How leadership affects decision making

There is a vast amount of literature on how leadership affects decision making in organisations which can be broadly classified into two separate categories. The first category focuses on the effect of leaders in firm performance and displays that leading firms are superior to their non-leading counterparts (e.g. Cherniss, Kuhlmann, and Van de Ven, 2009). In contrast, the second literature shows that firm leaders do not have an adverse effect on company performance but rather that it provides important benefits such as increased innovation (Nadkarni et al., 2017).



The focus offered by these two kinds of literature provides a clear insight into the importance of leadership in organisation decision making while also highlighting some key points for future research. Firstly, from the first category of literature, it is clear that leadership is important to firm performance. If leaders do not affect firm performance then there is no reason for companies to invest in their development and retain in their employment.


On the other hand, the second category of literature suggests that the presence of leadership actually provides advantages for company success. For example, Nadkarni et al., (2017) argue that there are three areas where leadership can improve company decision making including by strengthening relationships with external entities such as shareholders, suppliers and customers. These relationships have been provided as more likely to result in higher company performance than those who are not led by leaders.


However, the underlying reason behind this effect of leadership is still being research. It is believed to be down to two key factors. Firstly, leaders are able to provide greater levels of trust than their counterparts (Nadkarni et al., 2017). The level of trust a leader can provide has been linked with company success (e.g. Lim and Nadkarni, 2009) and if leaders are able to provide even greater levels of trust then it could be seen as a positive effect on company performance and firm value creation. Secondly, leadership has been shown to lead firms to adopt innovative strategies that increase firm value creation (e.g. Mautner and Satumbu et al., 2014). From these two key factors, it has been concluded that leadership can be beneficial in firm performance.


Both the first and second categories of literature highlight some key points for future research. Firstly, from the first category of literature, it has been suggested that leaders are able to provide greater levels of trust than their counterparts (Nadkarni et al., 2017). However, this study was conducted on company leaders and not all leaders will provide the same levels of trust. In order to test this idea, it would be better to compare company leaders with those who do not lead their companies. Secondly, from the second category of literature, it has been argued that leadership leads firms to adopt innovative strategies which increase firm value creation (e.g. Lim and Nadkarni, 2009). However, there are many different types of innovation that would require leadership to lead firm decision making. For example, some leaders may be able to provide leadership in innovation whilst other leaders may not be able to lead firms in this way. In order to test this idea, it would be better to compare company leaders with those who do not lead their companies.



Following these key points for future research, it is clear that the literature on leadership should offer us more understanding of how leaders affect organisation decision making. If we were able to understand these key points then we could see how leaders are able to improve firm performance and increase firm value creation. This would hopefully offer further insight into the importance of leadership in firm performance and the benefits it provides.


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