Transformational Corporate Leadership

you.

Chapter 1

The History of A Corporation

The word corporation derives from corpus, the Latin word for body, or a body of people. In the late seventeenth century, Stewart Kyd, the author of the first treatise on corporate law in English, defined a corporation as, a collection of many individuals united into one body, under a special denomination, having perpetual succession under an artificial form, and vested, by policy of the law, with the capacity of acting, in several respects, as an individual, particularly of taking and granting property, of contracting obligations, and of suing and being sued, of enjoying privileges and immunities in common, and of exercising a variety of political rights, more or less extensive, according to the design of its institution, or the powers conferred upon it, either at the time of its creation, or at any subsequent period of its existence.

Entities, which carried on business and were the subjects of legal rights, were found in ancient Rome, and the Maurya Empire in ancient India. In medieval Europe, churches were incorporated in the same manner as local governments, such as the Pope and the City of London Corporation. The point was that the incorporation would survive longer than the lives of any particular member, existing in perpetuity. The alleged oldest commercial corporation in the world, the Stora Kopparberg mining community in Falun, Sweden, obtained a charter from King Magnus Eriksson in 1347. Many European nations chartered corporations to lead colonial ventures, such as the Dutch East India Company or the Hudson’s Bay Company, and these corporations came to play a large part in the history of corporate colonialism.

The historical process has produced five functions discussed below that characterize the modern corporation. Corporations have emerged as...

1. Passive devices that hold property

2. Structures designed to exert monopoly control over and regulate a domain of specialized knowledge and skill

3. Means designed to pool capital and resources including human resources

4. A legal shield that protects owners and investors from liability and helps to spread and distribute financial, moral, and legal risk

5. Organizational decision-making structures that subordinate and synthesize the actions of human agents to bring about collective goals such as building a railroad, designing and manufacturing automobiles, and pursuing legitimate business ventures.

Passive Devices That Hold Property

When the abbot of a medieval monastery died, public officials had difficulty determining to whom its property, wealth, and resources passed. While this is hard to conceptualize from a modern standpoint, during the Middle Ages, no legal distinction could be made between

1. Managing property owned by others,

2. Exercising stewardship over property owned by others, and

3. Owning property.

Moreover, the concept and practice of owning property is complex. Property in its modern sense has been spelled out as a bundle of distinct rights including as Des Jardins puts it, the right to possess, control, use, benefit from, dispose of and exclude others from the property (P. 37). These distinct rights are not given as entailments of a natural concept of property but represent legally endowed capacities designed to respond to specific practical problems. So, to return to the problem created by the death of the abbot, a legal entity (called the church) was created and endowed with one of the bundled rights accompanying the notion of property, namely, the right to possess and hold property (Stone, 1974).

Structures That Exert Monopoly Control And Regulate A Domain Of Specialized Knowledge And Skill

Those familiar with European history know that the university came to be from student guilds. Students banded together to hire noted scholars willing to teach their research. Other guilds were formed around practical occupations as butchering or shoe making. Eventually, guilds evolved to address a series of practical problems:

1. How to educate individuals concerning the skills and knowledge required by the practice,

2. How to identify those responsible for the improper practice of the craft,

3. How to control who could and could not participate in (and profit from) the craft, and

4. How to regulate the craft to promote the interests of its practitioners and its beneficiaries or clients.

Guilds became responsible for controlling the privileges of a trade, establishing rules and standards of practice, and holding courts to adjudicate grievances between participants. (Stone: 11-13)

A Set Of Means Specially Designed To Pool Capital And Resources Including Human Resources

As business ventures became more ambitious, their successful execution required raising considerable funds and capital along with the coordination of the activities of diverse human agents. Organizational structures were created slowly over time to raise money, acquire capital, and manage these complex ventures. This included creating roles that were coordinated through complex organizational systems. The distinction between the owner and manager functions, so crucial to the structure of the modern corporation, emerged slowly during this period. Owners provided money and capital and determined the overall goals pursued by the organization. On the other hand, managers carried out administrative tasks that dealt with day-to-day operations. The moral and legal duty of the managers was to remain loyal to the aims and interests of the owners. Unchartered joint stock companies served as proto-corporations that generated capital, protected monopolies of trade and craft, and managed complex ventures such as importing spices and tea from the Orient. As these structures evolved, they increasingly embodied the important distinction between the ownership and management functions.

Providing A Legal Shield To Limit Owner And Operator Liability

Scandals in 18th century Great Britain revealed another set of problems besetting the emerging corporation. When the unchartered joint stock company, the South Sea Company, went bankrupt, all the investors and owners found themselves responsible for covering the huge debt created when risky investments and questionable ventures went sour. This debt went well beyond the resources of the investors destroying their personal fortunes and placing many of them in debtor’s prison. The specter of unlimited liability scared off potential investors and set back the development of the corporation. It became necessary to endow joint stock companies with powers and devices that limited and distributed financial, moral, and legal risk. (Both owners and managers required protection albeit in different ways.) Individuals would invest in joint stock companies only when the associated risks became manageable and widely distributed.

Organizational Structure That Subordinate And Synthesize The Actions Of Human Agents

Negatively, the development of the modern corporation was facilitated by creating a shield that limited the liability of owners and managers. Liability for owners was limited legally to the amount invested. Liability for managers required proving that they failed to remain faithful to the interests of the stockholders, the principals or originators of their actions. This broke down into demonstrating failure to exercise sound business judgment by, among other things, allowing outside, competing interests to corrupt their business judgment. Positively, the corporation emerged out of a series of legal innovations designed to establish and then control the collective power of corporate organizations. Complex organizational structures were created that designed differentiated roles filled by employees. These structures were helpful to channel the activities of employees toward corporate ends. The investor role stabilized into that of stockholders who owned or held shares of the corporation. To promote their interests and to establish the cardinal or fundamental objectives of the corporation, the stockholders elected representatives to serve on a board of directors. The directors then appointed managers responsible for running the corporation and realizing the interests and objectives of the stockholders. Managers, in turn, hired and supervised employees who executed the company’s day to day operations (line employees) and provided expert advice (staff employees). These roles (and the individuals who occupied them) were related to one another through complex decision- making hierarchies.

Modern Corporations

The modern corporation dates back to 1601, when Queen Elizabeth I created the East India Trading Company. At the time, the concept of a corporation was quite different than today. Corporations were small, quasi- government institutions chartered by the crown for a specific purpose. The idea was to bring together investors interested in financing large projects, such as exploration. Kings and queens kept a close watch on these corporations and didn’t hesitate to revoke charters if they weren’t happy with the way things were being run. The investors were responsible for any harm or loss caused by the company.

By the end of the 19th century the forces of limited liability, state and national deregulation, and vastly increasing capital markets had come together to give birth to the corporation in its modern-day form. The decline of restrictions on mergers and acquisitions encouraged a wave of corporate consolidation: from 1898 to 1904. The 1800 corporations in the US were consolidated into 157 paving way for the modern corporate era.

The 20th century saw a proliferation of enabling law across the world, which helped to drive economic booms in many countries before and after World War I. Starting in the 1980s, many countries with large state- owned corporations moved toward privatization, the selling of publicly owned services and enterprises to corporations. Deregulation (reducing the regulation of corporate activity) often accompanied privatization as part of a laissez-faire policy. Another major postwar shift was toward the development of conglomerates, in which large corporations purchased smaller corporations to expand their industrial base. Japanese firms developed a horizontal conglomeration model, the keiretsu, and this was later duplicated in other countries.

Corporations became full blown legal persons. They acquired legal standing (can sue and be sued), have been endowed with legal rights (due process, equal protection, and free speech), and have acquired legal duties (such as tax liabilities). The state regulated the powers of the corporation through the founding charters. The founding charters served roughly the same function for a corporation as a constitution did for a state.

References And Bibliography

1. Des Jardins, J.R. (1993). Environmental Ethics: An Introduction to Environmental Philosophy. Belmont, CA: Wadsworth Publishing Company.

2. Kyd, S. (2006). A Treatise on the Law of Corporations. (vol. 2). Clark, NJ: The Lawbook Exchange.

3. Stone, C. D. (1975). Where the Law Ends: The Social Control of Corporate Behavior. Prospectr Heights, IL: Waveland Press.

Chapter 2

Definitions Of Transformational Leadership

Transformational leadership is a type of leadership style that leads to positive changes in those who follow. Transformational leaders are generally energetic, enthusiastic and passionate. Not only are these leaders concerned and involved in the process; they are also focused on helping every member of the group succeed as well. It is a leadership style where one or more persons engage with others in such a way that leaders and followers raise one another to higher levels of motivation and morality (Downton, 1973).

Bass (1998) defines transformational leadership as leadership that creates valuable and positive change in the followers. A transformational leader focuses on transforming others to help each other, to look out for each other, be encouraging, harmonious, and look out for the organization as a whole. In this leadership, the leader enhances the motivation, moral and performance of his follower group. Transformational leadership occurs when leaders broaden and elevate the interests of their employees, when they generate awareness and acceptance of the purposes and the mission of the group and when they stir their employees to look beyond their own self-interest for the good of the group.

The History Of Transformational Leadership

James MacGregor Burns (1978) first introduced the concept of transformational leadership in his descriptive research on political leaders, but this term is now used in organizational psychology as well. According to Burns, transformational leadership is a process in which leaders and followers make each other to advance to a higher level of moral and motivation. Burns related to the difficulty in differentiation between management and leadership and claimed that the differences are in characteristics and behaviors. He established two concepts: transformational leadership and transactional leadership. According to Burns, the transformational style creates significant change in the life of people and organizations. It redesigns perceptions and values, changes expectations and aspirations of employees. Unlike in the transactional style, it is not based on a give and take relationship, but on the leader’s personality, traits and ability to make a change through vision and goals.

Another researcher, Bernard M. Bass (1985), suggested a transformational leadership theory that adds to the initial concepts of Burns (1978). According to Bass, the extent to which a leader is transformational is measured first in terms of his influence on the followers. The followers of such a leader feel trust, admiration, loyalty and respect to the leader and they are to do more than they expected in the beginning. The leader transforms and motivates followers by charisma, intellectual arousal and individual consideration. In addition, this leader seeks for new working ways, while he tries to identify new opportunities versus threats and tries to get out of the status quo and alter the environment.

The researchers, Bass & Avolio (1993), made an empirical study, which mapped the frequent leadership styles of managers and commanders. They located the two categories (transformational and transactional leadership) on a continuum and created more stages at the passage between those to leadership styles. This model is called The full range of leadership.

The full range of leadership introduces four elements, traits or components of a transformational leader (4 I’s):

1. Individualized consideration (mentoring) - The degree to which the leader attends to each follower’s needs, acts as a mentor or coach to the follower and listens to the follower’s concerns and needs. The leader gives empathy and support, keeps on open communication and place challenges to the followers. This also encompasses the need to respect and celebrate the individual contribution that each follower can make to the team. The followers have a will and aspirations for self-development and have an intrinsic motivation for their tasks.

2. Intellectual stimulation - The degree to which the leader challenges assumptions, takes risks and solicits followers’ ideas. Leaders with this trait stimulate and encourage creativity in their followers. They nurture and develop people who think independently. For such leaders learning is a value and unexpected situations are seen as opportunities to learn. The followers ask questions, think deeply about things and figure on better ways to execute their tasks. Intellectual stimulation means inspiring people to think differently or creatively by suggesting new ways of looking at things. Transformational leaders challenge the status quo.

3. Inspirational motivation - The degree to which the leader articulates a vision that is appealing and inspiring to followers. Leaders with inspirational motivation challenge followers with high standards, communicate optimism about future goals, and provide meaning for the task at hand. Followers need to have a strong sense of purpose if they are to be motivated to act. Purpose provides the energy that drives a group forward. The visionary aspect of leadership is supported by communication skills that make it precise and powerful. The followers are willing to invest more effort in their tasks, they are encouraged and optimistic about the future and believe in their abilities.

4. Idealized Influence/Charisma – This is the highest level of transformational leadership. The leader provides communal design of vision and purpose, values and norms that gives meaning to the work. By inculcating pride and feelings of mission within the stakeholders and providing personal example, the leader enhances the stakeholders performance capabilities. The followers trust and emulate this leader, identifying with the goals. They internalize the attitudes and goals and act in this spirit even when the leader is not around. Being charismatic is like having a dynamic, energetic and commanding presence. We idealize such people. Martin Luther King is a great example.

Transformational Versus Transactional Leadership

The Transactional Leader:

Approaches followers with an eye to exchanging one thing for another … Burns

Pursues a cost benefit, economic exchange to met subordinates current material and psychic needs in return for contracted services rendered by the subordinate … Bass

The Transformational Leader:

Recognizes and exploits an existing need or demand of a potential follower… (and) looks for potential motives in followers, seeks to satisfy higher needs, and engages the full person of the follower … Burns

The leader who recognizes the transactional needs in potential followers but tends to go further, seeking to arouse and satisfy higher needs, to engage the full person of the follower … to a higher level of need according to Maslow’s hier- archy of needs … Bass

Transformational leadership is a leadership perspective that explains how leaders change teams or organizations by creating, communicating and modeling a vision for the organization or work unit and inspiring employees to strive for that vision. Transactional leadership is more about ‘managing’ i.e. helping organizations achieve their current objectives more efficiently by linking job performance to valued rewards to ensuring that employees have the resources needed to get the job done. Transformational leadership on the other hand is more about ‘leading’ i.e. changing the organizations strategies and culture so that they can have a better fit with the surrounding environment. Transformational leaders are change agents who energize and direct employees to a new set of corporate values and behavior. Although transactional leadership steers an organization onto better courses of action, the caution is for the leader not to get trapped with the daily managerial work and forget relevance and forward (vision) casting.

Transformational leaders have a clear collective vision and most importantly they manage to communicate it effectively to all employees. They inspire employees to put the good of the whole organization above self-interest by acting as role models. They also stimulate employees to be more innovative, and they themselves take personal risks and are not afraid to use unconventional (but always ethical) methods in order to achieve the collective vision.

This form of leadership goes beyond traditional forms of transactional leadership that emphasized corrective action, mutual exchanges and rewards only when performance expectations were met. Transactional leadership relies mainly on centralized control. Managers control most activities, telling each person what, when and how to do each task. Transformational leaders, on the other hand, trust their subordinates and leave them space to breathe and grow.

The following table summarizes the differences between transactional and transformational leadership.

Table: 2.1 The differences between transactional and transformational leadership

Three Fundamental Goals Of Transformational Leadership

a.) Helping staff develop and maintain a collaborative culture: Norms of collective responsibility and continuous improvement encourage people to teach each other how to do things better. Transformational leaders involve staff in collaborative goal setting, reduce isolation, use bureaucratic mechanisms to support cultural changes, share leadership with others by delegating power, and actively communicate the company’s values, norms and beliefs.

b.) Fostering staff development: Employee motivation for development is enhanced when they internalize goals for professional growth. This process is facilitated when they are strongly committed to a corporate vision. To inspire and energize people, corporate goals should be explicit and ambitious but not unrealistic.

c.) Helping people solve problems more effectively: Transformational leaders stimulate people to engage in new activities and put forth that extra effort. Transformational leaders use practices primarily to help staff members work smarter, not harder. These leaders share a genuine belief that their staff members as a group could develop better solutions than the leader could alone.

Why Transformational Leadership Is Important For Organizational Functioning

Numerous studies have shown that transformational leadership:

1. Significantly increases organizational performance

2. Is positively linked with long term market share and customer satisfaction

3. Generates higher commitment to the organization from their employees

4. Increases employee trust in management and organizational citizenship behaviours (i.e., extra-role work-related behaviours such as conscientiousness, altruism and sportsmanship that are discretionary, not related to the formal reward system of the organization)

5. Enhances employee satisfaction