How Leadership Affect Corporate Governance and Culture

How do leadership styles affect governance and culture?
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Leadership is a crucial aspect of any organization, as it sets the direction and tone for the entire company. The leadership styles within a board, and more importantly a management team, will impact the success of a company and organization. It sets the tone for the corporate culture and needs careful consideration for any business.

In this article, we will explore the theories behind leadership, various leadership styles and how they can affect the board, management team and overall corporate culture. From autocratic to democratic, transformational to laissez-faire, we will examine the pros and cons of each style and examine how they can be applied for corporate governance. Additionally, we will discuss how leaders can adapt their leadership style to best suit their organization’s needs and objectives. By understanding the different leadership styles, organizations can make informed decisions on who to promote to leadership positions, and how to develop the leadership skills of their current leaders. 

A brief introduction to leadership

Leadership is a complex and multifaceted topic that has been the subject of much research and debate. However, it is a topic that is confusing, with several different definitions, theories and praxis to follow. Warren Bennis, an American scholar and pioneer in the academic field of contemporary leadership studies, states that leadership is “the most studied and least understood topic of any in the social sciences,” highlighting the ongoing struggle to fully understand and embrace leadership.

While different researchers have different definitions of leadership, it is commonly defined as a process, which influences and motivates others towards a shared goal. For example, Ralph Melvin Stogdill defines leadership as “an influencing process aimed at goal achievement,” and more importantly focused on influencing a specific group of people. James Kouzes and Barry Posner similarly see leadership as a struggle, claiming that leadership is “the art of mobilizing others to want to struggle for shared aspirations.”

No matter how you define leadership, it is recognized as a crucial aspect for the success of any organization or company. In recent years, there has been some shifts in focus for leadership. One particular shift emphasizes human capital and organizational management. Another shift highlights the ongoing debate over the distinction between leadership and management. Leaders are often seen as visionaries and strategists, while managers are responsible for monitoring and controlling performance and maintaining order in an organization. Some researchers argue that leaders and managers have distinct roles and responsibilities, while others believe that leadership and management are complementary and cannot be separated in practice.

The evolution of leadership theories – a walk down memory lane

In this section we will dig deeper into the different theories regarding leadership types and how it has changed over time.

1. Historical leadership theories

Theories about leadership have evolved over time as societal and organizational changes have influenced the way leaders approach their roles. When the first theories formed in the mid 1800’s there was a focus on leaders being born into their roles. These theories are called ‘The great man theories’, which emphasizes that leadership cannot be trained. Over time, these theories developed from focusing on the person as a leader, and to focusing more on the characteristics and traits of a good leader. The transition paved the way for social factors being considered when discussing leadership.

From the mid 1900’s the theories emphasized leadership behaviors as a central component for good leadership praxis. Social factors, such as behavior and environment, were now in the limelight when explaining leadership roles. These theories implied that leaders were able to assess the context in which they operate to decide which ‘leadership style’ to follow. Once again, the transition to various leadership styles, opened up for more multidimensional theories of leadership. 

2. New leadership theories and its complexity

In today’s circumstances of rapid change, disruptive innovation and increasing globalization has led to a new leadership era. Instead of focusing on leadership as a unidirectional, top-down influencing process, where lines are drawn between leaders and followers. The new leadership theories highlight the complexity of leadership. 

It considers the interactions, the situations and various systems, as well as, the intellectual potential and capacity of employees. From this discipline the rise of lean strategy and agile methodology was born to deal with complexity and rapid change. The complex organizational structures of today demand directors and managers, who can be considerate to these changes, to understand the businesses to their core, and that they are able to guide employees accordingly. That leads us to another dimension of leadership related to leadership styles, when working with developing a healthy corporate culture. 

5 different leadership styles and how to navigate them

As we have described the evolution of leadership theory, we will now dig deeper into different leadership styles. We will explain when the various styles are best used and discuss the two styles most suitable for the board. 

1. Autocratic leadership style

The first leadership style is the autocratic style. In the past, the autocratic leadership style was the main and traditional one. However, as organizations have become more complex, and the workforce more diverse, the autocratic leadership style has been seen as less effective. It is a style where leaders make all the decisions and do not involve their team in the decision-making process. With that being said, an autocratic style is best used in situations where time is of the essence and a quick decision needs to be made. For example, in times of crisis and emergency situations. 

2. Democratic leadership style

The second leadership style is the democratic style, which focuses on involving teams in the decision-making process and values the input of all members. This style is best used in situations where a consensus needs to be reached and everyone’s ideas need to be considered. It also fosters a sense of ownership and commitment among team members, as they feel that their opinions are valued. Research has shown that democratic leadership also can lead to higher levels of role satisfaction and engagement. 

3. Laissez-faire leadership style

The third leadership style is laissez-faire. Laissez-faire leaders give their team members a high degree of autonomy and do not closely supervise their work. The leaders give little to no direction to subordinates and instead give them total freedom to complete their tasks. From a corporate governance point of view, the laissez-faire leadership style is often used amongst startups that do not have any defined guidelines or processes to ensure a structured corporate governance process. This style is best used in situations where the team is highly skilled and self-motivated. It can lead to high levels of creativity and innovation as team members are given the freedom to work on their own. 

4. Transformational leadership style

The fourth leadership style is transformational. Transformational leaders inspire their team like role models to work towards a common goal and also to become better people. They lead by example and set high standards for their team to follow. They focus on the individual needs of their team members and help them to set and achieve personal and professional goals. This style is best used in situations where a team needs to be energized and motivated to achieve a common goal. 

5. Transactional leadership style

The fifth and final leadership style is the transactional. Transactional leadership is a style that focuses on clear, defined roles and responsibilities, and emphasizes the maintenance of the status quo. Transactional leaders establish clear guidelines and procedures to follow and hold team members accountable for meeting established goals and objectives. They use rewards and consequences, with a clear chain of command and achieving short-term goals. This style is best used in situations where a team needs to be managed in a structured and orderly manner. 

What makes effective leadership in corporate governance?

1. Asking the right questions

The eternal question is what actually makes an effective leader when examining corporate governance. Leadership is more complex than merely possessing certain characteristics or traits. Effective leaders are those who can adapt their leadership style to suit the situation. Their leadership style depends on the needs of the organization, board or management team they are leading. Situational-based leadership skills tend to be associated with the most effective leaders.

In corporate governance, directors and managers have significant roles and responsibilities that come with certain expectations. How they respond to their team and the organization is compliant to the circumstances. Effective leadership permeates the whole organization with long-term outcomes. While on the flipside, non-efficient leadership can impact the organization in various ways. The corporate governance that sets the tone of the organization, is hence affected by the leadership style of directors and managers. Further, this is strongly correlated with the corporate culture. 

Research by Prof. Manfred F. R. Kets de Vries and Alicia Cheak illuminate just this: leadership attributes in relation to corporate governance functions and board tasks. They suggest that effective leaders have two roles: charismatic and architectural. In the charismatic role, leaders envision a better future and empower their team to work towards a common vision. This role goes in line with the transformational leadership style. In the second role that makes an effective leader, the architectural one, leaders are tied to the organizational structures, processes and systems. Something of which aligns with strict leadership styles such as the autocratic and transactional.

You can always review the effectiveness of leadership at your organization using corporate governance software.

These tools can provide thorough evaluation that you can consider moving forward.

2. Being leaders as a team

Kets de Vries and Cheak argue that both being charismatic and architectural, are vital for effective leadership. However, one person rarely possesses all of these qualities, hence team competence is key. When leaders in the corporate governance setting are able to streamline their work. They are able to influence the whole organization positively. By adapting various styles depending on context of the organization, corporate governance becomes the most important driver for impact.

This goes from any organizational changes to affecting corporate culture. For example, when an organization is going through a crisis, there is a need for strict leadership – where someone can pave the way forward and decisions have to be made without hesitation. The strict leadership role is sometimes vital for the survival of the organization as well as navigating difficult corporate governance tasks. On the contrary, the inspirational role for effective leadership is substantial in times of change. Inspiration and charisma implies hope and engagement – which is crucial for healthy and positive corporate culture. 

How can we help?

If you need guidance with your leadership we at Governance@Work can help you! We offer an online evaluation for management teams in which you will gain an understanding of your growth potential areas. Being a leader in a setting with other leaders can sometimes be a rough environment. Every member has their own opinions on how to lead. Therefore, it is important to find ways to converge for better performance. Thereby, if the management team can work more streamlined, then it will later reflect on each manager’s separate team. Ultimately, creating a positive effect in entire organization. 

Try the efficiency of your board by doing our free test here.

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