Chief financial officers (CFOs) are change agents. Today, the CFO makes decisions that extend beyond standard accounting and treasury functions, and they are expected to monitor and manage performance, be strategic thinkers, manage risk, and create value. CFOs should understand that their leadership style may influence their ability to accomplish key objectives. Therefore, it’s important for CFOs to understand the leadership style they employ. This column explores the differences between transactional and transformational leadership styles.
Transactional leadership is based on an exchange of services for rewards that the leader controls, at least in part. Transactional leadership focuses on short-term, day-to-day leadership. In essence, the entire leader-worker relationship is based on a mutual system of reinforcement. Transactional leaders “clarify expectations, exchange promises and resources for support, arrange mutually satisfactory agreements, negotiate for resources, exchange assistance for effort, and provide recommendations for successful follower performance.”1
Transactional leaders recognize what followers need and want, and clarify how needs and wants will be satisfied if the follower expands the required effort to accomplish the task. Two general characteristics constitute transactional leadership: contingent reward and management by exception.
Contingent reward is the most active transactional leadership style. It is how the leader and followers exchange specific rewards for outcomes or results. A contingent reward is task-oriented, directing followers with rewards that depend on the fulfillment of certain tasks. Contingent reward leaders give tangible and intangible support in exchange for effort and performance, define rules concerning work duties, and decide the consequences of goal achievement.
Management by exception (either active or passive) characterizes how leaders monitor negative deviations and exert corrective action only when subordinates fail to meet objectives. Active management by exception is when a leader makes corrective criticisms or uses negative reinforcement. A passive management-by-exception leader waits to take action until mistakes are brought to his or her attention.2
Both styles put the subordinate under pressure to fulfill desired standards.
All leaders are transactional to some extent. Research indicates that transactional leadership is not necessarily ineffective or dissatisfying to subordinates, but it is generally less effective and less satisfying than transformational leadership.3
Transformational leaders are visionaries who appeal to the better nature of their followers. Transformational leadership motivates followers to do more than they originally expected to do by raising their level of awareness, by getting them to transcend self-interest, and by altering their need levels. There are five transformational leadership behaviors.
The first is inspirational motivation. Central to this factor is the articulation and representation of a vision with meaning. The second, idealized influence (attributed), relies on the attribution of charisma to the leader. According to researchers, charisma has to do with how people behave.4
Idealized influence (behavior), the third factor, emphasizes a collective sense of mission and values, and acting upon these values. The fourth factor is intellectual stimulation. This includes challenging the assumptions of followers’ beliefs as well as analyzing subordinates’ problems and possible solutions. The fifth, individualized consideration, recognizes individual needs and the development of followers’ individual strengths. Transformational leaders attend to each follower’s need for achievement and growth. There is only one measure of success for the transformational leader: the realization of intended change that satisfies the needs and motives of both leader and follower.
Regardless of the leadership style you gravitate toward, CFOs must build trust with the finance team and other departments. This helps to facilitate change and make faster progress toward operational goals. Determining your leadership style early will help you understand how to motivate and influence others to add value to your organization.
1 Bernard M. Bass, “Does the Transactional-Transformational Leadership Paradigm Transcend Organizational and National Boundaries?”
American Psychologist (February 1997).
2 David Jones and Rick Rudd, “Transactional, Transformational, or Laissez-Faire Leadership: An Assessment of College of Agriculture Academic Program Leaders’ (Deans) Leadership Styles,”
Journal of Agricultural Education, Vol. 49, No. 2 (2008).
3 Alison J. Doherty and Karen E. Danylchuk, “Transformational and Transactional Leadership in Interuniversity Athletics Management,”
Journal of Sports Management, Vol. 10, No. 3 (July 1996).
4 James M. Kouzes and Barry Z. Posner,
The Leadership Challenge: How to Make Extraordinary Things Happen in Organizations (fifth edition), Jossey-Bass (2012).
Patricia Benson, CPA, EdD, is vice president of finance and operations for Harcum College in Bryn Mawr. She can be reached at firstname.lastname@example.org.