“Adding Human, Social and Financial Capital to Your Organization

Through Transformational Leadership”

Dr. John J. Sosik

How do business professionals add value to their organizations? What leadership skills
do organizations, clients, and staff require from business professionals? Whether you
work for an organization or own your own business, these are questions that you need to
consider to be successful.

Consider the Enron, Worldcom and Arthur Anderson cases. Suddenly leadership and
ethical fiascos have come to the forefront, and no wonder. With our business school
training and MBAs, we’ve been well-trained when it comes to methods for adding to and
accounting for financial capital. Where we fall short is on the people or social side,
despite attempts by the business schools to highlight the importance of behavioral issues
on professional examinations and in continuing professional education.

Why is this important? Those of you who are familiar with the Balanced Scorecard as a
strategic performance measurement system will recognize that research shows that
behavioral issues, such as developing employee knowledge, skills and abilities, and
relationships with clients, colleagues and subcontractors, are lead indicators that drive the
financial or lag indicators of performance. This is certainly true for organizations such as
Vanguard, GE, Lockheed Martin, and the US Army who’ve found success with the
balanced scorecard and sharing leadership responsibilities with their associates.

In this column, we examine what it takes to add value to financial, human and social
capital through leadership that can be trained and build into an organization’s culture to
ensure success.

Leadership affects organizational performance. During his 20 year tenure at GE, Jack
Welch added $321 billion in economic value for his shareholders. He did this by re-
focusing GE units to be first or second in their industry or to get out, slashing costs and
laying off people, and then promoting extensive training and organizational development.
Do these results seem outstanding? Did “Neutron Jack” put his predecessors to shame?
But there is someone a lot less famous who put “Neutron Jack” to shame. Any ideas who
this is?

Most of us are probably not familiar with Darwin Smith. Smith was CEO of Kimberley-
Clarke from 1971 until 1991. Before 1971, Kimberley-Clark was a stodgy old paper
company whose stock had fallen 36% behind the general market over the previous 20
years. But under Smith’s leadership, Kimberley-Clarke generated cumulative stock
returns 4.1 times the general market, easily beating its rivals Scott Paper and Proctor and
Gamble, and even outperforming GE.

What was the secret to Smith’s leadership? He possessed what we have found in our
research to be associated with the highest levels of leader performance: a clear vision,
strong will, and a commitment to employees and customers.

These examples suggest that leadership of great organizations requires the development
of it’s assets. The financial capital assets need to be developed through wise investments
and operational efficiency. How you get there is the job of your associates. Leadership
has only indirect effects on financial capital. And these effects occur through your people,
processes, and business relationships. The human capital assets need to be developed
through training and development of the knowledge, skills and abilities of your
associates. The social capital assets need to be developed through sharing knowledge,
building teams, sustaining high quality relationships with your customers, clients and
suppliers.

Why should you care about leadership and the development of associates? Here are two
good reasons. First, leadership is increasingly being shared through empowerment,
teams, joint ventures, and the Internet. Organizations have increasingly empowered their
employees with the decision-making authority and confidence to help direct their
organizations. Today, with the emergence of on-line customer support systems, the idea
of empowerment has been pushed right out the organization’s door in order to empower
customers to provide information about how to better design processes and products. As
Steve Ballmer, CEO of Microsoft says, “When you are lost, ask your customers.”

Second, certain leadership styles are more effective than others in producing high levels
of individual, group and organizational performance. And that high performance can be
used for either constructive or destructive outcomes. Saddam Hussein’s leadership has led
to the murder of hundreds of thousands of people, two wars and the support of terrorism
in Israel and the United States. Former WorldCom CEO Bernie Ebbers represents how
leadership can have devastatingly destructive effects for shareholders, employees,
pensioners, and the entire financial market.

More constructive and positive forms of the leadership are seen with leaders like Herb
Kelleher and his influence when he was CEO of SouthWest Airlines. He smoked, arm-
wrestled to settle a dispute with a competitor, considered his favorite color to be Bourbon
(as in “Wild Turkey”), rapped in music videos, and his employees still worship the
ground he walks on. Known for his sense of humor and “culture of fun,” he’s nobody’s
fool. A trained attorney, Kelleher has turned his “warm and fuzzies” into cold hard cash.
While other airlines are filing for Chapter 11 bankruptcy, Kelleher has made SouthWest
Airlines one of the most profitable airlines for the last 15 years.

Now you’re probably saying, “These are all world-class famous leadership examples.
What does leadership have to do with the common man or woman?” A lot. Take for
example, Beth Bloom Gardner, a common entrepreneur who gives back to the Columbia
County region of Pennsylvania with outstanding community service. The entire
downtown Bloomsburg revitalization and centennial programs rests on her shoulders.
Leadership can happen at any level.

In each of these examples, the leader struggled with specific leadership challenges, just
like you do everyday. What leadership challenges do you face?
Chances are your challenges illustrate the difference between managers and leaders,
which is an important distinction because they have different roles and often approach
organizational tasks and objectives differently. Management is planning, directing and
controlling that organizes and structures its resources to properly carry out its plans. In
contrast, leadership promotes change to meet the rapid changes in markets and
technology and inspires commitment, loyalty and involvement to accomplish a mission
articulated by the leader. Management would be sufficient if the business world was
relatively stable, relationships in business weren’t important, and employees were self-
motivated and not self-centered. This isn’t the case and leadership is needed to address
these conditions.

Since leadership is required for operating in today’s business conditions, let’s look at
what makes up leadership from a few different angles. First, leadership is the way you
look at life, a philosophy. We each have a mental model of the way leaders should
behave, based on our beliefs and life experiences. Is your life all about what you can do
for your own benefit OR is it about what you can also do for others? Bernie Ebbers had a
self-centered leadership philosophy, whereas Sam Walton of Wal-Mart had a more other-
directed leadership philosophy.

Leadership is a life role. Those of you who are parents realize that parenting is probably
the most important life role you will play…and good parenting is probably the purest
form of leadership.

Leadership is a developmental process. It’s a life-long learning experience that evolves

over time. As we mature, our perspective on life changes, we experience different events
and all this influences how we interact with our associates, customers, family and friends.
How you led as a 22-year old right out of college is probably different from how you lead
today as a middle-aged professional.
Leadership is a set of behaviors. Behaviors are actions that can be learned and adapted to
specific situations. And they have definite effects on people like your employees,
customers, clients and associates. For example, George Patton’s inspirational leadership
motivated and influenced the Third Army to be loyal and committed to his objectives.

Leadership is also a social system. It has three main components that influence each
other. First is the leader, with his or her unique personality, motives, attitudes and
behaviors. And then we have the followers, with their personal agendas and baggage,
motives and personalities. They really can make things interesting! And finally, we have
the context or situation, where the leader and followers interact to get the work done. To
what extent did the capital market structure and our culture influence the behavior of
leaders and followers at Enron and WorldCom?

What is the makeup of your personal mental model of leadership? Think of a leader who
has significantly influenced you. In what situation did she influence you? How did he or
she behave? What were his or her effects on you and others?

Chances are that quite a few of the leadership ideals from your life experiences or mental
models of leadership map directly onto the Full Range Leadership model developed by
Bernard Bass of the State University of New York at Binghamton and Bruce Avolio of the
University of Nebraska. We have studied and validated this model for the last 20 years
with leaders from the military, industry, and non-profit sectors in countries all over the
world. Some of what you have described represent management behaviors, which our
research has found to be passive and less effective. And some of what you have described
represent leadership behaviors, which our research has found to be active and quite
effective.

Think of Bass and Avolio’s model as a tool that you can use to understand your full range
of leadership behavior. According to the model, each of us has a repertoire of leadership
behaviors that we can display. We display these behaviors in various frequencies
depending on our mental model of leadership, our personalities and the situations we are
in. We can avoid leadership and be passive. Or we can use leadership to correct things as
required. We can actively exchange rewards for our employees’ performance. Or we can
actively promote changes in people, processes, groups, and entire organizations. We have
found that leadership that is passive is generally ineffective, and leadership that is active
is generally effective. The most effective leaders display the active forms of leadership
more frequently than they display the passive forms of leadership.

Let’s take a closer look at how you can develop your leadership and the potential of your
associates by understanding the passive and active forms of leadership and how they
influence individual, group and organizational performance. The most passive and
ineffective style of leadership is Laissez Faire leadership, where the leader avoids getting
involved, making decisions, and dealing in chronic problems, is absent when needed, and
delays and fails to follow up on tasks. This leadership style generally results in very low
levels of follower performance, motivation, and satisfaction.

A somewhat more effective style is Passive Management-By-Exception leadership where

the leader intervenes only if standards not met, waits for things to go wrong before taking
action, and believes “if it ain’t broke, don’t fix it.” A more active and effective style is
Active Management-By-Exception leadership where the leader closely monitors work
performance for errors, focuses attention on mistakes, complaints, failures, deviations,
infractions, and arranges to know if and when things go wrong. The problem with the
management-by-exception styles is that they can promote fear and mistrust in followers,
and a focus on maintaining the status quo rather than innovation.

An effective and active style of leadership is Transactional Contingent Reward leadership

where the leader uses goal setting and contingent rewards to influence followers. Here the
leader clarifies followers’ expectations, discusses specifically expected outcomes and
performance targets, and uses rewards to reinforce the positive performance of followers.
However, such extrinsic motivation can make followers feel manipulated and does little
to develop their knowledge, skills and abilities.
The most effective leaders add transformational leadership to transactional leadership and
get their followers to perform beyond expectations. Transformational leaders are
individually considerate to their followers and customers. They spend time listening,
teaching and coaching. They treat others as individuals with different needs, abilities and
aspirations. They also help others to develop. For example, Unisys CEO Larry Weinbach
is a staunch believer in developing the full potential of his people. He has promoted
employee development with mentoring programs, knowledge management systems, and
Unisys University, which offers a wide variety of technical, leadership, team building and
personal development courses for Unisys employees.

Transformational leaders intellectually stimulate others to reexamine assumptions, seek

different perspectives, look at problems in new ways, and encourage non-traditional
thinking and re-thinking to break through inappropriate or outdated business models. For
example, Hewlett Packard CEO Carly Fiorina is known for her work with technology and
corporate makeovers. She has transformed Hewlett Packard from a slow-moving
engineering company to an Internet champion. Her best leadership quality is that she
performs creatively and is a risk-taker.

Transformational leaders also inspire their followers and role model organizational
values. They speak optimistically and enthusiastically, articulate an inspiring or evocate
vision, expresses confidence, and champions teamwork and high standards of
performance. Apple Computer CEO Steve Jobs is a transformational leader who
challenges his people to attain high levels of success, empowers them to feel stronger,
more confident, more competent and more in control of their destinies. Together with
Steve Wozniak, he created Apple and led the development of the highly successful
MacIntosh computer in 1984. After that, he left the company to start Next, and then
returned to resurrect Apple with the Imac and other innovative products in the late
1990’s.
The Virgin Group’s CEO Richard Branson is another good example of a transformational
leader. Branson is an adventurous and innovative leader who holds high expectations of
performance and ethical behavior for his associates. As a result, he is a dashing role
model for his employees. His inspirational speeches energize people to achieve more than
they expect. He constantly toys with new ideas for products, companies, and things that
will deeply satisfy his customers. And lastly, he treats his employees as unique
individuals who are trustworthy and capable of sharing his leadership.

Like Branson, you need to role model, inspire, innovate, and mentor your people to
achieve the high levels of individual, group and organizational performance and
satisfaction necessary to succeed. How can you build transformational leadership and its
positive effects into your organization’s culture? How can your organization reap the
benefits of transformational leadership? It’s an easy two-step process: (1) survey
assessment of your leadership as seen by your superiors, peers, subordinates, and
yourself, and (2) Full Range Leadership training.

In today’s troubled economy, its time we started adding more assets to our balance
sheets… the human and social capital assets built through transformational leadership. If
you want to add value to your organization’s capital, then transformational leadership is
one investment you can’t afford to write-off.

About the Author

John J. Sosik (Ph.D., State University of New York at Binghamton) is an associate

professor of management and organization at The Pennsylvania State University,
Great Valley School of Graduate Professional Studies, where he has received awards
for excellence in research, faculty innovation and teaching. Dr. Sosik teaches
organizational behavior, leadership and managerial accounting classes. His research
focuses on leadership processes in face-to-face and computer-mediated environments,
groups/teams and mentoring issues. He is an expert on transformational leadership,
having published over 50 articles and book chapters and delivered about 35 academic
conferences presentations since 1995, conducted training and organizational
development programs, and serves on the editorial boards of The Leadership
Quarterly and Group & Organization Management. He is the lead author of the
forthcoming book, The Dream Weavers: Strategy-Focused Leadership in Technology-
Driven Organizations (Information Age Publishing). Dr. Sosik recently was awarded
a grant from the National Science Foundation to study e-leadership of virtual teams at
Unisys Corporation. He is also a Certified Public Accountant in Pennsylvania and a
Certified Management Accountant.