Organization performance has been the focus of scholars since long. From Fortune 500 list of companies in 1992, only 120 appear in the list of Fortune 500 for the year 2007. That is, over 76% of the Fortune 500 companies disappeared from the list in 15 years, Accenture study (2007). In India, one of the most readily available organized data on performance of the business organizations is published by Economic Times, in terms of ranking of Top 500 companies in India. This is published every year so that the comparison from year to year is possible. For the purpose of this paper, 10 years’ data from the fiscal year 1995 to fiscal year 2005 was taken. These 10 years have been the years of liberalization and growth in Indian economy, marked with unprecedented and sweeping changes. This has thrown open opportunities in all sectors of economy. Organizations have had wider choices to embrace new technology, launch new products, enter new markets and become global companies. These opportunities have been available to all companies in India. Some of them made full use of these opportunities and grew very rapidly. On the other hand, a large number of companies have not been able to cope with this new liberalized competitive environment. Economic Times ranking of 500 top companies in India shows that 309 out of top 500, i.e. 62% of the companies listed in the fiscal year 1995 are no longer in the Economic Times listing of top 500 companies for the fiscal year 2005. Further, 101 out of total 500 companies i.e. 20% of the companies have declined in their ranking from fiscal year 1995 to fiscal year 2005. Only 90 companies, which are 18% of the Top 500 companies, have improved their ranking over the last 10 years. Both Fortune 500 and Economic Times 500 indicate a trend that large number of organizations are not able to sustain their success over a time period of 10 to 15 years.

 

Why does this happen? Does leadership play any role in influencing the company’s performance?

Wright Theerathom, Tu, Coilmore and Lado (1992) conclude that the leadership at the top management together with the prevailing organization culture, leading to choice of appropriate strategic option, leading to superior business performance. Ashley and Patel (2003) analyzed the data of Fortune 500 companies during 2001 and 2002. They identified 17 best-performing companies and 17 worst-performing companies in terms of shareholder returns. They found quality of management i.e. the leadership was one of the most significant factors that differentiated the company performances.

 

Strategic choices have large behavioral content in terms of cognitive base and values of the decision makers, Hambrick and Mason (1984). They have established that leaders’ assumption about future events, knowledge of alternatives, consequences and the value system has profound impact on performance of the organizations. According to Day and Lord (1988), leadership can make a difference of as high as 20 to 45% of performance in an organization. Joyce, Nohria and Roberson (2003), reported that leadership accounts for 14% variance in the firm’s performance. They established that leadership biases, experiences and preferences influence strategic choices and company performance.

Further, Hogan and Kaiser (2005), after reviewing the empirical literature on leadership and organization effectiveness, concluded that leadership is the most important factor impacting organization effectiveness.

What is leadership which has such an overwhelming impact on organizations. Stogdilll (1974) in the Handbook of Leadership defines leadership as the process of influencing the activities of an organized group in its efforts towards goal setting and goal achievement. The Webster dictionary meaning quoted by Augier and Teece (2005) defines leadership as ‘leading others along a way, guiding’. Javidan and House (2002) in their Global Leadership and Organizational Behavior Effectiveness (GLOBE) study of 62 countries define leadership as the ability to motivate, influence and enable individuals to contribute to the objective of organizations, of which they are members.

 

In this paper, in operational terms, leadership is defined as the process to motivate, influence and enable individuals to meet goals of the organizations, of which they are members.

 

As per this operational definition, leader is not leadership. Leader is an individual and leadership is a process. This paper deals with leadership that is process.

 

Leadership researches also establish that effectiveness of leadership equally depends upon nature of task, (Fiedler, 1967; House, 1971; Hersey and Blanchard, 1969; Sinha, 1990). Whittington, Goodwin and Murray (2004) established that challenging goals enhance the effect of leadership behavior on employee commitment and job performance. However, if the demand on the job becomes excessive, it may provoke the leader to adopt illegitimate means to demonstrate continued good performance. Hambrick, Finkelstein and Mooney (2005) established the effect of executive job demand on the leadership behavior.

 

Firstly, Hambrick et al. (2005) identified three major determinants of the executive job demand as task challenge, performance challenge and executive’s own aspirations. Task challenges are the conditions that make the performance of the task difficult, be it external environmental factors or internal factors such as resource scarcity or task complexity. Performance challenges arise due to various stakeholders such as firms’ shareholders, customers, government regulators or employees. Executive aspirations could be arising from one’s own need for achievement, age and tenure.

 

Research done by Hambrick et al (2005) can be best understood by the diagram below:

This Fig. 1 shows that leadership is surrounded by job demands arising out of numerous factors. These factors are rising aspiration of customers and shareholders, rapid changes in the environment, shorter product lifecycle, and high incentives. These factors surrounding the top management team create high pressure on the leadership. Pressure on the job gets further compounded by one’s own as well as the followers’ aspirations. Under such excessive pressures, the leadership often gets tempted to doing impression management or adopting unfair means to achieve the promised high achievement. Extent of job demand hence, is an important contextual variable which moderates leadership behaviour.

 

Excessive monetary reward linked to success, is another variable that moderates leadership behavior. Cannella and Monroe (1997) quoted Fama and Jensen, (1983) confirming that tying managerial remuneration to company performance induces performance orientation. However, when there is use of powerful incentive packages without sufficient institutional checks and balances, then it leads to temptations of cooking the books, Piper (2002). Hambrick et al (2005) conclude that researches have so far not been able to establish the right level of monetary reward which provides the right level of challenge without tempting the leadership toward engaging in erratic strategic choices, impression management and sometimes even illegalities. During the last decade, there has been increasingly greater focus to introduce and enhance performance-based incentive remuneration to raise the performance orientation in the organizations. If the top management team is put on excessive monetary reward, then the resultant leadership behavior may get moderated to somehow produce organization performance. This tempts the leadership to doing impression management or even adopting unfair means to achieve the targeted high goals.

Review of leadership literature also demonstrates that effectiveness of leadership is contingent upon quality of relationship between leader and subordinate, (Fiedler, 1967; Vroom and Yetton, 1973; Liden and Graen, 1980; Basss, 1999; Hersey and Blanchard, 1969; Sinha, 1990; Vaishli and Kumar, 2003).

 

 

High quality of leader’s relationship with followers leads to mutual trust and consequently increased delegation. Gerstner and Day (1997) mention that LMX (Leader Member Exchange) theory focuses on the dyadic exchange relationships between the leader and the follower. Jenssen and Van Yperen (2004) in their research in a Dutch firm found that high quality exchange relationship consists of mutual trust, respect and obligation. Wang, Law, Hackett, Wang, and Chen (2005) in People’s Republic of China, observed that transformational leadership behavior positively impacts quality of leader-member exchange, which in turn positively impacts organization citizenship behavior as well as task performance of the subordinates. Brower, Schoorman and Tan (2000) established relationship between trust and leader-member exchange. They concluded that leaders with high mutual trust tend to take higher risk and in turn do higher delegation. Lord and Brown (2001), in their research found that followers’ mental model about themselves and the leader’s, moderates the nature of relationship they will have with the leader and what will be effective leadership behavior, as shown in Fig. 2 as follows.

 

It shows that leader with high quality (HQ) of relationship with followers will be able to influence the follower’s mental model and hence have higher effectiveness. But if the quality of leader-follower relationship is of low quality (LQ), then leader may not be able to influence the follower’s mental model. Hence, leader’s effectiveness will be low. For leadership, this means, if they have high quality of relationship with their followers, then they will be able to influence the actions of the followers, to produce desired organization performance. That is, the quality of leaders relationship with followers impacts the leadership behavior.

 

Howell and Shamir (2005) mention that followers have two distinct types of relationships with their leaders – personalized and socialized with consequences as shown in Fig. 3.

The Fig. 3 shows the consequences of the two distinguished types of relationships followers have with their leaders. Followers with personalized relationship have blind faith on their leaders. In this relationship, leader feels empowered. There is danger that leader may hijack the organization towards his own agenda. On the other hand, if followers have socialized relationship with their leaders, then their relationship is for a specific mission. Followers and leaders have constant discussion on ‘means’ and ‘outcomes’. Under this relationship, leader cannot hijack the organization, as he or she will be questioned by the followers. This implies that the nature of relationship between leaders and their followers will influence the organization performance. If the relationship is personalized, then the organization will blindly follow the goals set by the leaders. In such a scenario, the leader can hijack the organization for his own agenda, which may or may not be in organization’s interest. On the other hand, if the relationship between leaders and their followers is ‘socialized’, there will be constant discussion on ‘goals’ as well as ‘means’ to achieving them. Nature of relationship between leaders and the followers becomes another moderating variable for impact of strategic leadership behavior on organization performance.

Any organization that relies on the ability of a single person at the top is living dangerously, observes Probst and Raisch (2005). Organizational crisis, which includes both bankruptcy and a dramatic fall in market value, has increasingly affected blue chip companies in recent years. Probst and Raisch (2005) have carried out in-depth analysis of the 100 largest organizational crises during the year 2000 – 2005, to identify the root causes including the role CEO leadership played in this crisis. The diagram below shows, how the successful companies suddenly crash.

Autocratic CEO leadership in an environment of excessive growth, drives the company to uncontrolled changes by diversifying in to unrelated businesses, in order to sustain the momentum of excessive growth. This gets compounded by excessive success culture marked by excessive bonuses and internally competitive culture, all of these lead the organization to burn out and eventually crash. Similarly, in the organizations which have weak leadership suffer from lack of success culture. This results in stagnation, premature aging and financial crash of an organization.

From these researches, one finds that following factors could lead to disastrous consequences for the organization –

·         Excessive job demand

·         Excessive monetary reward

·         High quality but personalized leader – follower relationship

·         Low quality leader – follower relationship

The first two factors as we all know are getting increasingly more pronounced in Indian business context. Jobs are becoming more demanding and monetary rewards in form of performance bonuses and stock options are increasingly becoming common place as well.

In terms of quality and nature of leader-follower relationship, let us look at Indian-social culture.

Hofstede (1980) in his study of 40 countries established that Indian culture consists of high power distance which promotes personalized bureaucracy i.e. people in power decide what happens and others follow.

Javidan and House (2002) in their Global Leadership and Organizational Behavior Effectiveness (GLOBE) project surveyed over 18000 managers across 622 countries have reaffirmed that in Indian Culture, Power distance in the organizations are high.

Therefore, there is a great chance that Indian business organization will either have leadership with close personalized relationship with followers who blindly follow them or leaders who are distant from their followers.

Either of these two scenarios will further increase the vulnerability of Indian business organization.

Overall, therefore our business organizations are very vulnerable to being hijacked by powerful leaders with blind followings leading to organization crash.

From the media reports, it appears that Satyam Infotech is perhaps a recent example of such an organization crash led by powerful promoter Chairman Ramlingam Raju. He appears to have never been questioned by his management team members. They blindly followed him.

 

How do we prevent organization getting hijacked to personal agenda of leaders? First and foremost, value base is very important for a leader under such situation. Value base will be the moral compass which will guide the leader to choose the right from wrong under moments of extreme pressure and temptations.

Secondly, leader must develop a strong top management team who are totally aligned to values and mission of the organization. Such members of the top management team will have, ‘socialized relationship’ with the leader. Consequently there will be healthy climate of constant discussions and scrutiny of ‘means’ and ‘outcomes’. Probst and Raizch (2005) based on their analysis of top 100 organization crisis during the first five years of this millennium, recommend that, to avoid organization crisis, CEO needs to ensure –

·         Sharing of power with team members

·         Establish process of ‘checks’ and ‘balance’

·         Create bottom up culture that encourages constructive questioning

·         Promote trust through openness in communication

·         Promote integrity and cooperation

We need to assess the organizations on these dimensions and facilitate building appropriate processes and culture in our organizations so as to avert such disasters in future.

 

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