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Asia Pacific Journal of Human Resources (2014) 52, 351–369
doi:10.1111/1744-7941.12012
Enhancing multiple dimensions of performance in small professional firms through leader–follower trust Fenwick Feng Jing East China Normal University, China Gayle C Avery Macquarie University, Australia Harald Bergsteiner Australian Catholic University, Australia
This study reports a range of positive effects of trusting relationships between leaders and followers on multiple measures of performance in small professional service firms. Six performance measures were used: financial outcomes, staff and customer satisfaction, productivity, and staff and manager tenure. Predictions that firms with high levels of manager–follower trust would outperform their low-trust peers were supported on all measures. Importantly, the findings indicated that retaining managers and staff in small firms is associated with high levels of manager–follower trust. Keywords:
leadership, performance, pharmacies, retention, small business, trust
Key points 1 Fostering high levels of trust between managers and their staff enhances productivity and financial performance. 2 Both managers and employees stay longer in small firms with high trust environments. 3 Customer satisfaction is greater where managers and their staff enjoy high-trust relationships.
Relatively little is known about how the nature of leadership and management1 affects small business performance (Cope, Kempster and Parry 2011). This omission is of concern because small businesses provide extensive innovation, growth and employment in many economies. For example, in Australia about 95% of businesses trading in 2011 were small, accounting for almost half the employment in the private non-financial sector, and constituting nearly 90% of firms engaging in innovation (Connolly, Norman and Correspondence: Professor Gayle Avery, Institute for Sustainable Leadership & Macquarie Graduate School of Management, Macquarie University, Sydney, NSW 2109, Australia; e-mail:
[email protected] Accepted for publication 26 May 2013. © 2013 Australian Human Resources Institute
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West 2012). While relatively little is known about the effects of leadership on the performance of small businesses, understanding of the management and performance of small professional service firms is even more limited. This paper addresses this gap by reporting on a study of trust in retail pharmacies in Australia. Pharmacies are small professional service firms that are expected to make significant contributions to many economies, given advances in medicine and the consequent ageing of many populations. In many parts of the world, pharmacies are experiencing numerous business challenges, including those stemming from increasing government regulations and reductions in health budgets. Furthermore, the Australian retail pharmacy sector currently appears to be underperforming. Instead of achieving the 6.7% average compound annual growth rates (CAGR) that IBISWorld (2007) predicted for pharmacies in 2007–12, the sector appears to have experienced an average annual growth of only 1.8%, and average profits in 2011 of 2.5% (the Australian industry average was 4.5%). Pharmacy growth predictions for 2012–17 have been revised downwards to 2.4% (KordaMentha 2011). In sum, it appears that retail pharmacies are not capitalising on the potential offered by the growing health needs for Australia’s ageing population. Examining pharmacy leadership behaviours is becoming quite urgent, because like many other businesses, pharmacies will become increasingly dependent on maximising productivity and performance in the impending labour shortage predicted to span nearly two decades (Australian Government Productivity Commission 2005). As Barrett and Meyer (2010, 148) point out ‘managing employees effectively has the potential to deliver benefits to all smaller firms’. Among the plethora of leadership theories, two conceptualisations in particular seem relevant to understanding the effects of trust on small business performance. First are theories that focus on the relationships between groups of followers surrounding the leader, such as leader–member exchange theory (Graen and Uhl-Bien 1995). Trust, fundamental to effective workplace relationships (e.g. Burke et al. 2007), plays a major role in the quality of leader–follower relationships (Hu et al. 2012). The nature and quality of these relationships would be particularly potent in small firms where frequent interpersonal contact among members is common. One view of how trust develops between leaders and employees is based on the interpersonal exchanges that the parties to a relationship experience (Brower, Schoorman and Tan 2000). During these exchanges, participants evaluate each others’ ability, benevolence and integrity, three key components of trust (e.g. Brower, Schoorman and Tan 2000). The second leadership approach relevant to understanding small firm performance comes from the vision-based theories of leadership (e.g. Avery 2004; Bass 1990; Shamir, House and Arthur 1993). Vision-based leadership, which inspires followers to exert extra effort to achieve a shared purpose, is associated with superior performance (see Wang et al.’s 2011 meta-analysis). Two recent studies into pharmacy management are consistent with both the above theories, concluding that outlets providing a warm climate and where managers and employees share a vision, experience enhanced performance on multiple measures – staff 352
© 2013 Australian Human Resources Institute
Fenwick Feng Jing, Gayle C Avery and Harald Bergsteiner
Leader–follower trust
Performance
Financial
Staff
Customer
performance
satisfaction
satisfaction
Productivity
Staff/manager tenure
Figure 1 Conceptual framework
satisfaction, customer satisfaction, financial performance, productivity, and both manager and staff retention (Jing, Avery and Bergsteiner 2011, 2013). This paper examines these effects for a third leadership variable predicted to improve organisational performance, leader–follower trust (see Figure 1), which may influence small firms differently from larger enterprises (Dirks and Ferrin 2002). One reason is that the smaller firms represent a simpler and more integrated social system, employ fewer people, use fewer hierarchical levels and subdivide work less (Baum, Locke and Kirkpatrick 1998); and provide less physical distance between employees and their managers. The latter could simultaneously reduce psychological distance, which some regard as a defining element of the leadership influencing process (e.g. Antonakis and Atwater 2002). The inevitable close working relationships between small business managers and their staff may magnify the effects of trust/distrust compared with larger enterprises. In small organisations, leader–follower contact is likely to be relatively frequent and direct, making a manager’s behaviour highly visible and enabling it to have powerful effects on employee attitudes and behaviour – positively or negatively (e.g. Wiesner and Innes 2010). Trust may be more easily destroyed or have more serious consequences if broken in small firms where there is little chance for disaffected employees to transfer out of their manager’s sphere of influence. We adopt Sako’s (1992, 37) definition that trust refers to one’s confidence in another that ‘the other behaves or responds in a predictable and mutually acceptable manner’. Trust can also be defined in terms of the extent to which one believes in, and is willing to depend on, another party. Some scholars include the idea of making oneself vulnerable to the other in their concepts of trust. Mayer, Davis and Schoorman (1995) argue that the trusting party (trustor) will trust another party (the trustee) based on both the trustor’s general tendency to trust others and on the trustor’s perception that the trustee in question is trustworthy. As the relationship progresses, people re-evaluate the level of trust in © 2013 Australian Human Resources Institute
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the relationship and the trustor may adjust the level at which he or she is willing to make him/herself vulnerable to the trustee. Trust and performance Despite attempts to identify the factors that foster leader–follower trust and its outcomes, findings about the contribution of trust to business performance have been mixed (Burke et al. 2007). This is not aided by lack of theory and understanding of the factors underlying trust in both large and small organisations. Much of the existing research into the effects of leadership behaviours on business performance has been conducted in large organisations, which are typically led by professional managers with greater access to training and human and other resources than their counterparts in smaller businesses. Various studies highlight inconsistent leadership styles among small business operators, whether owner or manager. For example, Wang and Poutziouris’ (2010) investigation into over 5000 British SME owner-managers identified that a hands-on directive approach was common in small service firms, possibly because small business operators carry out multiple roles, necessitated by their limited time and staff. This is essentially a classical leadership style in which a shared vision and trust are not considered essential ingredients, unlike in visionary leadership (e.g. Avery 2004). Thus, the literature is somewhat mixed on whether trust in small versus large enterprises manifests itself in similar ways and engenders similar performance outcomes. This study aims to clarify this. The following sections derive the specific hypotheses from the literature; describe the methodology and data analysis; discuss findings, limitations and opportunities for further research; and present conclusions and managerial implications. Hypotheses Building on the above, the following hypotheses were developed, linking trust to organisational performance using multiple measures: financial outcomes, staff and customer satisfaction, productivity and retention. The rationale for each hypothesis is stated. Trust and financial performance Rich’s (1997) study of sales managers and salespersons from diverse industries established that trust indirectly increases overall sales performance. Similarly, Schwepker and Good (2012) reported that in a sales environment, employees’ trust in the organisation positively affected customer-oriented selling, which in turn enhanced sales performance. Various mechanisms have since been identified through which trust influences financial performance. Mayer and Gavin (1999) proposed that when employees believe their leader cannot be trusted they divert energy toward ‘covering their backs’, which detracts from their work performance. Wang and Clegg (2002) argue that true employee involvement, which enhances management effectiveness and organisational financial performance, results from mutual trust between management and employees. These authors note that 354
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lack of trust and a classical leadership style are not likely to generate the engagement, discretionary effort or emotional commitment that engenders high performance. Thus, the effect of high manager–follower trust on financial performance was tested in hypothesis 1a. Trust and staff satisfaction Numerous studies confirm a strong link between trust and employee satisfaction (e.g. Gilstrap and Collins 2012; Matzler and Renzl 2006; Mulki, Jaramillo and Locander 2006). Dirks and Ferrin’s (2002) meta-analysis highlighted that supervisors are particularly important sources of employee trust, with significantly raised outcomes such as organisational citizenship behaviours, job satisfaction, and job performance attributable to the direct supervisor’s influence. Thus, where trust exists between the pharmacy manager and other staff, staff satisfaction should be enhanced (hypothesis 1b). Trust and customer satisfaction Trust between employees and customers is complex, but critical to developing and maintaining successful sales relationships. A study of trust across diverse sales environments (Swan, Bowers and Richardson 1999) concluded that salespeople can influence the development of trust between themselves and their customers – vital to any business because trusting environments enhance customer attitudes, intentions and behaviours. Podsakoff et al. (1990) found that leader–follower trust enhanced courtesy and altruism behaviours, essential for directly relating to customers. In a franchised service organisation, higher employee satisfaction directly increased customer satisfaction, and indirectly doubled repurchase intentions (Evanschitzky et al. 2011). These researchers concluded that managers can strongly affect customer satisfaction and behavioural intentions by satisfying their staff, including via trust, even without any direct managerial contact with customers. Thus, hypothesis 1c predicts that follower–manager trust increases customer satisfaction. Hypothesis 1: Compared with pharmaceutical stores characterised by low levels of manager–follower trust, pharmacies characterised by high manager–follower trust levels exhibit enhanced: (hypothesis 1a) financial performance, (hypothesis 1b) staff satisfaction, and (hypothesis 1c) customer satisfaction. Hypothesis 2 was proposed to confirm that the commonly-reported association between staff and customer satisfaction occurs in retail pharmacies. Hypothesis 2: Staff and customer satisfaction are positively related. Since the number of prescriptions processed per day on average is an important indicator of productivity in retail pharmacies (Iyer and Doucette 2003), hypothesis 3 was postulated. Hypothesis 3: Pharmacies characterised by high levels of manager–follower trust exhibit greater productivity (numbers of prescriptions processed) compared with their counterparts operating with low levels of trust. © 2013 Australian Human Resources Institute
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Staff retention Another predicted effect of high manager–employee trust is reduced employee turnover – important because staff turnover is associated with poor organisational performance and productivity (Argote et al. 1995), and negatively affects staff morale and organisational effectiveness (Gray, Phillips and Normand 1996). Dirks and Ferrin’s (2002) meta-analysis showed that trust is a significant predictor of intent to quit but the higher the employee’s trust in his/her manager, the less likely he or she is to leave. Others have confirmed this (e.g. Connell, Ferres and Travaglione 2003; Mayer et al. 2011; Schnake and Dumler 2000), but often in large firms. For example, Connell, Ferres and Travaglione (2003) reported that both staff turnover intentions and commitment were significant outcomes of trust in manager–follower relationships within a large Australian organisation, and Mulki, Jaramillo and Locander (2006) highlighted the role of trust in retention in a global pharmaceutical company. In small businesses, low-trust relations may generate higher staff turnover than in larger firms where dissatisfied employees can at least transfer to another manager inside the firm. Manager tenure was also included in the following hypotheses on tenure: Hypothesis 4: In organisations characterised by high rather than low levels of trust (hypothesis 4a) employees and (hypothesis 4b) managers stay longer (i.e. report longer tenure).
Method One manager, up to three of their employees and three buying customers in Sydney city and suburban pharmacies were interviewed face-to-face. Separate manager, staff and customer questionnaires were developed to canvass multiple perspectives, although the unit of analysis was the pharmacy. Pharmacies were selected systematically from the Yellow Pages. After approaching 131 pharmacies, 100 stores participated (76.3% response rate; 41% of which belonged to a pharmacy chain). Pharmacy managers were defined as full-time leaders who manage their pharmacies and are normally stationed there daily. Staff refers to employees who worked under those managers, including any pharmacists, pharmacy assistants and salespersons not classified as the manager. Three eligibility criteria were that employees: were employed in an operational position by the store; worked under the manager interviewed; and were on duty when approached. Interviewed customers visited the pharmacies while the manager was on duty and bought a pharmacy product or service. The 580 respondents comprised managers (100), staff (217) and customers (263). Male/female proportions were: managers 48%/52%; staff 14.3%/85.7%. Managers were mostly aged under 40 years: 20 to 29 (42%) and 30 to 39 (26%). Staff were mainly aged 20 to 29 years (66.8%), and only 13% were over 40 years. About 53.5% of staff had worked in the pharmacy for 1 to 2 years, and 27% of managers had managed that pharmacy for under 12 months. 356
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Measures Considering the multidimensional nature of performance, the use of multiple performance indicators obtained through different methods was desirable, and this paper seeks to build on, and where necessary improve upon, previous studies regarding the measures used. Comparing effects using different performance outcomes may provide a more accurate estimate of the relationship between trust and organisational performance (e.g. de Hoogh et al. 2004). From her cross-country research on manufacturer–supplier relationships, Sako (1992) identified three components of trust essential for improving organisational performance: contractual trust (i.e. one’s expectations that an exchange partner keeps its promises), competence trust (i.e. one’s confidence in the exchange partner’s competence, or professional standard, in carrying out specific tasks), and goodwill trust (i.e. one’s confidence in an exchange partner’s open commitment to supporting and continuing a focal exchange relationship). These three dimensions, tested for reliability and validity by others, were adopted for this study on the assumption that they also apply to manager–employee exchanges. Measures of these and other variables are described next. Trust between leader and followers was assessed by asking staff members five questions developed from Sako’s (1992) above three aspects of trust (questionnaires are available upon request). Items 1(1) and 1(2) on the staff questionnaire measure goodwill trust. Items 1(3) and 1(4) measure contractual trust between leader and followers, while competence trust is assessed via item 1(5). Likert responses of ‘strongly disagree–disagree’ were categorised as low trust, while ‘agree–strongly agree’ responses were classified as high levels of trust. Based on the literature, leader–follower trust was expected to have positive associations with several performance indicators, and the following measures were adopted. Staff satisfaction was assessed in terms of employees’ overall job satisfaction as well as specific aspects of satisfaction, such as pay, policies and opportunities for advancement, consistent with Kantabutra and Avery (2006). These authors in turn had adapted these items from Slavitt et al.’s (1986) Index of Work Satisfaction (IWS) Questionnaire, the measures of which had been tested for reliability and validity. Customer satisfaction items assessed the customer’s overall satisfaction level with the pharmacy’s service and other specific aspects. These measures were also adopted from Kantabutra and Avery (2006) who had derived them from Hackl, Scharitzer and Zuba (2000). Financial performance was necessarily measured indirectly given the anticipated difficulty of obtaining financial reports from small businesses (e.g. Palmer 1994; Perera and Baker 2007; Sian and Roberts 2009). Therefore, following suggestions that indirect measures and self-reports can be reliable (e.g. de Hoogh et al. 2004), financial performance was measured via manager reports on increases and decreases in net profits, sales turnover and controllable business costs. Productivity was assessed by asking managers to state the number of prescriptions typically filled daily, a number that has to be officially tracked and reported. © 2013 Australian Human Resources Institute
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Staff and manager retention was measured by asking employees and managers respectively about their tenure in years at that pharmacy. Results Structural equation modelling (SEM) was used to test hypotheses 1a, 1b and 1c. Five steps were followed using AMOS 7.0 (Holmes-Smith, Coote and Cunningham 2004) synthesised from Hair et al. (1998), Kline (1998) and Tabachnick and Fidell (2001). Hypothesis 2 was tested using Pearson correlation, the remaining hypotheses with regression. SEM factor loadings or standardised regression weights of all constructs were above 0.50, suggesting that these variables reflect the underlying trait of the construct. The variable reliability of all constructs was above 0.70, indicating reasonably good measurement of trust and convergent validity between manager and followers, financial performance, staff satisfaction and customer satisfaction. Goodness-of-fit indices also show that the model fitted the data well, with the p value, CMIN, RMSEA, GFI, TLI and CFI all within acceptable criteria levels (Holmes-Smith, Coote and Cunningham 2004). Diverse reliability checks yielded consistent results (Malhotra et al. 2002). The output of SEM and confirmatory factor analysis (see Table 1) showed that all scales satisfied the assumption of unidimensionality, and all Cronbach’s alpha (Gerbing and Anderson 1988) values exceeded 0.60 (Malhotra et al. 2002). All squared multiple correlations (SMCs) were above 0.30 (equivalent to a standardised loading of less than 0.50, see Table 2), indicating good item reliability for the observed variables. Table 3 summarises the descriptive statistics and intercorrelations of the variables. Thus, the above results suggest the adequacy of these models permits them to be used further in this analysis. All hypotheses were supported, as indicated below. Hypotheses 1a, 1b, 1c: Several goodness-of-fit indices were used to assess the overall fit of the proposed SEM model (see Jöreskog and Sörbom 1993): Chi-square goodness of fit, goodness-of-fit index (GFI), comparative fit index (CFI), Tucker–Lewis index (TLI), and root-mean-square error of approximation (RMSEA) with confidence intervals. For GFI, CFI, and TLI, values of 0.95 or above indicate a model with acceptable fit (Bentler and Bonett 1980; Hu and Bentler 1999) and for RMSEA, values of 0.05 or less indicate a wellfitting model (Hu and Bentler 1999). The measurement model fits the present data well: χ2 (92) = 157.5 (p = 0.000), GFI = 0.99, CFI = 0.95, TLI = 0.97, and RMSEA = 0.021. Table 1
Reliability of the original scales
Composite variable
No. of items
Original reliability
Trust Financial performance Staff satisfaction Customer satisfaction
5 4 8 8
.668 .747 .818 .884
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Table 2
Item reliability (SMCs)
Constructs Items (SMCs) TRUST1 .32 STFS1 .53 CUSS1 .54 FIN1 .77
TRUST STFS CUSS FIN
Table 3
1 2 3 4
TRUST3 .33 STFS2 .37 CUSS3 .31 FIN2 .32
TRUST4 .55 STFS4 .56 CUSS5 .45 FIN3 .41
TRUST5 .53 STFS6 .37 CUSS7 .36
STFS7 .42 CUSS8 .41
STFS8 .41 CUSS14 .39
STFS9 .56 CUSS16 .77
STFS10 .35 CUSS17 .82
Correlations and descriptive statistics of the study variables
Trust Financial performance Staff satisfaction Customer satisfaction
M
SD
1
2
3
4
4.56 1.78 3.40 2.79
.62 .34 .48 .47
− −.144 .267** .321**
− .102 .124
− .990**
−
** p ⬍ 0.01.
Financial performance + .21
Trust
+ .23
Staff satisfaction
+ .23 Customer satisfaction
Figure 2 Structural model of effects of leader–follower trust on organisational performance Note: The figures are beta-weights derived from the SEM calculations.
Figure 2 shows the structural effects model for leader–follower trust and financial performance, staff satisfaction and customer satisfaction, while Table 4 shows the model fit summary for hypotheses 1a, 1b and 1c. Regression coefficients for leader–follower trust were statistically significant (p = 0.05) for each of these measures. Table 5 summarises significant relationships between high levels of leader–follower trust and © 2013 Australian Human Resources Institute
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Table 4
Model fit summary for H1a, H1b and H1c
Indices
Model fit summary
Model level of fit
Good level of fit criteria
CMIN DF P GFI RMSEA CFI RFI TLI
2.792 2 .302 .998 .021 .953 .932 .972
⬎.05 ⬎.90 ⬍.10 ⬎.90 ⬎.90 .90 ⬍ TLI ⬍ 1
≥ .05 ≥ .90 ≤ .10 ≥ .90 ≥ .90 .90 ≤ TLI ≤ 1
Table 5
Regression weight for H1a, H1b and H1c
FINANCE STAFF CUSTOMER
← ← ←
TRUST TRUST TRUST
Estimate
SE
CR
p
.257 .227 .225
.234 .072 .073
2.039 3.145 3.006
.048 .002 .002
The regression weights display unstandardised regression coefficients in the ‘Estimate’ column; standard errors in the ‘SE’ column; t-value in the ‘CR’ (Critical Ration) column; ‘p’ values for statistical significance.
financial performance (p ⬍ 0.05; CR ⬎ 1.96), staff satisfaction (p ⬍ 0.05; CR ⬎ 1.96) and customer satisfaction (p ⬍ 0.05; CR ⬎ 1.96). Thus, high levels of leader–follower trust were positively associated with financial performance, staff satisfaction and customer satisfaction, supporting hypotheses 1a, 1b, 1c. Hypothesis 2: Correlations between staff satisfaction and customer satisfaction yielded a significant positive relationship (0.994, p ⬍ 0.05), thereby supporting hypothesis 2. Hypothesis 3: Multiple regression analyses supported hypothesis 3, showing that trust between manager and followers was positively related to productivity (F1,96 = 25.792, p ⬍ 0.005, Adjusted R2 = 0.204). In other words, pharmacies displaying high levels of manager–follower trust were associated with significantly more prescriptions filled daily (Mean = 236, SD = 101) than those operating with low trust (β = 0.460, p ⬍ 0.005, hypothesis 3). The latter averaged only 115 prescriptions daily (SD = 53). Hypotheses 4a, 4b: Level of trust was found to be positively associated with staff tenure (F1,98 = 44.333, p ⬍ 0.005, Adjusted R2 = 0.304), thereby supporting hypothesis 4a (β = 0.558, p ⬍ 0.005). Similarly, hypothesis 4b linking longer manager tenure to trust was supported (β = 0.584, p ⬍ 0.005). These results show that pharmacies engaged in high levels of manager–follower trust retain staff longer than their low-trust counterparts. 360
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Discussion By confirming all hypotheses, this study highlights the importance of manager–follower trust on multiple performance measures in small professional service businesses, namely pharmacies. High levels of trust were associated with positive organisational outcomes in terms of financial performance, customer and staff satisfaction, productivity, and both long-term manager and staff tenure. Expected links between trust and performance on multiple measures arising from previous research conducted primarily in larger enterprises were confirmed. The strong positive association found between staff and customer satisfaction reaffirmed the motto ‘happy staff make happy customers’, and possibly vice versa. A ‘double-positive effect’ may influence customers of organisations with satisfied employees (Evanschitzky et al. 2011), whereby enhanced customer satisfaction results in employees feeling good. This enhances their performance, which, in turn, increases customer satisfaction. The study has also made a significant contribution in relation to findings on the association between long manager tenure and trust, which has been underresearched to date. The effects of trust on each measure are discussed in turn. Financial performance and productivity A key finding for small business operators is the powerful effect of trust on small firm financial performance and productivity. Dirks and Ferrin (2002) identified two mechanisms by which trust might affect behaviour and performance: character-based and relationship-based trust. The character-based perspective focuses on how perceptions of the leader’s character affect a follower’s vulnerability tolerance. Mayer, Davis and Schoorman (1995) proposed that when followers believe their leaders have integrity, capability and benevolence, they will be more comfortable engaging in behaviours that put themselves at risk (such as sharing sensitive information). The relationship-based perspective rests on principles of social exchange. It deals with employees’ willingness to reciprocate the care and consideration that a leader expresses in a relationship. That is, individuals who feel that their leader has, or will, demonstrate care and consideration will reciprocate this sentiment in the form of desired behaviours for that leader. Konovsky and Pugh (1994) drew on this logic to argue that a social exchange relationship encourages individuals to spend more time on required tasks and be willing to go above and beyond their job role under trusted managers. Both theoretical perspectives imply that trust may result in higher organisational performance (Dirks and Ferrin 2002), but they raise performance by distinct, and potentially complementary, routes. Another perspective is that trust increases the ability of leaders and employees to collaborate, thereby increasing organisational effectiveness and efficiency (Dirks 1999), which in turn may improve how the organisation executes its tasks. Trust also frees up resources by facilitating less friction in organisational relationships (Clegg 1997). Efficiency is also expected to increase because trust reduces the need for controls (such as rules and monitoring) leaving time for other activities (Bergsteiner and Avery 2007), and increases the © 2013 Australian Human Resources Institute
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ability to confront performance problems. Both of these factors help maximise use of organisational resources (Dirks 1999). Being more efficient and less distracted by relationship problems, pharmacy employees in trusting manager relationships can process more prescriptions per day. In other words, when the level of trust between leader and followers is increased, an organisation experiences superior organisational processes and thus higher performance, compared with low-trust environments. Staff satisfaction The finding that trust is associated with job satisfaction has been well established, and Dirks and Ferrin (2002) noted that direct leaders (e.g. supervisors) appear to be a particularly important referent of trust. In small businesses, this effect could be magnified. There, contact would be expected to be close with direct supervisors, providing employees with many opportunities to assess their manager’s trustworthiness. Howell and Hall-Merenda’s (1999) longitudinal investigation revealed the positive influence of physical proximity to the manager on performance. These authors concluded that the effects of transformational or visionary leadership led to significantly higher follower performance in close rather than in distant situations. A leader’s vision is thus likely to be particularly influential in close relationships, and a shared vision enhances performance further (Jing, Avery and Bergsteiner 2013). Dirks and Ferrin (2002) point out that employees feel safer and more positive about their leaders when they believe that their leaders are trustworthy. According to these authors, managers’ showing respect and behaving predictably and acceptably towards employees generates reciprocal trust. Yet another contribution to understanding why satisfied staff are associated with higher performance comes from Chen, Hwang and Liu’s (2012) finding that trust significantly influences employee voluntary performance – in trusting environments employees go beyond their role requirements. In contrast, low-trust environments can lead to psychologically distressing situations, particularly where leaders have power over important aspects of one’s job (Dirks and Ferrin 2002). Consequently, leader–follower trust has a strong, direct effect on staff satisfaction. Clearly, the reasons why trust enhances staff satisfaction are myriad, but the key point is that trust helps create a satisfied workforce that benefits performance and productivity in small service firms, as well as in larger firms. Customer satisfaction That staff satisfaction influences customer satisfaction is well documented, including by the strong positive correlation found in this study. Among the theoretical reasons for this are attraction/selection theory and contagion theory (von Wangenheim, Evanschitzky and Wunderlich 2007). From the attraction/selection perspective, individuals in a small business come to share particular experiences, which lead them to exhibit similar attitudes and behaviours, such as in how they treat customers. Thus, high levels of leader–follower trust encourage people to look after customers as employees seek to meet cultural expectations. An alternative explanation for the link between customer and staff satisfaction is 362
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contagion, that is, that emotions transfer between people and influence other parties, such as customers, even if the staff member is not conscious of the emotion being transmitted. It is conceivable that multiple explanations apply, reinforcing each other. Sharing visions centred on customer service could augment staff satisfaction affecting customer satisfaction in small businesses with positive, trusting environments. Interestingly, the most commonly shared visions emerging from Jing, Avery and Bergsteiner’s (2013) study of pharmacies centred on helping customers – consistent with other findings that professional employees often bring personal visions of helping others (Hassali, Khan and Shafie 2009). As all employees in pharmacies form part of the process that connects with the customer at the point of sale, each employee can therefore affect the level of customer satisfaction. As a consequence, leader–follower trust has a strong, direct effect on staff satisfaction and an indirect effect on customer satisfaction in pharmacies, where customers often consult staff. This effect may be magnified in small businesses, where the interaction between all employees is largely with the one manager rather than being filtered through middle managers and team leaders. Staff turnover The significant relationship found between manager–follower trust and staff turnover is also consistent with previous findings. Various researchers (e.g. Dirks and Ferrin 2002, Schnake and Dumler 2000) indicate that trust crucially influences employee work attitudes and thus predicts an individual’s intent to leave. Matzler and Renzl (2006) concluded that high trust increases employee loyalty, thereby binding people to their employer. Bijlsma and Koopman’s (2003) meta-analysis also indicated that trusting leader–follower relationships increase staff loyalty and decrease intentions to leave. Manager–follower trust reflects employees’ perceptions and emotional responses to the characteristics of the work environment, including job satisfaction, work attitudes and organisational commitment (Bijlsma and Koopman 2003; Dirks and Ferrin 2002; Glisson and Durick 1988; Schnake and Dumler 2000). Relating this to the present study, pharmacy employees working in environments with high levels of trust between them and their manager are therefore more likely to be satisfied with their jobs, be more committed to their organisations, share a customer-oriented vision, and, hence, are less likely to leave. Manager tenure Most previous studies of tenure have focused on employees; however, retaining managers is also critical, given the costs of recruiting and training new managers, and disruptions caused to the firm’s financial and social functioning (Gray, Phillips and Normand 1996). Furthermore, tenure affects performance. Hughes et al. (2010) reported that longincumbent managers of football organisations were associated with performance far above the average. In retail pharmacies, Jing, Avery and Bergsteiner (2011, 2013) reported that managers stayed longer under conditions of visionary leadership and a warm climate, and that performance was higher under long-tenured managers. Longer tenure may benefit performance by enabling managers and employees to build relationships with customers, © 2013 Australian Human Resources Institute
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who then are likely to return when they need advice, which can be quite personal when it concerns a person’s health. Retaining existing customers in turn benefits financial performance, given estimates that acquiring new customers costs six times more than retaining existing clients (Reichheld 1996). This study has shown that high levels of manager–follower trust enhance six common measures of performance – financial performance, staff satisfaction, customer satisfaction, productivity, and manager and employee retention. Logically, these performance outcomes interact to support the business further. For example, solid financial performance enables staff to be retained and adequately paid. Satisfied employees are more likely to stay, thereby reducing recruitment costs. In a trusting relationship with their managers, employee satisfaction is high, in turn influencing customer attitudes. Satisfied customers happy with the service quality and relationships they have with employees are likely to return, potentially reducing the costs of acquiring new customers. Thus, a virtuous cycle is created, enhancing overall business performance. It is therefore not surprising that pharmacies where staff and managers display high levels of trust process significantly more prescriptions and report superior financial results compared with their less trusting competitors. Limitations and further research This paper provides some new insights into the effects of leader–follower trust on performance in small business settings. However, the findings should be viewed in the light of some limitations. The first limitation relates to the self-reported financial measurements. Although analysis revealed no significant method bias, ideally financial measures would be better derived from official records should they become available for small business. Another limitation is that all respondents in this study were based in one large city. Future researchers could replicate and extend the findings by including cross-cultural and city/ rural components to enhance the generalisability of the results, as well as replicating the study outside the pharmaceutical industry. Within the pharmaceutical setting, researchers could examine the context in which trust is likely to develop and what prevents some managers from engendering higher trust. Future researchers could also adopt a phenomenological approach to obtain a deeper understanding of the nature of the relationships between management and staff, the components of leader–follower trust for retail pharmacies, and the factors shaping the relationship between leader–follower trust and performance. Conclusions and implications Despite documented benefits from trust on a range of organisational outcomes, creating and sustaining trust is often difficult in practice (Kramer 1999). Nonetheless, leader– follower trust can be developed in various ways, for example: by showing respect and trust towards employees; striving for cohesion through a clearly enunciated vision; building 364
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commitment to organisational goals; fostering co-operation and collaboration; motivating employees to participate in formulating strategy; being predictable in relations with others; supporting employees; expressing interest in employees’ opinions and well-being; being fair; and endeavouring to maintain effective interpersonal relations. The benefits of high levels of leader–follower trust extend beyond the goal of simply enhancing current performance. Australian pharmacies face rapid growth in the context of a declining workforce over the next couple of decades. Therefore, it becomes vital that they, like other employers, provide a work environment that is attractive to both recruiting and retaining scarce future workers, including managers. Fostering trusting relationships between workers and their managers is a good place to start.
Note 1
The terms leadership/leader and management /manager are used interchangeably in this paper.
Fenwick Feng Jing (DBA, Macquarie; MSc, Lancaster) is lecturer in HRM, School of Public Administration, East China Normal University, Shanghai and specialises in leadership and organisational performance. He has published An investigation of the relationship between leadership paradigms and organisational performance in pharmaceutical sales organisations and several journal articles. Gayle C Avery (PhD, Monash) is professor, MGSM, Macquarie University, and CEO, Institute for Sustainable Leadership, Sydney. Gayle Avery specialises in leadership, particularly leadership for creating and maintaining resilient and high performing enterprises. She has published many books including Understanding leadership: Paradigms and cases and Leadership for sustainable futures: Achieving success in a competitive world, and is co-author of Honeybees and locusts: The business case for sustainable leadership. Harald Bergsteiner (PhD, Macquarie) is honorary professor, Australian Catholic University, and director, Institute for Sustainable Leadership, Sydney. Harry Bergsteiner specialises in accountability and sustainable leadership. He has written numerous academic papers and books, including Accountability theory meets accountability practice, and is co-author of Honeybees and locusts: The business case for sustainable leadership.
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