Transformational Leadership in the Financial Services Industry

Introduction and Background

To understand the role of leadership in the financial services industry, it is important to discuss the history and background of leadership and how leadership has manifested in banking. This section provides a brief explanation of that history, defines leadership, and discusses both transactional and transformational leadership before describing the central topic of this proposal: transformational leadership in banking.

The history of leadership theory is one in which many frameworks have developed over time, from Great Man Theory to Trait Theory to Transactional and Transformational Theories. The continuous evolution of leadership theory occurs because leadership is such a unique phenomenon that it has prompted researchers to reassess previously held assumptions based on new evidence uncovered by new studies year after year. Great Man Theory, which posited that great leaders are born, gave way to Trait Theory, which posited that great leaders share common traits and characteristics. Gradually, this theory gave way to more precise analysis of how leaders interact with followers in different environments, what challenges they face, and how they overcome them. Leadership scholars have thus endeavored to explain leadership in ever more fundamental terms.

Defining Leadership Styles

De Vries (2010) has noted that there is a strong relationship between communication styles and leadership styles. The six main communication styles found in a work environment are verbal aggressiveness, precision of speech, expressiveness of voice, assuredness of manner, supportiveness in feeling, and persuasive argumentativeness (De Vries, 2010). Each of these styles can contribute to the success of a leader in managing, supporting, motivating, and building relationships with followers. The more precise a leader is with words, the clearer the understanding of followers tends to be. The more supportive a leader shows himself or herself to be, the more positive the feelings of followers are. The more persuasive the leader is, the more likely followers are to accept the vision presented to them. Whether one is a transactional or a transformational leader, communication is deeply linked to leadership effectiveness (Sethuraman & Suresh, 2014).

Transactional leadership is one of the more common approaches in the business world today. It is based on a system of rewards and punishments. In a work environment context, a transactional leader is defined as one who adopts a goal-oriented attitude to motivate workers, doling out rewards or punishments based on workers' performance (Belias & Koustelios, 2014). The theory of transactional leadership is based on the idea that followers follow because they are incentivized to do so by the leader. However, one of the main problems with this approach is that it does not emphasize relationship building between the leader and the follower. The worker's incentive to follow is based on extrinsic rather than the more powerful intrinsic motivational factors.

There are many examples of famous leaders in history who may be labeled as transformational leaders, but one must be careful to recognize what is known as the pseudo-transformational leader. Pseudo-transformational leaders have an ill-spirited agenda. Many leaders with charismatic personalities tend to be discussed in the context of transformational leadership, because transformational leaders are often imagined to be charismatic, energetic, spirited, and revolutionary. For this reason, the typical range of figures described as transformational leaders extends from Jesus Christ to Adolf Hitler and Jim Jones and everything in between. However, leaders who lack a positive agenda must not be included in the spectrum of transformational leaders, for they are pseudo-transformational leaders. They advocate for negative change rather than for positive, constructive change (Cote, 2017).

Transformational leadership is a model that can be used within all industries in which group leaders help to motivate and inspire their employees and colleagues. This style of leadership is used to create beneficial change and successful results by increasing motivation within the work environment. The transformational leader must be able to communicate a vision, generate support for that vision among workers, motivate them to work toward that vision, and provide them with the tools, knowledge, and means of achieving the goal. It is a particularly useful style in change management situations, though some resistance from workers attached to established practices may be expected.

Research has shown that in today's era of competitiveness, transformational leadership is the most effective style for achieving competitive results (Indira, 2018). Transformational leaders embrace change and encourage feedback through behavioral changes and open-mindedness among workers. Walumbwa (2005) shows that even in situations involving cultural differences, transformational leadership can be successful. This style assumes that employees are the most valuable assets of an organization and that, to realize that value, their commitment level needs to be increased. Transformational leadership style is one of the determining factors that can influence the commitment level of the workforce (Riaz, Akram & Ijaz, 2011).

Transformational Leadership in Banking

Transformational leadership in the banking sector is the focal point of this paper. The author has observed a lack of motivation and encouragement among workers within the banking industry and believes that this lack of motivation leads to a sense of complacency and undesirable results for the firm.

Iqbal (2016) demonstrated that within the banking sector, transformational leadership can help reduce organizational politics and therefore increase the commitment and motivation of workers. The results from this research validate that through embracing a transformational leadership style, upper management may also find their work more satisfying. When subordinates are engaged with their jobs, they perform far better, which in turn satisfies superiors. This atmosphere benefits everyone and ultimately leads to greater organizational effectiveness (Abouraia, 2017).

In the current economic environment, finding new ways to motivate employees through traditional financial means has become increasingly difficult. Gone are the days of large monetary bonuses for anyone outside the top ranks of big banking. The typical employee in the office no longer feels a meaningful financial reward at the end of the year. That being said, leaders must find alternative ways to motivate subordinates. Based on the research reviewed in this paper, it is evident that transformational rather than transactional leadership offers the best way forward. Indeed, Kark (2003) shows that transformational leadership in the form of recognition and approval promotes empowerment in the employee, giving the worker a sense of psychological assurance and the ability to work with confidence and productivity.

A lack of motivation, encouragement, and innovation are key characteristics missing from many banking work environments today. With regulations becoming stricter over the years, the financial services industry has had to contend with the strain of lowered profitability. Due to a lack of resources industry-wide, innovative spirit has diminished. The one resource still available to management is the pool of talented staff. Tapping that potential is the central problem faced by leaders in the industry today.