain ways and not others. This means that emotional intelligence has a natural link with leadership. It can be broken down into four main components: Appraisal and expression of emotions Use of emotion to enhance cognitive processes and decision making Knowledge about emotions Management of emotions (George, 2000, p. 1034) One helpful analogy that is used in the literature is that of a virus passing from one person to the other: “A leader who is able to manage emotions in the self and in others will be better able to propagate emotional contagion within the group.” (Webb, 2004, p. 28) Several studies have indicated that the more emotional intelligence a leader has, the more effective he or she is, and the more effective the whole unit or organisation is also. (Goleman, 1995; Megerian and Sosik, 1996;). These ideas have all proved very useful in the field of leadership theory, but there is still some distance between a person’s ability to appreciate and understand the emotions and motivations of the people in an organisation, and the ability to actually apply this knowledge in a way that enhances the organisation’s ability to innovate. This gap is addressed somewhat by the concept of transformational leadership. Transformational leadership. Transformational leadership can be defined as a relatively new paradigm of leadership which moves away from a control-oriented, top-down style to something more dynamic which encourages leadership and the exercise of autonomy and choice at all levels in an organisation. As the name suggests, it is intended to transform the organisation, and make big changes in the way that workers and managers deal with each other. From a psychological perspective transformational leadership involves idealized influence (Webb, 2004, p. 18). Clearly some aspects of charismatic leadership and indeed emotional intelligence can be accommodated within the broader concept of transformational leadership. It was first proposed in the late 1970s and early 1980s by Burns, (1985) who contrasted transformational leadership with other kinds of leadership, especially transactional leadership, which can be defined as being “based on an exchange of services (from a teacher, for example) for various kinds of rewards (salary, recognition, and intrinsic rewards) that the leader controls, at least in part.” (Leithwood and Poplin, 1992, p. 9) This transactional type of leadership is a necessary part of any commercial organisation because it sets the parameters for day to business being done and creates firm frameworks for target setting and achieving business objectives. It is somewhat lacking, however, in situations where innovation is needed. In such a situation the formal structures and processes can actually hinder or even prevent new ideas from emerging and taking root. Most companies therefore accept a certain amount of transactional leadership for routine matters that preserve the current status quo, but look for transformational leadership in strategic and future-focused areas. Wherever there is a need for a change from the current situation, transformation leadership presents itself as a wise choice. The work of Bass built on the foundations of Burns, and extended the concept of transformation still further. Bass noted that there are some implications of transformational leadership that can be quite a challenge to implement, for example the fact that “transformational leaders motivate others to do more than they originally intended and often even more than they thought possible. They set more challenging expectations and typically achieve higher performances” (Bass, 1998, p. 4) What this means is that transformational leadership is not an easy option. It makes heavy demands not only of the leaders, but also of all other members of the organisation. Considerable efforts were made to design questionnaires and ways of consistently measuring transformational leadership (Avolio, and Bass, 1999). These standardized measures for transformational leadership have helped to generate useful fieldwork and this one of the reasons why transformational leadership has remained popular into the twenty first century. There is real evidence that it makes a difference, and organisations can be sure that it is a worthwhile investment of time and energy. Since one of the key features of transformational leadership is that it is a dynamic style, encouraging a positive attitude to change in the organisation, it is often regarded as being especially useful when a company is seeking innovation. (Howell and Avolio, 1993) Since transformational leaders provide more emotional and intellectual stimulation for their followers, there is more likelihood that these followers will experience more job satisfaction, and more freely offered contributions to the welfare of the organisation, and its goals, even beyond the minimum that is expected of them. Modassir and Singh call this “Organizational Citizenship Behavior” or OCB which is defined as “discretionary behavior that is not part of an employee’s formal job requirement but it is that which promotes the effective functioning of the organization.” (Modassir and Singh, 2008, p. 10) Transformational leadership has been tried in a number of international contexts, and it has proved itself to be useful in many of them. In the case of Taiwan, for example, there is a fast-moving high technology sector and innovation is a key to the success of many companies related to this industry. A study based on the Taiwanese electronics and communications industry found that many factors influence a company’s potential for organizational innovation, but the most important factor is the leadership style of top managers. (Jung, Chow and Wu, 2003) The emotional intelligence and attitudes of the manager affect innovation directly but there are other, more subtle aspects of transformational leadership that affect organizational innovation indirectly, such as empowerment and organizational climate, with the result that workers demonstrate an increased level of creativity in their daily work (Jung, Chow and Wu, 2003, pp. 538-540). Research in Scandinavia on sector creativity has noted that the geographical location of companies can be an important factor in determining how open they are to new ideas, and how quickly they generate innovation: “creativity is greater in labour markets with more diverse employment bases and in those which contain a larger share of national employment in certain industries, thus confirming the importance of urbanisation and localisation economies in stimulating creativity” (Andersson, et al., 2005, p. 1). The proximity of other similar organizations in the neighbourhood seems to spark more competition between companies, and more attempts to differentiate their products from each other. The term that Andersson et al. (2005) use is “agglomeration.” A certain amount of mutual motivation occurs as well as competition, and a prime example of this can be seen in the phenomenon of Silicon valley in the United States. Several very significant technology developments occurred there in the same short space of time, and the commercial banking sector played a big part in its success. The banking sector is an important part of the “ecosystem” that produces innovation, entrepreneurship and success on a grand scale. Dean notes that the two most important trends that the founders of Silicon valley spotted as being critical for innovation and exopansion: “First, they were relatively quick to realize the importance and potential of entrepreneurs,…And second, these founders realized that even in venture capitalists were catalysts for entrepreneurial values, these young companies would still need corporate banking services.” (Dean, 2000, p. 318) The nature of this banking business was designed to meet the changing circumstances that the new technology brought with it. Instead of a traditional focus on real estate and commercial lending, both of which began to run into problems in the 1980s the new Silicon valley bank identified emerging growth lending as the core for their future success. Looking back from the position of the present time, this does not seem such a radical move, but back in the 1980s, before the rise of the personal computer and eventually the internet, such a strategy was indeed very forward-looking. A significant change in the nature of high technology businesses made the founders of new banks change many aspects of their business: “… the assets in an information-age economy are often intangible, including patents, processes, business plans and other intellectual property… We had to become willing and able to lend creatively.” (Dean, 2000, p. 319) The context in the United States is somewhat different from that of the Gulf states, but the principle of banks adapting to changing commercial circumstances at the very start of new phases is applicable across both cultures. Far from following behind innovations in the market place, and the emergence of whole new industries, banks have a role to play in building the infrastructure, or to use Dean’s word, the ecosystem, in which innovation and success will flourish. Environmental factors are important, if the climate for innovation is to be optimised. (Sarros, Cooper and Santora, 2008) and research is at last beginning to consider the external factors which affect leadership and innovation as well as those inside particular organisations.(Gumusluoglu and Ilsev, 2009). Psychological Empowerment In recent years a number of empirical studies have looked back at the effects which transformational leadership has had on various organisations and it is evident that not every application of transformation leads to the desired outcome of enhanced innovation. It is important to understand not only the role of the leader, but also the role of those who follow, and this has led to research on notions such as “psychological empowerment” which are said to mediate the relationship between transformational leadership and outcomes, and generate greater general job satisfaction and more active commitment to the organisation (Castro et al., 2008, p. 1843). Empirical evidence for this mediating role of psychological empowerment in transformational leadership was found in a study of 520 staff nurses in a Singaporean public hospital. (Avolio et al. 2004). Another study of 230 employees of a government agency in the Netherlands also found that “transformational leadership is positively related to innovative behavior only when psychological empowerment is high.” (Pieterese et al., 2010, p. 609) The theory is that when workers are inspired by their leaders, they feel psychologically able to contribute more of their own ideas to their work environment. Innovative behaviour is defined by Pieterse et al. as “a multi-stage process of problem recognition, generation of ideas, building support for ideas, and idea implementation.” (Pieterse et al., 2010, p. 610) The key to innovation and creativity in the workforce is therefore their motivation, and this can be influenced by leadership style. Although transactional leadership is a valuable and necessary part of most organisations, the addition of a transformational leadership dimension can take the focus away from the performance of strictly defined roles, and can be experienced by the workforce as controlling, which can demotivate the workers and inhibit their own creativity. Empowerment usually involves delegation of responsibilities from top management down to lower levels in a hierarchically structured environment. This has been familiar as a management style for many years. Resting on the work of Thomas and Velthouse (1990), Pieterse et al. note that psychological empowerment affects each individual in a personal way and is defined as “a psychological state residing within individuals, reflecting an active orientation towards a work role” (Pieterse et al., 2010, p. 611). In fact if this psychological empowerment is missing in a transformational leadership scenario, then employees may well feel inspired by their leader, but at the same time they might feel unable to turn these feelings into action in the workplace. Three major components of this psychological empowerment have been identified, namely the internalisation of corporate goals within each individual person, control over the work environment and perceptions of self-efficacy, or competence. (Menon, 2001, p. 153) All three components have to be in place if psychological empowerment is to be effective. In areas of an organisation where innovation is especially critical, for example in research and development, or in a situation where there is a need to move to greater customer orientation in the sales force, there is evidence that innovation can be fostered at team level. There are some intriguing theories about the effects that different levels of transformational leadership can have on team innovation. One study has shown that the most effective levels of transformational leadership for producing innovation in teams are either low or high levels, while the middle range of moderately high transformational leadership is less effective (Eisenbeiss and Boerner, 2010, p. 364) If such teams have low levels of transformational leadership, then their natural autonomy allows them to be creative and innovate. With somewhat higher levels, there can be too much intellectual guidance, which stifles innovation. This suggests that transformational leadership and innovation stand in U shaped relationship to each other, and this has major implications for the implementation of transformational leadership if innovation is the overriding priority for an organisation. It appears it is better not to do it at all, than to implement it half-heartedly. An interesting study on sales staff reported that psychological empowerment and the psychological climate of the workplace are both directly influenced by the leadership style of a subordinate’s direct superior and that sales workers who are required to operate across the boundary between the inside of the organisation and the outside need to have managers who see the internal and external factors holistically (Martin and Bush, 2006, p. 423). Martin and Bush hypothesised that the greater a sales representative’s perception of psychological empowerment was, the greater his or her objective and subjective sales performance would be. In their fieldwork with 106 sales managers and 313 sales respresentatives, however, it was found that only subjective performance was supported by the facts, and that objective performance was not improved by increased perception of psychological empowerment (Martin and Bush, 2006, p. 431). This study therefore supports the positive effect of psychological empowerment on employee perceptions, but it does question how significant this is for improved performance in the organisation. The authors conclude with the sobering remark: “Thus, empowerment should not simply be an assumption in sales settings. Instead, understanding which dimensions of empowerment lead to stronger sales performance becomes a critical issue for organizations” (Martin and Bush, 2006, p. 434). Clearly the way that psychological empowerment is implemented has an influence on how much innovation can be achieved. A leadership model for innovation in the Bahraini banking sector. The most recent scholarship on leadership theory is beginning to synthesise some of these earlier ideas and apply them more specifically to an emphasis less on effectiveness and more on innovation. Other dimensions such as ethics and moral reasoning are being brought into the debate (Sivanathan and Fekken, 2002). There is also some much needed consideration of the role of those who follow, and the need for them to become more and more self-regulated, and less dependent upon supervision and guidance from team leaders. (Prati et al., 2003). In the most up to date studies a wider range of empirical evidence is being considered, for example using samples from organisations in Greece, (Xenikou and Simosi, 2006), Korea (Shin and Zhou, 2003), Kenya (Mwangi, Mukulu and Kabare, 2011) and even Afghanistan (Kaifi and Mujtaba, 2010). There is very little literature on the challenges facing the banking sector in Bahrain, however. A few studies have looked at the particular needs of banking (Bantel and Jackson, 1989) and also of Islamic banking and its particular challenges (Omar and Abdel Haq, 1996; Iqbal and Molyneux, 2005). There is one useful case study investigating awareness and implementation of Customer Relationship Management (CRM) in a Bahrain bank where it was found that there were two main barriers to an effective implementation of this technique, namely “info-phobia” which means that customers do not want to release any personal information to the bank, and a problem of scattered data which is not well stored and therefore inaccessible to managers. (Al-Alawi, 2004, p. 384) There is still much to be done to ensure that appropriate lessons from the international literature are drawn and applied to this sector. Research Questions 1 Which leadership style is currently the most popular in the Bahrain banking sector? 2 How well developed is transformational leadership in the Bahraini banking sector? 3 What can be done to improve innovation in the sector? 4 How can psychological empowerment be enhanced in the Bahraini banking sector? Research Purpose The main purpose of this research is explore the issue of leadership and determine how it is currently being used to promote innovation in Bahraini banking system. The risks as well as benefits of innovation will need to be evaluated, and a detailed exploration of the strengths and weaknesses of current practices in Bahrain. A second purpose is to look carefully at the different components of transformational leadership and to to determine which ones are appropriate and necessary in this specific sector. This includes aspects of emotional intelligence which appear to be well developed in those who hold leadership roles in Bahraini banks but there may be others, such as psychological empowerment which are not so much used. This area will be examined carefully in the light of the traditional culture of Bahrain, and the special nature of banking businesses operated from this island location in the Arabian Gulf region. This entails looking at the rather conservative approach which has been moderately successful so far in Bahrain, and judging whether a continuation of this steady but slow development will be able to supply the innovation that is needed. Thirdly the paradigm of transformational leadership will be explored with specific reference to strategies for implementation widespread application in the Bahraini banking context. This entails looking at first at the general theory of transformational leadership and its aims and methods as it was first conceived. After that the application of transformational leadership principles is examined, with reference to a number of international contexts. In this section the barriers to implementation, and the drawbacks of transformational leadership are examined, along with its obvious benefits, especially in connection with innovation. Finally specific recommendations are made on the most effective ways of introducing psychological empowerment into the Bahraini banking sector. The possibility of combining existing theories in a unique way is explored, so that the best of international theories can be adapted in a way that reflects the particular needs of this sector in its own geographical and cultural location. Research Gap Emotional intelligence and transformational leadership are generally accepted as being valuable in modern organisations, and their role in helping promote innovation has also been explored in some, but not all business contexts. Most of the research on these areas has focussed on technology industries, education and organisations such as the military and so there is a need to apply this thinking to the banking context. There is also a tendency to assume Western Capitalist values, and little appreciation of the diversity of cultures in the world. A specific examination of these theories in the Arab states is now needed, with due consideration of the banking traditions that have been established there. The present study will help to establish whether these fairly standard theories relating to leadership and innovation are transferable across cultures, or whether they might require adjustment for different local contexts. In particular this study examines how psychological empowerment can be used to drive faster innovation in the current context of the banking system in Bahrain. Conclusion 1 Innovation is a critical success factor in the Bahrain banking sector. Description of the sector with facts and figures will show the sector is small and somewhat isolated from the global market place, both geographically and in terms of ideas. A swot analysis will show that innovation is the most critical success factor of all. A start has been made, and the goals appear to be sensible and clear, but there is still some doubt about how to achieve them. This hypothesis is true. 2 Emotional intelligence is a necessary but not sufficient requirement for improving innovation in the Bahraini banking sector. Description of Bahraini culture, and brief history of banking. Strong leaders are traditional, and they have done well so far. The scale and speed of globalisation is,however, too much for these traditional methods, and so they need to be enhanced. 3 A combination of the emotional intelligence and transformational leadership paradigms is a necessary and sufficient requirement for improving innovation in the Bahraini banking sector. More thought needed on how to demonstrate this. (fieldwork?) 4 Transformational leadership with an emphasis on psychological empowerment is the best strategy for encouraging innovation in the Bahraini banking sector. There are useful things to be gained from transformational leadership, but it may not be exactly transferable in its Western form. More work needs to be done on the role that cultural difference plays in leadership. Pscyhological empowerment in this context may take slightly different forms – this needs to be explored. Limitation Some variables in the Bahraini workplace such as gender and indigenous/expatriate relations are undoubtedly relevant to this topic, but to examine all of these in depth would be beyond the scope of this study. The focus has to be on the sector as a whole, and guiding principles for executive and senior management to consider for future planning. Future Research This research looks at innovation, and existing paradigms of leadership style that can support it, namely emotional intelligence, psychological empowerment and transformational leadership. It would be interesting to develop a new paradigm that is better suited to the context in Bahrain, and to test this in the field. The time scale for this would be years, and so it is not feasible at this point, but it would be a useful follow-up to this study. Note: need to think more about method and evidence. Suggestion: Possible small case study of a banking issue that has gone well, and another that has gone less well? Questionnaire on manager and employee perceptions on the importance of innovation, and perceptions on empowerment? References Al-Alawi, A.I. (2004) Customer Relationship Management in the Kingdom of Bahrain. Issues in Information Systems 5 (2), pp. 380-386. Andersson, R., Quigley, J. M. and Wilhelmsson, M. 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