Why is leadership important? The crucial ways leaders shape a company

a woman is showing why is leadership important to a team

57% of employees have left an organization because of a manager.

Sometimes the most important things are the easiest to overlook because we take them for granted. But when a company falls on hard times, when team morale is low, when productivity is down or when turnover is high, there is one aspect of your company you should immediately assess: leadership.

While leadership is, of course, crucial for managers, supervisors and team leads—any employee, even those in the most junior roles, can and should develop and exhibit traits of good leadership.

So why is leadership important? Read on to find out how it affects every aspect of your organization (with the research and statistics to back it up!).

Table of contents
7 reasons why leadership is important for every organization
Yes, leadership is important—so why do companies neglect it?
How will you invest in leadership at your organization?

7 reasons why leadership is important for every organization

1. It can improve retention rates.

Bad leadership sends good workers packing. DDI's Frontline Leader Project found that 57% of employees have quit because of their manager. In fact, a worker's relationship with their manager is so crucial that 58% of them would remain at a job with lower pay but a great boss, according to research by Randstad US.

Further, according to the 2017 US Employee Pulse survey, when managers regularly acknowledge good work, employees are five times more likely to stay.

And you have good reason to be concerned about people leaving over a preventable cause. A high turnover rate hurts your organization, destroying team morale and forcing you to spend more time and money training replacements.

2. It can make or break employee engagement.

Gallup, the analytics company that has tracked employee engagement since 2000, found that managers have immense influence when it comes to employee engagement scores. In fact, managers make up 70% of the variance in engagement.

In addition, O.C. Tanner’s 2020 Global Culture Report found that when leaders show employees how their work is connected to a purpose, employees are 747% more likely to be highly engaged.

That’s right, the way your managers lead a team has a direct effect on employee engagement. So what can they do better? Here’s what Gallup suggests:

  • Meet with direct reports regularly. When managers regularly meet with their direct reports, those employees are nearly three times as likely to be engaged.
  • Communicate daily. The most engaged workers are the ones who communicate daily with their boss—whether that’s face-to-face, on the phone or digital. All the more reason to improve your leadership communication!
  • Be approachable. Managers who are approachable have the most engaged employees. As Jim Harter and Amy Adkins write on the Gallup website, “The best managers make a concerted effort to get to know their employees and help them feel comfortable talking about any subject, whether it is work related or not.”
  • Do performance management the right way. When managers help their direct reports set performance goals, those employees are more engaged. Gallup research has also found that being clear on what’s expected of them is vital for employee performance. Great managers frequently discuss expectations with their direct reports, not just during annual performance reviews.
  • Focus on strengths, not weaknesses. Nobody likes to have their flaws continuously pointed out. Not surprisingly, employees with managers who focus on their strengths are more engaged than employees with managers who focus on their weaknesses.

3. It shapes your company culture.

Leaders set the standard: They set an example for others to follow, create and enforce policies, reward good behaviors and root out negative ones. 

For instance, if a leader models transparency by being upfront about how they came to a decision, being open to feedback and being honest about setbacks, they will build trust in their team. If, however, a leader hides their decision-making process, shoots down any negative feedback and conceals problems, they’ll instill fear and distrust among their employees.

In short, leadership and culture are inextricably linked. If you want a healthy culture, train your managers to cultivate your corporate values within their teams.

4. Leadership affects employee well-being.

Good leadership makes all the difference in employee well-being. According to O.C. Tanner’s 2020 Global Culture Report, when leaders connect their team to accomplishment, employees are 46% less likely to experience burnout. And when leaders build connections between their team members, it boosts the chances that employees will feel a strong sense of well-being by 156%.

Further leadership style can make all the difference. A study published in Work & Stress journal found that transformational leadership is positively linked to employee psychological well-being, namely, trust. On the flip side, transactional leadership had the opposite effect on well-being: a reduced trust in leadership.

But what is “transformational leadership”? According to professor Bernard Bass, it “occurs when leaders broaden and elevate the interests of their employees, when they generate awareness and acceptance of the purposes and mission of the group, and when they stir their employees to look beyond their own self-interest for the good of the group.”

On the other hand, Bass defined “transactional leadership” as one in which “the leader gets things done by making, and fulfilling, promises of recognition, pay increases, and advancement for employees who perform well.” This is not, in and of itself, a bad thing. But the problem lies in some of its tactics, such as using threats to motivate employees to do better.

Lastly, here’s a statistic that should make every leader’s stomach churn: Deloitte’s Workplace Burnout Survey found that the biggest driver of employee burnout is a “lack of support or recognition from leadership.”

5. Leadership impacts employee performance.

The DDI report mentioned above found that a sense of purpose is the number one driver of employee performance. And guess who gets to shape that sense of purpose? That’s right, those in leadership. Managers are the ones who select which projects employees get to work on, and good managers aim to align employees’ goals, talents and abilities with the work that they do.

In a 2012 study published in the International Research Journal of Business Studies, researcher Marnis Atmojo found that transformational leadership positively influences job satisfaction, which, in turn, improves employee performance.

6. In times of crisis, employees look to leadership more than ever.

No organization is immune to crisis. According to PwC's 2019 Global Crisis Survey, 69% of “leaders have experienced at least one corporate crisis in the last five years." How resilient a workforce is in the face of hard times largely depends on its leadership. This includes how leaders prepare before a crisis and how they act during and after it.

Remember what we went over earlier about how leaders set an example for others to follow? In times of crisis, if a leader acts panicked and irritable, it will create a panicked and irritable workforce too. When things are uncertain, your employees need a leader who adapts to the situation in a helpful way.

7. Leadership affects your organization’s bottom line.

In 2019, Zenger Folkman published a study comparing leader quality and profitability across multiple branches of a Fortune 500 mortgage lending organization. What they found was that profitability was positively correlated with leader quality. In fact, offices led by the top 10% of branch managers made more than double the average profit of the other 90%. Offices led by the bottom 10% of branch managers, however, actually showed an average net loss of $1.2 million.

Another study published in The Journal of Technology, Management, and Applied Engineering in 2013 looked at leadership data from 100 branch offices of a wholesale distributor. Researchers found that branch sales were higher when branch managers believed they practiced a transformational leadership style, but branch sales were lower when subordinates believed their branch managers practiced a more transactional style.

Yes, leadership is important—so why do companies neglect it?

Despite the many reasons why leadership is important, many companies still fail to invest in leadership development. According to DDI’s Frontline Leader Project, “Managers don't get leadership training until four years after they've become a manager.”

In addition, Brandon Hall Group's 2015 State of Leadership Development Study found that 83% of organizations said leadership development is important or very important for all levels—but only 5% had actually implemented solutions for all levels.

When organizations don’t understand why leadership is important, it makes sense they’d be hesitant to invest in leadership development.

How will you invest in leadership at your organization?

At this point, you’ve seen the myriad of ways that leadership affects your company—from employee engagement to retention rates to your bottom line. It’s up to you to decide how you will use this information to invest in leadership development through things like executive coaching.

But before you decide which programs to implement, you need to assess your leaders’ workplace motivations. Remember, based on the research mentioned earlier, focusing on strengths creates more engaged employees than focusing on weaknesses.

Want an easy way to know your leaders’ strengths and access free coaching? Have them sign up for F4S for free today.

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