The impact of transformational leadership on employee engagement in banking sector at Ho Chi Minh city of Vietnam

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MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY DUONG THI THANH TAM THE IMPACT OF TRANSFORMATIONAL LEADERSHIP ON EMPLOYEE ENGAGEMENT IN BANKING SECTOR AT HO CHI MINH CITY OF VIETNAM MASTER OF BUSINESS ADMINISTRATION THESIS HoChiMinh City - 2012 DUONG THI THANH TAM THE IMPACT OF TRANSFORMATIONAL LEADERSHIP ON EMPLOYEE ENGAGEMENT IN BANKING SECTOR AT HO CHI MINH CITY OF VIETNAM Major: Business Administration Major Code: 60.34.05 MASTER OF BUSINESS ADMINISTRATION THESIS Supervisor: DR TRAN HA MINH QUAN ACKNOWLEDGEMENT I would like to express my heartfelt gratitude and deepest appreciation to my research Supervisor, Dr Tran Ha Minh Quan for his intensive support, valuable suggestions, guidance and encouragement during the course of my study I would like to thank many of my colleagues at HSBC and friends from other banks located in Ho Chi Minh City who helped me during the collection of the data I would like to express my sincere gratitude to all of my teachers at Faculty of Business Administration and Postgraduate Faculty, University of Economics Ho Chi Minh City for their teaching and guidance during my MBA course I would like to specially express my thanks to all of my classmates, my friends from for their support and encouragement I would also like to avail this opportunity to express my appreciation to Professor Nguyen Dong Phong, UEH Board of Directors for creating MBA program in English Finally, I heartily dedicate this study to my beloved parents and my husband, Hien who have encouraged and supported me during my study and complete this thesis ABSTRACT Employee engagement is important to any organization which wants to grow stably and increase profitability Leadership is one of important factor that can impact on the level engagement of the followers Transformational leadership, especially, is the most effective leadership behavior 4 in each organization in this flat world Exploring the relationship between transformational leadership and employee engagement is really important for each organization This will help the leaders or the managers in the organization increase the level of engagement of their subordinates by applying appropriate leadership behavior especially transformational leadership The purpose of this study was to explore the impact of four components of transformational leadership on the level of employee engagement in banking sector at Ho Chi Minh City of Vietnam Then it tries to find out which level each component of transformational leadership have influence on the level of employee engagement in banking sector in the context of Ho Chi Minh City of Vietnam This study used Bass and Avolio’s (2004) Multifactor Leadership Questionnaire (3rd edition, Form5X) to measure the transformational leadership and the Utrecht Work Engagement Scale (UWES; Schaufeli et al., 2002 to measure the level of employee engagement The survey was undertaken with a sample of 205 respondents who are working in banks at Ho Chi Minh City of Vietnam 5 The results reveal that all dimensions of transformational leadership except Inspirational Motivation have the positive influence on the level of employee engagement in banking sector of Ho Chi Minh City of Vietnam The component - Individualized Consideration of transformational leadership behavior have the strongest influence of the level of employee engagement.Based on the findings, it is recommended that the managers or leaders in banking sector of Ho Chi Minh City of Vietnam should apply the transformational leadership in practice to improve the level of engagement of their employees Keywords: transformational leadership, employee engagement, banking, individualized consideration, intellectual stimulation, inspirational motivation, idealized influenceCONTENTS 7 Appendix CHAPTER INTRODUCTION The introductory chapter discusses the research background and research objective Furthermore, the research scope and design and research structure are also outlined 1.1 Research background Today’s business environment requires that companies maintain maximum flexibility in order to adapt to the changing demands of the marketplace In recent years, multinational companies from around the world have eagerly embraced globalization and try to develop and implement a worldwide competition An aggressive campaign to boost profitability, increase market share, and improve customer satisfaction has been launch by a group of leaders Besides, organizations have to face now with the challenges of human resource development and management, in order to retain their best employees Employee turnover is a problem faced by all organizations High turnover rates have been associated with decreased customer satisfaction (Koys, 2001), productivity (Huselid, 1995), future revenue growth (Baron, Hannan, & Burton, 2001), and profitability (Glebbeek & Bax, 2004).Therefore, now all organizations are highly concerned to keep their valuable employees not only to reduce the turnover cost but to ensure the stability and developing constantly In order to be successful, each organization needs to minimize turnover as well as maximize the effort each individual devotes to his or her organization Organizations expect their employees to be proactive and show initiative, collaborate smoothly with others, take responsibility for their own professional development, and to be committed to high quality performance standard An important way of doing this is through employee engagement As noted by Schaufeli and Bakker (2004), engaged employees are likely to have a greater attachment to their organization and a lower tendency to quit 8 Engagement becomes an emerging psychological construct that purports to measures how much a person is into his job The concept of work engagement has gained momentum because of its predictive value for job performance (Bakker, 2009; Schaufeli & Salanova, 2007) Employees who are engaged put much effort into their work because they indentify with it It is convinced that the people are the most important assets who form the strength of the company and nothing can be achieved without their commitment Organizations need employees who feel energetic and dedicated, and who are absorbed by their work In other words, organizations need engaged workers In order to achieve this aim, employees should be encouraged to participate in organizational activities which are expected to enhance their engagement Managers have to build close work relations with their subordinates to cope with the stressful and heavy working environment The role of leader behaviors is very important to engage their followers, especially the transformational leadership Researches showed that individualized consideration, intellectual stimulation, inspirational motivation, and idealized influence — four components of transformational leadership all result in extra effort from workers, higher productivity, higher morale and satisfaction, higher organizational effectiveness, lower turnover, lower absenteeism, and greater organizational adaptability (Robbins & Judge, 2007) In banking sector, due to the nature of business, the more braches and offices banks have, the more chances they have to get more business and market shares Thus, banking employees constitute the largest group of services providers As banking is one of the vital service industry for any country and plays an important role in developing the economy, once banking industry develop constantly, the economy will go together A healthy banking system depends on the performance of sound personnel In order to make sure that their employees are good performers they have to know how to retain talented people and how to engage those people 9 In the context of Vietnam, after we officially become a member of WTO, liberating of financial industry is a commitment that we must to comply This liberation gives many chances not only for foreign banks to enter to Vietnamese market but also local banks to expand their operation to compete with other ones Together with the expanding in banking network, the need of human resources in financial sector is increasing quickly As a consequence, banking sector always is facing the turnover problem Therefore, to retain talented employees, banks need to understand how to engage their employees Results from research organizations and corporate results have demonstrated there may be a strong link between engagement, employee performance and business outcomes However, how to increase employee engagement level so that they can contribute with high performance for banks in Vietnam is not much explored So far, there has been no research on the effect of leadership behavior on employee engagement level in banking sector in Vietnamese context 1.2 Research objective The present research investigates the impact four components of transformational leadership behaviors on employee engagement level, particularly in banking sector in Ho Chi Minh City of Vietnam The purpose of this research is to check if those components of transformational leadership had positive impact on employee engagement, then provide some suggestions for leaders or managers in banking sector to improve their followers’ commitment to increase organizational performance and profitability The research will answer the following questions: Question 1: Which components of transformational leadership have influence on employee engagement level? 10 10 The findings of this research are in accordance with previous researches that the transformational leadership styles have positive impact on level of employee engagement However, this study also show different results that not all dimensions of transformational leadership have positive influence on employee engagement CHAPTER IMPLICATION AND LIMITATION This study examines the relationship between transformational leadership behaviors and employee engagement level in Vietnamese context represented by the respondents from banks located in Ho Chi Minh City The findings from this research will help the leaders or the managers in banks increase the level of engagement of their subordinates by applying appropriate leadership behavior especially transformational leadership 1.1 Implications The present study has an important implication for leadership research and practical organizations especially in banking sector First, this study added to the body of leadership literature in particular Vietnamese context The transformational leadership styles have positive impact on the level of employee engagement in Vietnamese context The results of this study also showed that the dimension Individualized consideration of transformational leadership have the strongest impact on the level of engagement of employee Thus, on practical side, if the leaders apply transformational leadership style through encouraging employees’ innovative thinking, spending time to teach and coach them, considering their personal feelings before implementing a decision, helping the followers to develop their strengths This will help to increase the level of emotional attachment that employees have with the organizations Employees will feel pride to be part of it, find similarity between their own values and organization values, and ready to put more effort into their job which in turn increases the productivity and profitability of the organization as well as customer satisfaction The other dimensions of transformational leadership except Inspirational motivation also have positive impact on the level of employee engagement Therefore, when the leaders show great persistence and determination in the pursuit of objectives, show high standards of ethical, principles and moral conduct, sacrifice self-gain for the gain of 65 65 other, consider subordinates’ needs over their own needs and share success and risks with subordinate, the followers will trust, admire, respect the leaders and strive to emulate them Subordinates are encouraged to develop in an attempt to reach their full potential This will enhance the engagement level of the subordinates The level of employee engagement also increase when leaders count their new ideas and creative problem solutions are counted while involving in the process of addressing problems and finding solutions When leaders applied intellectual stimulation, employees feel comfortable and safe in expressing their opinions, hence increase their level of engagement Although this research results showed that Inspirational motivation have no impact on the level of employee engagement, but this study was implemented in the context of banking sector of Ho Chi Minh City of Vietnam only, in other context there may be the relationship between this component of transformational leadership and employee engagement Thus, the leaders should not ignore it as they also contribute to the total value of transformational leadership which really influent the employee engagement level This research has reinforced the important of transformational leadership behaviors to subordinates and to organizations Organizations must train and develop transformational leadership at all levels of the business, if they wish to have greater influence on employee engagement In addition, when the level of employee engagement increase, the organization can reduce turnover cost and ensure the stability and develop constantly In conclusion, the world is changing everyday People are becoming more education, more willing to take risks and to accept responsibilities Employees in organizations want to participate in decision making, to be consulted, to be given a voice in the workplace and be able to express themselves Thus, transformational leadership style is the more appropriate in every organization which wants to be survival and developed constantly 66 66 1.2 Limitation and future directions The first limitation of this research is it just examines the impact of transformational leadership on employee engagement level There are many other leadership styles such as transactional leadership, laissez-faire leadership, servant leadership, etc which may impact on the level of employee engagement In addition, the engagement of employees may be influenced by other factors such as organizational culture, working condition or compensation and benefit policy The more causing factors are considered, the more accurate the results will be Therefore, future researches may examine the impact of other factors on employee engagement level in the Vietnamese context In addition, due to the limitation time frame and resources, the sample of this research is very smalland the approach to collect data is convenient sampling method The respondents may not fully understand the questions in the questionnaire to give the most accuracy response as the author can not explain all of their concerns during the answering questionnaire This may cause to reduce the qualities of the answered questionnaires This study focused on the banking sector in Ho Chi Minh City of Vietnam The respondents of this research come from some representative banks As the nature of banking sector required many offices and branches, the total volume of employees working for a bank is very large The future research can be replicated in a specific bank that covers as much as possible causing factors of employee engagement and the message come to employees easier so that they may duly understand the questionnaires which support them to give the best accuracy response Then a proper action plan can be establish by management at the company to improve their employee engagement level The respondents from this research come from the banking sector Respondents from other industries may have different level of engagement affected by their superior leadership behaviors Thus, future researches may explore the relationship between leadership styles and the level engagement of employees working in other industries to have the whole picture of Vietnamese context The age range of this study’s respondent is very young, 65% of respondents are from 20-29 years old with 67 67 maximum five or six year length of services with the bank This group of respondents is considered as high mobility and not in much level of engagement It caused by the sampling method that the questionnaire was sent to friends and colleagues of the author who is also in this age range Future research may have a proper sampling method to achieve a well-proportioned ratio of different range age Lastly, the limitation of this study is the instruments were used is Multifactor Leadership Questionnaire of Bass and Avolio (2004) to measure the transformational leadership and Utrecht Work Engagement Scale (UWES; Schaufeli et al., 2002) to measure the level of employee engagement The future research can use other instruments of other researchers to measure the leadership style and employee engagement to have a broaden picture of this relationship In summarize, Today’s business environment requires that companies maintain maximum flexibility in order to adapt to the changing demands of the marketplace It is not only technology or products, but human capital that makes the difference between business success and failure, organizations must hold themselves accountable for the leadership behaviors that they promote Organizations must train and develop visionary leaders who have ability to lead an organization effectively into the future, while also caring for stimulating, and engaging their most important asset: their employees 68 68 References Bushra, F., Usman, A & Naveed, A (2011), Effect of Transformational Leadership on Employees Job Satisfaction and Organizational Commitment in Banking Sector of Lahore (Pakistan), International Journal of Business and Social Science, Vol.2, No.18, October 2011, 261-267 Hockey, J & Ley,I (2009), Leading for Engagement: How Senior Leaders Engage Their 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