The effect of transformational leadership on the profitability of Finnish firms

Purpose – The purpose of this study is to find the effect of transformational leadership in profitability in different contexts. Design/methodology/approach – Data are gathered of 200 Finnish firms. Profitability is measured by profitability ratios one to two years after the survey to take account of lagged effects. The sample is split into sub-samples with respect to four context variables indicated by prior research to be important for transformational leadership: size, competition, perceived environmental uncertainty (PEU) and research and development (R & D) effort. The effect of leadership dimensions on lagged profitability was assessed by partial least squares analysis. Findings – Factor analysis gave a five-factor solution for transformational leadership variables indicating dimensions as: challenging, enabling, visioning, rewarding and contesting. Results did show that transformational leadership has a weak general effect on profitability. Results also offer some support for hypotheses for the strong effects of transformational leadership in different contexts. Enabling has an effect in low competition context; rewarding has an effect in low PEU, low competition and high R & D contexts; and contesting has an effect in large companies and in high PEU context. Research limitations/implications – The commonly used Bass’ measurement of transformational leadership was not used here; instead, Kouzes and Posners’ modified version was in use. Factor analysis of this version resulted to the three factors only in a few loadings, even if high. Practical implications – The importance of rewarding behavior of leaders is even stronger than previously thought. Thus, managers should concentrate more on the positive feedback of followers. Originality/value – This paper fulfills a gap of research on leadership and profitability and also stresses the importance of situational variables which may affect the usefulness of different leadership styles.