Leadership development practice bundles and organizational performance: The mediating role of human capital and social capital

Highlights

• LDPs that build intrapersonal KSAs of leaders (differentiation LDPs) are positively related to organizational level human capital.

• LDPs that develop leaders’ interpersonal KDAs of leaders (integration LDPs) are positively related to organizational level social capital.

• Human capital, in turn, is related to organizational sales growth.

Abstract

There is evidence linking a variety of leadership development practices (LDPs) with individual-level leader outcomes. However, both theoretical and empirical work relating bundles of multiple LDPs and organizational performance is lacking in the literature. To address this gap, we proposed and tested a model examining the influence of two LDP bundles on organizational performance, with human capital and social capital as mediators. Differentiation LDPs are aimed primarily at building intrapersonal knowledge, skills, and abilities of leaders, while integration LDPs help build their interpersonal knowledge, skills, and abilities. Utilizing a sample of 223 organizations in a growing economy (India), we found that differentiation LDPs were positively associated with human capital, while integration LDPs positively influenced social capital. Further, human capital mediated the relationship between differentiation LDPs and sales growth. Our study highlights the economic impact of investing in leadership development and the mechanisms underlying the relationship between LDPs and organizational performance.

Introduction

Leadership development can be considered a strategic priority for contemporary organizations (McCauley, Kanaga, & Lafferty, 2010). This is because skilled leaders are necessary for the effective design and implementation of business strategy (Augier & Teece, 2009), management of follower attitudes and behaviors (Avolio, Gardner, Walumbwa, Luthans, & May, 2004), regulation of team processes and outcomes (Morgeson, DeRue, & Karam, 2010), and overall organizational performance (Waldman, Ramirez, House, & Puranam, 2001). One indicator of the value placed on leadership development is the reaction of stock markets to the appointment (as CEOs) of ex-managers from organizations that are known for systematically developing their leaders (Lehmberg, Rowe, White, & Phillips, 2009). Also, recent estimates suggest that investments in leadership development have continued through economic cycles, with US firms spending $13.6 billion on leadership development programs in the year 2012 (O'Leonard & Loew, 2012), and 35% of the firms in Europe and 52% in Asia increased their leadership development budget in 2011 (Global Leadership Forecast, 2011).

Given the widespread perception of the importance of leadership development, it is not surprising that various studies have tried to evaluate the effectiveness of different types of developmental programs and experiences (e.g., the meta-analyses of Burke and Day, 1986, Collins and Holton, 2004, Powell and Yalcin, 2010). These results suggest that individual managers experiencing developmental assignments and participating in various developmental programs including formal training, mentoring, and action learning acquire a variety of managerial skills (Dragoni et al., 2009, McCauley et al., 1994). In other words, leadership development practices (LDPs) appear to indeed help individual managers become better leaders, and the relative effectiveness of various LDPs in this regard continues to be explored (Day & Dragoni, 2015).

However, to date, the effects of LDPs on organizational performance remain largely unexplored, both theoretically and empirically (Collins and Holton, 2004, Richard et al., 2014). For instance, a search for the term “leadership development” in the abstracts of seven journals that publish leadership-relevant articles (Academy of Management Journal, Human Resource Management, Human Resource Management Journal, Journal of Applied Psychology, Journal of Management, Leadership Quarterly, and Personnel Psychology) published during the last decade (2006–2016) reveal 12 quantitative articles, excluding meta-analyses. Of these, only one article, which aims to predict the types of LDPs that firms adopt, appears to focus on multiple LDPs at the organization-level of analysis (Caligiuri & Colakoglu, 2007). Further, there is a dearth of studies estimating the financial impact of LDPs (cf. Avolio et al., 2010, Richard et al., 2014). These gaps can be considered deficiencies in the literature given the role of leaders in influencing “the way inputs are combined across different levels of analysis to produce unit outputs, often by influencing the actions of others” (Dinh et al., 2014; p. 43). This is because the development of leaders can influence how they mobilize or orchestrate human resources and other resources and influence important organizational outcomes.

In other words, while there is good evidence that LDPs can make individual managers better leaders, there is much less work on whether and how LDPs contribute to organization-level performance. We target that gap in the literature in the current study. Drawing on multiple LDPs that are most commonly employed in the leadership development literature on the individual level of analysis, we examine how the implementation of bundles of LDPs by organizations influence organization-level constructs such as human capital, social capital, and, ultimately, organization-level performance. We test our hypotheses utilizing data collected from 223 organizations operating in India, a fast-growing economy where leadership development is becoming a significant priority. Our findings suggest that cross-organizational variance in LDPs is another important piece of the story about how people management contributes to organizational performance and, perhaps, to competitive advantage. We begin by briefly reviewing insights from the extant leadership development literature.