A longitudinal study of the effects of charismatic leadership and organizational culture on objective and perceived corporate performance

a b s t r a c t

We investigated the combined effects of charismatic leadership and organizational culture on
perceived and objective company performance using a longitudinal design. Employees
(N=1214) in 46 branches of a large Dutch bank rated branch management on charismatic
leadership, organizational culture in terms of work practices, as well as perceived
organizational performance. Objective performance data were collected twice, two years
apart. The split sample technique attenuated common source bias. Results of structural
equation modeling, in which Time 1 financial performance measures were controlled, revealed
that charisma increased financial performance; however culture did not do so. Culture and
charisma were significantly related to perceived performance, and culture and charisma were
interrelated. A longer time interval may be necessary before the effects of culture on financial
performance become apparent. The findings are discussed against the backdrop of the value of
intangible resources.

  1. Introduction
    Two types of intangible resources that are regularly noted in the scholarly management literature to explain sustainable firm
    success are leadership and culture (Schein, 1985). This study explores the questions, do charismatic leadership and organizational
    culture each add value to a firm’s performance, and what is the link between leadership and culture? Leadership has been defined
    as “the ability of an individual to influence, motivate, and enable others to contribute toward the effectiveness and success of an
    organization of which they are members” (House, Javidan, Hanges, & Dorfman, 2002, p. 5), and it is thought that organizational
    culture affects performance through a complex interplay of leadership style, business strategy, and organizational structure and
    process (Hult, Cavusgil, Delingonul, Kiyak, & Lagerström, 2007). Much of the organizational culture literature blurs the distinction
    between leadership and culture and leadership content is often included in the operational definitions of culture (Ashkanasy,
    Broadfoot, & Falkus, 2000; Marcoulides & Heck, 1993). In practice, whereas charismatic leaders can induce change through
    appealing visions, organizational cultures can, for example, act as barriers against change. These insights make clear that
    leadership and culture are two sides of the same coin.

Decades worth of leadership studies have examined the relationship between leadership styles of top management teams and
organizational performance. Meta-analyses have shown that leadership is significantly related to desirable organizational
outcomes (Judge & Piccolo, 2004; Lowe, Kroeck, & Sivasubramaniam, 1996; Waldman, Javidan, & Varella, 2004; Wang,
Oh, Courtright, & Colbert, 2011). There has also been some, albeit limited, empirical support for the effects of culture on
organizational performance (Hartnell, Ou, & Kinicki, 2011; Sackmann, 2011; Wilderom, Glunk, & Maslowski, 2000). A
recent meta-analysis of the relationship between human resources and firm performance recommended that “one set of
processes that might be particularly important to study…is the use of high-performance work practices and systems
within organizations…” (Crook, Todd, Combs, Woehr, & Ketchen, 2011, p. 451). A further shortcoming in both the
leadership and culture literatures concerns the predominant use of subjective, instead of objective organizational
performance measures. This study seeks to integrate the separate lines of research on leadership and culture, and to
disentangle the interplay between the two and their effects on organization performance. Objective and subjective
measures were used to measure performance and perceptions of organizational work practices were used to measure
culture. A longitudinal design was employed so that the causal effects of leadership and culture on objective
performance could be investigated.
1.1. Charismatic leadership and organizational performance
The meta-analysis by Lowe et al. (1996) has shown that, of the various leader dimensions, charisma has the strongest
relationship with leader effectiveness. Charismatic leaders influence employees because they are perceived as strong, effective
leaders with appealing visions (Paulsen, Maldonado, Callan, & Ayoko, 2009). According to House’s (1977) self-concept theory of
charismatic leadership, charismatic leaders articulate a vision that relates followers’ self-concepts to their roles within the
organization, and followers internalize the values associated with the vision. Charismatic leaders further enhance collective
employee efficacy by expressing confidence that followers can accomplish their collective objectives. Fluid speaking styles,
symbolic behavior, and storytelling about bold decisions, are important behaviors exhibited by charismatic leaders (Galvin,
Balkundi, & Waldman, 2010; Pentland, 2010).
Although there has been ample evidence in the leadership literature of a link between leader charisma and perceived
organizational performance, there has been much less evidence of a link with objective performance measures (Agle, Nagarajan,
Sonnenfeld, & Srinivasan, 2006; Elenkov, 2002; Lowe et al., 1996). Lowe et al. (1996) initially reported a meta-analytic mean
corrected correlation of r=.35 between transformational leadership and perceived measures of performance. Subsequently, the
meta-analysis by Judge and Piccolo (2004) showed that the estimated true score of the link between perceived performance and
transformational leadership, of which charisma is a key factor, was ρ=.26.
The relationship between charisma and objective measures of performance has been less clear. A review of the literature
uncovered 11 empirical, published studies that used objective measures of performance—measures such as percentage of
goals achieved and profit margin (see Appendix 1). Of these 11 studies, which included 14 operationalizations of objective
performance, two studies provided clear evidence of a relationship, seven studies provided tentative evidence, and two
studies failed to find a relationship altogether. Only studies 1 and 3 provided unambiguous evidence of a link between
charismatic leadership and performance. Both studies used the MLQ to measure charismatic leadership, and their objective
performance measures were used internally by the organizations to assess success. Study 1 (Howell & Avolio, 1993) reported
that charismatic leadership predicted the percentage of goals that were met within the unit, as measured one year later.
Study 3 (Geyer & Steyrer, 1998) reported that a measure of transformational leadership, which also included several
charisma items, was positively related to objective long-term performance in 20 banks such as the volume of savings and
loans; and to objective short-term performance such as the annual number of insurance products and subsidized housing
loans.
A further seven studies provided only tentative evidence of a relationship between charismatic leadership and performance
(see studies 2, 4, 5, 6, 7, 9, and 11). Barling, Weber, and Kelloway (1996) used pre- and post-test performance measures of
personal loan offerings and credit card sales and found that leaders who received charismatic leadership training performed
better than the control group, however the training and control groups consisted of only nine and eleven managers, respectively.
Three studies showed that managerial charisma was related to controllable costs, however only in small firms (Koene, Vogelaar, &
Soeters, 2002); to stock price returns, but only when business conditions were uncertain (Tosi, Misangyi, Fanelli, Waldman, &
Yammarino, 2004); and to profit margins and return on investment, but not sales growth (Waldman et al., 2004). Finally, of the
nine charisma scales used in the study by Rowold and Laukamp (2009), only the unconventional behavior scale was related to
profit.
The majority of studies cited above were not longitudinal and failed to control for prior objective organizational
performance. This is crucial because employees who knew of their organization’s objective performance may have attributed
more or less desirable behaviors to their leaders than was actually warranted (Rosenzweig, 2007). Similarly,Meindl, and Ehrlich
(1987) have described a “romance of leadership” effect and have shown that leaders received more credit for favorable
organizational outcomes than did other factors. Only studies 4 and 9 controlled for perceptions of prior objective performance.
However their results were tentative and conditional. Waldman, Ramírez, House and Puranam (2001) found that charismatic
leadership predicted profit margin only when market conditions were uncertain, and Agle, Nagarajan, Sonnenfeld, and
Srinivasan (2006) reported that charisma was related to objective measures of past performance such as stock price, return on
assets, and sales growth, but not to subsequent objective performance. All in all, actual empirical support for the effect of charismatic leadership on objective performance has been meager. Therefore, an important purpose of our study was to
investigate this effect with a more robust research design that made causal inferences possible. Based on the foregoing, we
formulated the following hypothesis:
Hypothesis 1. The charismatic leadership style of top management:
a) affects objective organizational performance, and
b) is positively related to perceived organizational performance.
1.2. Organizational culture, charismatic leadership, and performance
Recently, Sackmann (2011) reviewed 55 organization culture studies and reported that some studies showed direct effects of
culture on performance. Direct effects have been reported by Carmeli and Tishler (2004) and by Xenikou and Simosi (2006), however
the latter reported an effect on only two of four cultural traits (achievement and adaptive orientation). Direct links with
organizational performance have also been reported when cultures were competitive and innovative (Ogbonna & Harris, 2000) and
when customer-oriented cultures were combined with time-based manufacturing practices (Nahm, Vonderembse, & Koufteros,
2004). However, the effects of culture on objective performance in these studieswas difficult to assess because the construct had been
either operationalized differently or reported in an imprecise or non-comprehensive manner. A critical examination of the effects of
culture on performance has shown that findings have been tenuous at best. Wilderom et al. (2000) analyzed the relevant published
empirical studies in detail and noted the following research design weaknesses: a) the sole use of either perceived or objective
performance measures, b) the use of cross-sectional designs which make subsequent causal inferences impossible, c) failure to
control for common method variance, and d) the use of managers only as raters of the cultures and the failure to include random
samples of employees. Considering the importance of organizational culture, it is surprising that solid effects of culture on
performance have been so scarce. The present study is designed to overcome the weaknesses noted above.
One possible reason for the disappointing results is that most studies have operationalized organizational culture with surveys
that have tapped shared values and attitudes instead of work practices. Schein (1985) distinguished between underlying beliefs
and espoused values as elements of organizational culture and warned that espoused values may not accurately reflect the culture
because of the effect of social desirability. Following Schein (2011), the underlying beliefs themselves may be unconscious but are
expressed in learned responses to problems of survival in the external world and problems of internal integration. Therefore,
work practices may be better indictors of culture. An organization’s cultural practices are a separate and recognizable part of the
fabric of any organizational unit and refer to patterns in “people’s recurrent actions” (Feldman & Orlikowski, 2011, p. 1240) at the
unit-level of analysis. Organizational practices “…reflect the shared knowledge and competence of the organization…they tend to
be…viewed as the taken-for-granted-way of doing certain tasks” (Kostova, 1999, p. 309).
Hofstede (2001) showed that organizations differedmore pointedly on practices than on values. According to Hofstede (2001) the
practice, for example, of “being on time tomeetings,”more clearly discriminated organizations fromone another than did the value of
“importance of challenging work.” He noted that organizational culture was learned later in life and was therefore not as deeply
rooted as were values and attitudes. Hofstede, Neuijen, Ohayv and Sanders (1990) argued that culture could best be measured with
practices because they reflected the collective wisdom within an organization about how job duties were to be performed.
Several scholars have recommended that culture be operationalized as organization practices (Calori & Sarnin, 1991; Marcoulides &
Heck, 1993). Accordingly, we developed a set of five organizational work practices to “further elucidate the veracity of culture’s
relationshipwith effectiveness criteria” (Hartnell et al., 2011, p. 688). Thework practices used tomeasure organizational culturewere:
empowerment, external orientation, interdepartmental cooperation, human-resource orientation, and improvement orientation. The
work practices were based on a synthesis of the organizational culture literature by Van Den Berg andWilderom (2004).
Empowerment is the degree to which employees have decision latitude in their jobs. Charismatic leaders with a vision tend to
encourage employees to take greater personal responsibility towards achieving that vision (Bass & Avolio, 1993). Logan and
Ganster (2007) showed that performance improved for those business units of a large trucking company that received
empowerment interventions. Accordingly, Tsai (2006, p. 1512) found that in Taiwan “the effective use of employee
empowerment practices is positively related to organizational performance.” Spreitzer, Kizilos, and Nason (1997) found that
several dimensions of psychological empowerment were related to effectiveness while the meta-analytic review of Seibert,
Wang, and Courtright (2011) also lent support for bringing empowerment into a practice measure of organizational culture.
External orientation focuses on how firms operate in an external environment with customers, markets, and competitors. Opensystems
theory and many otherwritings about culture havemade it clear that an organization’s external orientation is reflected in its
internal functioning (Alpkan, Yilmaz, & Kaya, 2007; Ellinger, Ketchen, Hult, Elmadağ & Richey, 2008).Menguc, Auh, and Shih (2007)
have shown that charismatic leaders, through their influence on the market orientation of employees, affected a firm’s external
orientation. A meta-analysis of 56 empirical studies showed clearly that market orientation, which is a segment of external
orientation, is a determinant of performance (Ellis, 2006). Along these lines, a study in a Chinese context showed that a culture with a
strong market orientation had an indirect positive effect on new product performance (Wei & Morgan, 2004). More recently,
Yarbrough, Morgan, and Vorhies (2011) found support for the firm-performance importance of its external-orientation practices.
Interdepartmental cooperation, also known as interdepartmental integration, is the third work practice. It was selected
because horizontal differentiation is a well-known barrier to productive intergroup communication. Charismatic leaders in senior

management emphasize the common, integrative purposes of the organization, and therefore stimulate cooperation between and
among the organization’s units. Recent positive performance effects of interdepartmental integration have been reported by
Ellinger, Daughtery, and Keller (2000), Kahn (2001, 2005), and Lascu, Manrai, Manrai, and Kleczek (2006).
Many authors have considered human resource content, the fourth factor, to be a part of an organization’s culture because
human resource policies affect every employee (Coff & Kryscynski, 2011; Marcoulides & Heck, 1993). Annual employee
performance appraisals are a typical example. Bass and Avolio (1993) found that transformational leaders took responsibility for
developing their followers. Additional studies have shown that those organizations with quality-focused human resource
orientations that included training, participation in results-oriented appraisals, and career advancement through internal ladders,
had better financial and product/service performance (Akdere, 2009; Akhtar, Ding, & Ge, 2008; Sels et al., 2006). Although human
resource programs come with extra costs, those costs are often offset by productivity gains (Subramony, 2009).
Finally, the degree of improvement orientation among personnel reflects an organization’s inclination toward change.
Charismatic leaders, through their visions, often foster a culture of proactive, creative change and growth (Bass & Avolio, 1993). A
positive relationship between different continuous improvement interventions and performance has been reported in several
studies (Corso & Giacobbe, 2007; Hyland, Mellor, & Sloan, 2007; Middel, Op De Weegh, & Gieskes, 2007). For example, Total
Quality Management has been known to lower production costs and improve performance (Kenichiro, 2002).
In addition to discussing the effects of leadership and culture on organizational performance, it is also important to consider
the interplay between leadership and culture. Leadership and culture are related constructs in that they both describe social
interactions within organizations, however their effects emanate clearly from different levels-of-analyses (Yammarino, Dionne,
Chun, & Dansereau, 2005). Whereas leadership denotes the behavior of one or more individuals who act in a formal or informal
role, culture is a byproduct of group processes.
Clearly, leaders do influence a company’s culture. For example, company founders often imprint organizations with their own
personalities and behavioral patterns (Ford, Wilderom, & Caparella, 2008). And charismatic leaders tend to change the culture by
first understanding how the culture developed and then providing a vision with new shared assumptions, values, norms, and
practices. Conversely, culture may influence leadership behaviors. Leaders who appear to best represent the existing or desired
culture are often the first to be recruited from within the organization. Moreover, culture shapes managerial perceptions of events
that, in turn, affect how leaders manage (Jaskyte, 2010; Walter & Bruch, 2009). For example, managers will be more hesitant to
use an authoritarian leadership style when the culture endorses employee empowerment.
Based on the foregoing, we formulated the following hypothesis:
Hypothesis 2. Organizational cultures with more empowerment, external orientation, interdepartmental cooperation, humanresource
orientation, and improvement orientation:
a) affect objective organizational performance,
b) are positively related to perceived organizational performance, and
c) are linked to the charismatic leadership style of top management.
To summarize, we examined how leader charisma and organizational culture jointly affect firm performance, and how the two
factors are related to one another. This study differs from many previous studies in that, a) both objective as well as perceived
measures of organizational performance were incorporated, and b) work practices, instead of values, were used to measure
perceptions of culture. A longitudinal design in which measures were taken at two points in time was employed so that causal
relationships between leadership and culture, and objective performance, could be investigated. Moreover, survey responses
were split into subsamples to minimize common method variance. Finally, whereas most other studies have been conducted in
North America, this study was conducted in The Netherlands.

  1. Method
    2.1. Sample and data collection
    Data were collected from 3258 employees who worked in branch offices of a large Dutch bank—one of the 30 largest banks in
    the world. A stratified sample of 61 branches, from a population of 596, was randomly selected and grouped according to branch
    size: 30 employees or less, 31–60 employees, 61–100 employees, and 100 employees or more. The number of branches in each
    group was 20, 23, 13, and 5, respectively. The sampling procedure reduced the chance of selective sample artifacts. Questionnaires
    and prepaid return envelopes were sent to the home addresses of the 3258 employees and 1531 (47%) were returned after two
    months.
    The number of respondents per branch ranged from five to 75 with a mean of 26 and a median of 21. Questionnaires from
    branches with fewer than five respondents were eliminated because the standard errors of the means of the variables would have
    been too large to aggregate. Therefore the final sample consisted of 1509 respondents from 58 local branches. The average
    employment tenure was 9.8 (SD=2.1). Twelve percent of the respondents worked in upper management; 27% worked in other
    managerial or supervisory positions; and 61% held lower level jobs. Fifty percent were male, and 41% held a Bachelor’s degree or
    higher. The sample was representative of the entire bank, which reduced the chance of non-response bias. Several bank branches
    merged during this study which further reduced the sample to 46 branches and 1214 survey respondents

2.2. Measures
2.2.1. Charismatic leadership
The degree to which the top management within each branch was perceived as charismatic by followers was measured with
the short version of the Multifactor Leadership Questionnaire (Bass & Avolio, 1989). We used the Dutch version of the MLQ
translated by Den Hartog, Van Muijen, and Koopman (1994). In their study, factor analysis on the transformational items revealed
one single factor, on which the charisma items loaded highest. In the present study we used the 10 highest loading items.
Employees used 5-point Likert scales from 1 (very rarely) to 5 (very often) to rate how often top management in their branch
exhibited a number of behaviors. A sample item was, “Communicates a clear vision of the future.”
An exploratory factor analysis, with principal-axis factoring on scores aggregated within each branch, revealed that the ten
leadership items loaded on a single factor (see Table 1). Items 1 to 4 represented the strong leader element of charismatic
leadership whereas the remaining items focused on the value-based vision that leaders articulate. Table 2 shows that the ICC(1)
and ICC(2) values for charismatic leadership were relatively high, which indicated a high level of agreement among the
employees.
As shown in Table 2, the internal consistency of the scale with data aggregated at the branch level was .95. Cronbach’s alpha of
charismatic leadership, as computed with individual level data, was .89, which compares favorably to values reported by others
who used scales that were nearly identical to that used in the current study. Glunk (1999) reported a value of .93 at the unit level
in a sample of 46 small Dutch and German IT service organizations. Moreover, Freriks (2005) reported values of .92 in a large
Dutch electronics factory, and .95 in a sample of 747 respondents who were representative of the entire Dutch working
population.
2.2.2. Organizational culture
A pilot study was conducted to confirm the five cultural practice dimensions: empowerment, external orientation,
interdepartmental cooperation, human resource orientation, and improvement orientation. A 45-item questionnaire, taken from
Van Den Berg and Wilderom (2004), was sent to selected branch offices. One branch office from each of the four size‐categories
participated in return for a report of the results. Two hundred eighty-two employees completed the questionnaire anonymously
and the response rate was 59%. The demographic data for respondents in the pilot study did not differ materially from those in the
main study. Similarly, objective financial performance statistics showed no difference between the pilot and main samples. An
exploratory factor analysis at the individual level revealed that 28 items loaded on the five hypothesized factors. The number of
items per factor and Cronbach’s alphas were: empowerment (5/.77), external orientation (8/.83), interdepartmental cooperation
(5/.86), human resource orientation (5/.82), and improvement orientation (5/.81). Additional interviews with bank employees
yielded seven more items so that the final scale contained 35 items. Items were phrased as statements and employees rated each
item on a 5-point frequency scale from 1 (very rarely) to 5 (very often). A sample item for the empowerment factor was, “There is
room for non-managerial employees to make their own decisions.”
Scores at the branch level were aggregated for all subsequent analyses. ICC(1) and the ICC(2) were computed because a
precondition for aggregating data concerns perceptual agreement within a unit (James, 1982). James reported a median of
approximately .12 for ICC(1)s in climate studies. We followed the guidelines developed by McGraw and Wong (1996) for
calculating and evaluating the ICCs. The results presented in Table 2 showed that, with the exception of improvement orientation,
the percentages of variance explained by the other four scales of empowerment, external orientation, interdepartmental
cooperation, and human-resource orientation were acceptable and that the reliabilities of their mean scores within branch offices
were high.
A factor analysis with principal-axis factoring and varimax rotation was conducted on the aggregated data within each of the
58 branches because the items measured organization-wide characteristics. Items that loaded higher than .50 on the intended
factors were reanalyzed, yielding a five factor structure. The aggregated scores were quite stable because they were based on the

mean scores of many individuals, thus fewer cases were required than would have been the case for individual scores (Hofstede
et al., 1990). The factor analysis was repeated with data at the individual level and the resulting item loadings were the same as
those at the branch level. Factors, items, and item loadings for the final factor analysis with aggregated data are presented in
Table 3. However, the dimension of improvement orientation was not used in further hypothesis testing because the ICC’s were
too low.
Cronbach’s alphas were high for all of the five culture scales (see Table 3). Because the final scales were constructed in the
main study, the alphas may have been inflated by capitalizing on chance. The values were so high, however, that it was unlikely
that reliabilities in other samples would be low (b.70). The results were in accordance with those of Hofstede et al. (1990) that
aggregated scores tend to be very reliable. Comparable reliability values from data computed at the individual level were available
from other studies. For example, Cronbach’s alphas for the five culture scales ranged from .71 to .90 in a sample of 16 Dutch firms
and 16 Lithuanian firms (Ozorovskaja, Voordijk, & Wilderom, 2007), from .80 to .86 in a sample of 747 respondents who were
representative of the entire Dutch working population and who were employed in vastly different organizations (Freriks, 2005),
and from .71 to .78 in two British samples (Ghobadian & O’Regan, 2002; O’Regan & Lehmann, 2008).
Finally, we examined differences between managerial and non-managerial personnel on each of the four culture dimensions,
as well as among three categories of employees that served private, industrial, and internal clients. Analyses of variance showed

that, although some mean differences were significant, they were small (b.22). Therefore, we did not take these differences into
account in subsequent analyses.
2.2.3. Perceived organizational performance
A scale was created to measure perceived performance and employees were asked to rate whether their branch needed to
improve on the following criteria: a) efficiency, b) customer satisfaction, c) managerial behavior, d) professional behavior,
e) service quality, f) contact with clients, g) market position, and h) reputation. Response categories ranged from 1 (very little) to
5 (very much). Items were phrased to reduce social desirability effects and were reverse coded. Cronbach’s alpha, computed at the
branch level, was .93 for this scale.
2.2.4. Objective organizational performance
Performance data were collected at two points in time. Time 1 (T1) data were collected in the original 58 local branch offices
during the same year in which employees completed the questionnaires. Subsequently, Time 2 (T2) data were collected in 46
locations two years later. As noted above, twelve branches were deleted because they had merged with another branch office.
Objective organizational performance was measured with a single ratio in which the total profit for a specific branch within a
given year minus the return on capital was divided by the total operating costs plus depreciation. Corrections on profits and
operating costs were necessary because return on capital was not the result of banking activities in any given year, and the
depreciation of the branch’s assets constituted costs that had been paid earlier. A ratio of 1.0 for a given year meant that a branch
office had no profit. Branch office performance ratios ranged from .97 to 1.50. This ratio is widely considered to be the only
reliable financial performance measure for these local bank branches and is also used by the Dutch Central Bank when it examines
these individual branches.
2.3. Analyses
The three hypotheses were tested using LISREL8, structural equation modeling. The following fit indices were selected based
on the recommendations of Fan, Thompson, and Wang (1999): the root mean square error of approximation (RMSEA), the
standardized root mean square residuals (SRMR), and the comparative fit index (CFI). Values of the RMSEA and the SRMR up to .05
indicate a close fit between the data and the model and values up to .08 represent a reasonable fit. The CFI should be higher than
.95.
A path from Time 1 (T1) to Time 2 (T2) concerning objective performance was added in the model in Fig. 1 to test for the
effects of charismatic leadership and culture on objective performance. Granger (1969) has indicated that a causal effect can be
tested by relating an independent variable measured at T1 to a dependent variable measured at T2, while controlling for the effect
of the dependent variable at T1. Because a company’s objective performance might affect attributions of charismatic leadership,
paths from objective performance at Time 1 to perceived performance were included in the models depicted in Figs. 2 and 3.
The analyses for leadership, culture, and perceived performance required a correction for common source bias because these
data were collected from only one source, namely, employees. Following the split-sample technique (Rousseau, 1985), we
randomly divided employees from each branch into separate samples. Although it was not possible to divide employees into three
samples because some branch offices did not have enough employees, it was possible to do so for two equal or nearly equal split
samples, A (M=12.99) and B (M=13.01). Whereas scores for the culture dimensions were calculated using sample A,
charismatic leadership scores were derived from sample B. These scores were then used to assess the relationships among
leadership, culture, and perceived performance (see Figs. 2 and 3).

  1. Results
    Correlations among all measures are presented in Table 4. Whereas charismatic leadership correlated significantly with
    objective performance at T1 and again at T2, the culture dimensions did not do so. The correlation between perceived and
    objective performance at T1 was moderate and significant. Intergroup reliabilities are presented in parentheses along the
    diagonal and were derived by correlating a variable with itself using scores from split group samples A and B. As noted above, the
    improvement-orientation scale was not used in further analyses because its reliability was too low.
    Hypothesis 1a was supported because the coefficient of the path from charismatic leadership to objective performance at T2
    was significantly positive (see Fig. 1). The four culture dimensions were used as observed variables to construct the latent variable
    of organizational culture. The latent variables of charismatic leadership, objective performance at T1, and objective performance
    at T2, were constructed by fixing them to the corresponding observed variables, and then setting the error variance of the
    observed variables to 1 minus the reliability of the measure. The reliabilities used for doing so were .05 for leadership, 0 for T1
    objective performance, and 0 for T2 objective performance. The effects of culture and leadership on one another were controlled
    for because these two variables appeared in the same model. The split-sample method was used to control for common source
    bias. The test for how well the data fit the model yielded the following results: χ² (11)=11.02, p=.44, RMSEA=.007,
    SRMR=.048, and CFI=1.00. The results showed that the overall model did not differ significantly from the data and that the fit
    between the two was good.
    Hypothesis 1b was supported because the coefficient of the path from leadership to perceived performance, controlling for
    actual objective performance, was significant and positive (see Fig. 2). Split samples were used to control for response tendencies
    when measuring leadership and perceived performance. The coefficient of the path from objective performance to perceived
    performance was .29 (pb.05) which suggested that perceived performance was affected by a possible knowledge of financial
    performance. However, the fit of the overall model with the data could not be tested because the model had no degrees of freedom.

Hypothesis 2a was not supported because the coefficient of the path from culture to objective performance at T2 was not
significant (see Fig. 1). However, Hypothesis 2b was supported because the coefficient of the path from culture to perceived
performance was significant and strongly positive (see Fig. 3). The split-sample method was used once again to test the model in
Fig. 3. We controlled for prior objective financial performance because it might affect perceived subsequent performance. The
results of the fit test were: χ² (8)=7.78, p=.46, RMSEA=.00, SRMR=.05, and CFI=1.00. These results showed that the model
had a close fit and that the relationship between culture and perceived performance was strong, even after controlling for
objective performance.
An alternative model with paths from objective performance at T1 to leadership and culture was tested because objective
performance might affect perceptions of leadership and culture. The path from objective performance at T1 to leadership was
significant (β=.26, pb.05, one-tailed). However, the fit statistics were: χ² (9)=23.35, pb.01, RMSEA=.19, SRMR=.19, and
CFI=.66 which showed that this model did not fit the data. The results showed that the effect of prior financial performance on
leadership perceptions cannot be excluded on the basis of these data, but that the alternative model is a poor descriptor of reality.
An accurate test of this effect would involve measuring leadership perceptions at two points in time.
Analyses related to Hypothesis 2c revealed that all four culture scales were jointly related to charismatic leadership style. To
minimize the effects of common source variance, the four culture dimensions used scores from split-sample A and charisma was
measured with scores from split-sample B. Correlations, where N=54 and pb.01 (one-tailed), showed that leadership was
significantly related to empowerment (r=.52), external orientation (r=.61), interdepartmental cooperation (r=.36), and
human-resource orientation (.50).
It was possible that the relationship between charismatic leadership and bank unit performance was dependent on culture,
and that the relationship between culture and performance was dependent on leadership. Therefore, the interaction effect of
leadership with each of the four culture dimensions was regressed on the T1 and T2 objective performance measures as well as on
perceived performance. Leadership and a culture dimension were entered as a set in the first step of a hierarchical regression and
the cross product of their standardized scores was entered in the second step. The cross products were also standardized to
reduce multicollinearity. Eight analyses in all were conducted, however, in no instance did the cross products significantly
increase the percentage of variance explained in either the objective or perceived performance measures. These results showed
that the relationship between leadership and performance did not depend on culture, nor did the relationship between culture
and performance depend on leadership.
It may be argued that the high correlations between charismatic leadership and culture can be attributed to the overlap
between the two measures. A factor analysis with varimax rotation (N=57) on the entire set of culture and leadership items
resulted in a 6-factor solution: one leadership and five culture factors. As expected, the culture items loaded on the relevant
culture factors and the leadership items loaded on the single charismatic leadership factor. Thus, leadership and culture can be
seen as independent constructs.
We further investigated whether culture mediated the relationship between charismatic leadership and organizational
performance, and whether charismatic leadership mediated the relationship between culture and performance. Mediator effects
have been reported by Ogbonna and Harris (2000), however, they measured participative, supportive, and instrumental
leadership, as well as competitive, innovative, bureaucratic, and community culture—measures that differed substantially from
those used in the current study. We used the Sobel test because it overcomes the problems of low power, Type I error, and the
inabilities to address suppression effects and whether the indirect effect is significantly different from zero and in the expected
direction (MacKinnon, Lockwood, Hoffman, West, & Sheets, 2002). Results showed that none of the indirect effects on objective
and perceived performance was significant. The results indicated that culture did not mediate the relationship between
charismatic leadership and performance, nor did charisma mediate the relationship between culture and performance. However

the indirect effect of charisma, through the latent variable of culture, on perceived performance was marginally significant (Sobel
z=1.70, pb.10; two-tailed) suggesting a trend that may be investigated in future studies.

  1. Discussion
    The present study is one of few that investigates the relationships among charismatic leadership, organizational culture, and
    firm performance. The most important finding is that charismatic leadership affects objective company performance.
    Additionally, charismatic leadership and culture are related to perceived firm performance. Finally, the results show that
    charismatic leadership is related to the organizational practices of empowerment, external orientation, interdepartmental
    cooperation, and human-resource orientation. We are, however, unable to report that culture is related to objective financial
    performance.
    The finding that top leadership style affects firm performance supports the theory that charismatic leaders, by presenting an
    attractive vision and expressing confidence in followers, motivate their subordinates to exhibit extra effort, which in turn may
    increase financial performance. Our research design permits a causal inference because we use objective performance data at two
    points in time, over a two year time span. One might argue that performance also affects leadership style because objective
    performance might affect attributions of charismatic leadership. However, objective performance at time 2 was measured two
    years after measures of leader charisma were taken and the correlation between objective performance at Time 1 and at Time 2 is
    only moderate in size (r=.44).
    Employees who work in organizations that are managed by charismatic senior managers, with cultures characterized by
    organization practices of empowerment, external orientation, interdepartmental cooperation, and human-resource orientation,
    tend to think that their company is performing well. Because we control for objective performance at Time 1, it is less likely that
    the results can be attributed to knowledge of financial results. Also, the results cannot be affected by common rater bias because
    the raters who assess leadership and culture are different from those who assess perceived organizational performance.
    Therefore, the present study suggests that charismatic leadership and culture affect perceived performance, although reciprocal
    effects cannot be excluded. Similarly, the relationships between leadership style and the facets of culture cannot be attributed to
    common-rater bias because we use the split-sample method. On this score the research design does not allow for a causal
    inference; leadership style might affect culture and vice versa. Nevertheless, it is noteworthy that charismatic leaders are found in
    cultures defined by these well-selected organizational practices. Given that the person–environment relationship of human
    behavior is reciprocal in nature (Bandura, 1986), as well as in keeping with the lack of empirical studies that have looked at
    reciprocity between organizational culture and leadership style (Hartnell & Walumbwa, 2011; Parry & Proctor-Thomson, 2003),
    future research must delve into their likely reciprocal effects.
    Dutch leadership and human resource practices differ from those in the United States, and our results may be on the
    conservative side because Dutch managers are unable to be as directive as, for example, American managers. Dutch culture, based
    on the famous Polder Model in which consensus of differing opinions is a primary objective, encourages employees to state their
    opinions and encourages managers to strive for consensus with subordinates before making decisions. This characteristic is
    formalized in Dutch companies in Works Councils, in which committees of rank and file workers review management decisions in
    the spirit of codetermination (Wiersma & Van Den Berg, 1999). Moreover, whereas evidence suggests that charismatic leaders in
    the United States are extrovert, flamboyant, directive, and type-A personalities, their Dutch counterparts are introvert, reflective,
    consultative, and type-Bs (Koopman, 1991). Although not all findings need to be replicated in other cultures, it is prudent to do so
    where differences in how the macro cultures operate raise doubts concerning generalizability.
    It is somewhat surprising that organizational culture is not directly related to financial performance. High-quality
    organizational work practices are costly and time consuming to develop and perhaps such practices cannot be expected to
    increase profitability in the short run. Thus, it seems likely that the effect of culture on performance may take more than two years
    (Crook, Todd, Combs, Woehr, & Ketchen, 2011; Shamir, 2011). Denison (1984), for example, highlights the importance of a large
    time lag between implementation and effect. The lack of a relationship between culture and objective financial performance also
    indicates that, at least in the two year time interval covered by this study, the effect of charismatic leadership on financial
    performance is not mediated by culture. No wonder then that most senior managers with short term orientations do not ‘burn
    their fingers’ on culture change. Accordingly, Harris and Ogbonna (2002) warn quite explicitly of the unintended consequences of
    culture interventions.
    Restriction of range may also explain why culture and performance are unrelated in this study. The study was conducted
    within a single industry and within a single Dutch bank. An advantage of this design feature is that the firms have similar
    environments and that the survey items apply to all branch offices because those offices belong to the same overall company
    while still being independent enough to show differences in the variables of interest. Also, this relatively homogeneous sample of
    branch offices offsets the limited number of control variables used. However, it is precisely because the local branch offices are
    part of a single large company that the branch office cultures will necessarily show less variance than if they had come from
    entirely different companies.
    The moderate correlation between perceived performance and financial performance at Time 1 (r=.35; pb.05) is most likely
    because corporate financial performance is dependent on many factors outside of management control such as competitors,
    market conditions, and overall economics. We use financial, as well as perceived performance because both measures have
    advantages. Financial performance is the main criterion for most organizations. However, it neglects factors such as financial

investments on which there have been no returns to date, relationships with clients and providers, and future opportunities.
Perceived performance is a broader outcome concept, but being subjective, it is subject to rater biases.
A limitation of this study is that we do not control for changes in top management in the branches. There are no indications
that new top managers were installed, but in the event that changes did occur the effects of charismatic leadership are on the
conservative side in the sense that, without any changes in top management positions, the relationships with charismatic
leadership will probably be stronger. Another potential limitation concerns the small sample size of 58/46 branches. However, it
should be noted that the perceptual variables are based on the ratings of 1509/1214 employees and that they are very reliable. In
addition, the objective financial data are reliable. This strengthens the conclusions that can be drawn from the results.
A practical implication of the study is that organizations should select top managers who have charisma. Such leaders appear
to have positive effects on an organization’s performance, and most likely on its culture as well. For the same reasons, topmanagement
training should focus on charismatic behaviors such as articulating an attractive vision, expressing confidence in
followers, taking personal risks, and building identification with the group. It should be noted that the MLQ focuses more on
socialized than on personalized aspects of charisma. A differentiation between these aspects is important because personalized,
narcissistic, and toxic charismatic leaders represent the so-called dark side of charismatic leadership (e.g., Brown & Trevino, 2009;
Ligon, Hunter, & Mumford, 2008). Personalized charismatic leaders are more concerned with their own interests and may actually
harm the company, whereas socialized charismatic leaders are more altruistic. Therefore, organizations should focus selection
and training of leaders on socialized charismatic behaviors.
In addition, organizations are advised to improve their culture by stimulating the practices of empowerment, external
orientation, interdepartmental cooperation, and human-resource orientation, given that this study established that they are
strongly related to perceived firm performance and do match well with socialized charismatic leadership. As a result, employees
may perceive higher levels of performance in the short term, but the effects on financial performance have yet to be
demonstrated. The employed set of organizational work practices can be seen also as an additive set of “positive practices” that
Cameron, Mora, Leutscher and Calarco (2011) recently came up with, and they may stimulate the thus far separately ongoing
abstract discourse of seeing organizations as organizing practices, known as the “practice turn” (Feldman & Orlikowski, 2011).
Clearly, more studies are needed that examine the effects of sets of carefully chosen organizational practices on the financial
performance over a longer period of time and with multiple measures along the way.
From an intangible organizational-resource perspective, the most important finding of this longitudinal study is that the
intangible factor, charismatic leadership style, leads to high objective firm performance. This finding is not trivial, particularly if
placed in the perspective of the “186 intangibles” (Barney, Ketchen, & Wright, 2011, p. 1311) that have been studied by scholars
who operate largely outside leadership theory. Our main finding may convince non-leadership scholars to take the intangible,
charismatic leadership factor more seriously. Thus, now that we have disentangled specific organizational leadership and cultural
forces, we have shown that charismatic leadership theory contributes to the broader academic study of the competitive
advantage of human capital: in addition to more tangible capital (see, e.g., Crook et al., 2011; Hansen & Wernerfelt, 1989).
Moreover, given that intangible resources are not always sufficiently exploited in an organization (see, also, Ennen & Richter,
2010; Ployhart, Weekley, & Ramsey, 2009), new in-depth studies of the link between socialized charismatic leadership and firm
culture are needed. The results of the present study are promising enough to undertake tests of reciprocal causal links
between charismatic leadership and culture (Hartnell & Walumbwa, 2011). Both constructs must then be measured several
times using cross-lagged analyses. In addition to socialized charismatic top leadership, organizational culture is expected to
have a positive effect, over time. The results of the current study clearly point to this proposition, thereby underscoring the
view of Barney et al. (2011, p. 1311) that “there is considerable scope for further research that examines…human and social
capital resources.”
The results of the present study may prompt field investigations on the simultaneous effects of socialized charismatic
leadership training and organizational culture-improvement programs (see, also, Antonakis, Fenley, & Liechti, 2011; Jung &
Takeuchi, 2010). If leadership studies would branch out more into such dynamic learning or actual social-change directions (see,
also, Gardner, Lowe, Moss, Mahoney, & Cogliser, 2010, p. 951; Jung & Takeuchi, 2010; Levay, 2010), the needed insight into the
joint effects of leadership and organizational culture is likely to spark (see, also, Kelloway & Barling, 2010; Mayer, Kuenzi,
Greenbaum, Bardes, & Salvador, 2009). For this to happen we advocate longitudinal studies on “the interaction of social structure
and agency in creating conditions for stability and change” (Dover & Lawrence, 2010, p. 306). Also Ng and Feldman (2010, p. 709)
noted that new studies would need to better “distinguish among …various types of internal social capital….” Therefore, our key
future-research point is that the field is in need of research that more precisely specifies and assesses the intra-organizational
effects of intangible “everyday actions” (Feldman & Orlikowski, 2011; Smith, 2010, p. 279) of charismatic leaders (e.g., Antonakis
et al., 2011). In that spirit, once distinct literatures on human’s organizing capital—such as that of organizational leadership and
culture—must be paired much more often (Crook et al., 2011; Ford et al., 2008; Hartnell &Walumbwa, 2011). This study examines
two intangible, intra-firm resources with roots in leadership and culture theory that in terms of strategy- or managementtheorizing
approximate the variables “quality of supervision” and “cultural norms” (Coff & Kryscynski, 2011, p. 1436). We find
these two latter terms imprecisely formulated. We argue, based on the results of this study, that the fairly abstract capabilityperformance
perspective on organizations (rooted, amongst others, in contingency and resource-based theory) may borrow from
leadership studies, like this one, specificity on how an organization may “extract the most out of its resources” (Auh & Menguc,
2009, p. 767, 757). Carefully prepared longitudinal action research of these “cross-level components of human capital-based
advantages” (Coff & Kryscynski, 2011, p. 1429; Molloy, Chadwick, Ployhart, & Golden, 2011) is likely to lead to better orchestrated
management scholarship which in turn may lift its own competitive advantage.

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