The Leadership Quarterly 16 (2005) 39 – 52

CEO transformational leadership and organizational outcomes:

The mediating role of human–capital-enhancing
human resource management
Weichun Zhua,*, Irene K.H. Chewb,1, William D. Spanglerc,2
a
Department of Management and Gallup Leadership Institute, University of Nebraska Lincoln, Lincoln, NE 68588, USA
b
Department of Organization, Management and Strategy, Nanyang Technological University, Singapore 639815, Singapore
c
School of Management and Centre for Leadership Studies, State University of New York at Binghamton,
Binghamton, NY 13902, USA

Abstract

Using a field survey and company data of 170 firms in Singapore, we tested an integrated theoretical model
relating CEO transformational leadership (TL), human–capital-enhancing human resource management (HRM), and
organizational outcomes, including subjective assessment of organizational performance, absenteeism, and average
sales. We found that human–capital-enhancing HRM fully mediates the relationship between CEO transformational
leadership and subjective assessment of organizational outcomes and partially mediates the relationship between
CEO transformational leadership and absenteeism. We discuss practical and theoretical implications.
D 2004 Elsevier Inc. All rights reserved.

Keywords: Transformational leadership; Human resource management; Organizational outcomes

1. Introduction

The field of organizational behavior has witnessed an increasing interest in studies of

transformational leadership (TL) and human–capital-enhancing (or progressive) human resource

* Corresponding author. Tel.: +1 402 472 9860.

E-mail addresses: wzhu0@bigred.unl.edu (W. Zhu)8 akhchew@ntu.edu.sg (I.K.H. Chew)8 spangler@binghamton.edu
(W.D. Spangler).
1
Tel.: +65 679 056 87.
2
Tel.: +1 607 777 2563.

1048-9843/$ - see front matter D 2004 Elsevier Inc. All rights reserved.
doi:10.1016/j.leaqua.2004.06.001
40 W. Zhu et al. / The Leadership Quarterly 16 (2005) 39–52

management (HRM). Both of these developments represent radical departures from previous
research.
In the case of leadership, previous scholarship focused on command, coordination, delegation, and
resource acquisition. The relationship between leader or manager and subordinate was supposed to be
impersonal and based on an exchange or transaction of rewards for services. The focus was on
efficient use of resources within the status quo. More recent transformational leadership focuses on
changing the status quo, both the organizational status as well as individuals within the organization.
Methods for accomplishing these changes or transformations differ greatly from previous
administrative techniques. Here, the focus is on the relationship of the leader to other organizational
members as well as the impact the leader has on others via such phenomena as charisma (or idealized
influence), inspiration, and vision. At the risk of oversimplifying, we may say that the difference
between traditional and more recent leadership research is the difference between management and
leadership.
Likewise, newer research in the area of human resource management differs substantially from older
research. Older research focused on administrative issues of selection, performance appraisal,
compensation, training, and compliance with legal requirements. Newer theorizing and research also
looks at how the HRM function may be used to serve the strategic interests of the organization and how
HRM may increase the capacity of organizational members.
Although these two new streams of research have grown up together, little or no research has
examined how these two organizational phenomena may be related to each other. Both
transformational leadership and human–capital-enhancing HRM have positive effects on individual
and organizational performance, but the nature of the relationship remains obscure. Perhaps they are
independent phenomena. Much of the transformational leadership literature stresses the cognitive
and affective relationship between leader and organizational members and stresses the differences
between leadership and traditional management or administration of impersonal systems. Therefore,
it makes sense to suppose that transformational leadership would have its primary effects outside of
the formal administrative system. In this case, transformational leadership and human–capital-
enhancing HRM would be independent inasmuch as human–capital-enhancing HRM is part of the
organizational administrative system. An alternative, which we explore in the present research, is
the somewhat less intuitively obvious proposition that transformational leadership and human–
capital-enhancing HRM may work together to enhance individual and organizational performance.
Specifically, we propose that much of the effect of transformational leadership is mediated by
human–capital-enhancing HRM, in addition to any direct effect of transformational leadership on
outcomes.

2. Literature review and hypotheses

2.1. Leadership and organizational outcomes

Leadership is one of the key driving forces for improving firm performance. Leaders, as the
key decision-makers, determine the acquisition, development, and deployment of organizational
resources, the conversion of these resources into valuable products and services, and the delivery
of value to organizational stakeholders. Thus, they are potent sources of managerial rents and
 W. Zhu et al. / The Leadership Quarterly 16 (2005) 39–52 41

hence sustained competitive advantage (Avolio, 1999; Lado, Boyd, & Wright, 1992; Rowe,
2001).
Transactional leadership helps organizations achieve their current objectives more efficiently by
linking job performance to valued rewards and by ensuring employees have the resources needed to
get the job done. The level of integration and interdependencies that are needed for the new work
environment as well as global competition require leadership that goes beyond the more basic
transactional styles, which involve contingent reinforcement and management-by-exception, to styles
that are more intellectually stimulating, inspirational, and charismatic (Avolio, Bass, & Jung, 1999;
Bass, 1997; Bass & Avolio, 1993). Further, transformational leaders create a strategic vision,
communicate that vision through framing and use of metaphor, model the vision by bwalking the talkQ
and acting consistently, and build commitment towards the vision (Avolio, 1999; McShane & Von
Glinow, 2000).
This view suggests that transformational leadership will result in high levels of cohesion,
commitment, trust, motivation, and performance in these new organizational environments. Previous
empirical research and metaanalyses have indicated that transformational leadership has a positive effect
on individual performance and organizational outcomes (Howell & Hall-Merenda, 1999). Numerous
studies have reported positive relationships between transformational leadership and outcomes at the
individual level and firm levels (Avolio, 1999; Kirkpatrick & Locke, 1996). Most recently, many
empirical studies have reported that transformational leadership has a positive impact on follower
performance and firm outcomes (Avolio, Zhu, Koh, & Puja, 2003; Jung & Sosik, 2002; MacKenzie,
Podsakoff, & Rich, 2000; Walumbwa, 2002). A number of comparative studies (e.g., Waldman,
Ramirez, House, & Puranam, 2001) have also reported that transformational leadership behaviors are
more positively related to subordinate effectiveness in a variety of organizational settings than are
transactional behaviors.

2.2. Human–capital-enhancing HRM and organizational outcomes

Human resources are the efforts, skills, and capabilities that people contribute to an employing
organization that enable it to continue in existence. Human–capital-enhancing HRM is generally
perceived as a distinctive approach to managing people that seeks to achieve competitive advantage
through the strategic development of a highly committed and capable workforce (Huselid, 1995; Youndt,
Snell, Dean, & Lepak, 1996). Sophisticated and integrated HRM practices will have a positive effect on
employee performance by increasing knowledge, skills and abilities, improving motivation, reducing
shirking and absenteeism, and increasing the retention of competent employees. Three factors underpin
the human–capital-enhancing approach towards HRM. First, there is a distinctive philosophy which
emphasizes employee commitment and motivation. Second, relations of trust allow scope and flexibility
for employees to exercise influence. Third, culture and leadership styles become important focuses for
action in their own right (Towers, 1994).
Substantial research has demonstrated the positive effects of human–capital-enhancing HRM.
Ichniowski, Shaw, and Prennushi (1987) reported that the impact of bcooperative and innovativeQ HRM
practices had a positive and significant impact on organizational productivity. Companies have been
encouraged to adopt a variety of performance-enhancing or progressive human resource management
practices to improve their global competitiveness (Delaney & Huselid, 1996). Youndt et al. (1996)
pointed out that human–capital-enhancing HRM practices that focus on skill acquisition and
42 W. Zhu et al. / The Leadership Quarterly 16 (2005) 39–52

development could facilitate adaptability and responsiveness as well as improve motivation and morale
of employees. Many researchers (Arthur, 1994; Becker & Gerhart, 1996; Guthrie, 2001; Huselid, 1995;
Youndt et al., 1996) have produced evidence of the value of progressive HR practices and systems on
firm outcomes. Other studies have found that there is a positive association between human–capital-
enhancing HRM and organizational outcomes (Cascio, 1991; Delaney & Huselid, 1996; Flamholtz,
1985; Huselid, 1995; Youndt et al., 1996). Research has shown that performing, high-involving, or
progressive HRM is positively related to organizational outcomes, including innovation (Laursen &
Foss, 2003; Rondeau & Wagar, 2002).

2.3. The mediating role of human–capital-enhancing HRM

We expect human–capital-enhancing HRM to mediate the relationship between transformational

leadership and organizational outcomes in the following ways. Transformational leaders have a clear
vision of what the company is going to be and what it is going to do in the future (Bass, 1985; Bass
& Avolio, 1993). This vision embraces a much-improved company and/or a better way of running a
business. Leaders must create an innovative vision, believe very strongly in the vision, be able to
articulate it, and communicate it to employees so that they too will believe in it and become excited
by it.
Human resource management plays a critical role in this communication process between the leader
and the members of the organization. Without human resource management’s staffing, training, and
communication, the vision of the leader is not effectively transmitted. For the vision to become a reality,
the leader has to rely on human resource management to help employees to become passionate and
excited about it, and the leader has to provide employees with a blueprint on how to achieve the vision.
Passion comes from commitment and involvement which come from job and organizational changes
created by human resource management. That is, employees must be empowered so that they can enact
the leader’s vision.
Further, transformational leaders’ individualized consideration of the needs of their employees may
induce them to create human–capital-enhancing human resource management practices to motivate and
empower followers. Transformational leaders pay attention to individual and personal difference in
needs development and growth and provide necessary resourses to help followers to realize their dreams.
Positive human resource management practices such as staffing, training, performance appraisal, and
compensation systems are the means whereby leaders express their individual consideration of
employees.
Transformational leaders listen attentively and pay special attention to followers’ needs for
achievement and growth by acting as mentors or coaches, by creating effective or human–capital-
enhancing HRM, and by encouraging followers to take on responsibility in order to develop their
potential (Avolio, 1999; Bass & Avolio, 1994; Bryman, 1992).
In these ways, organizational employees appreciate leaders and organizations that provide
opportunities for decision latitude, challenges, responsibility as well as meaning, impact, and self-
determination. They are more likely to reciprocate by being more committed to their organizations than
employees in more traditional organizations (Wayne, Liden, & Sparrowe, 2000). Committed and
motivated employees working in an environment of trust, flexibility, and empowerment amplify the
leadership of the CEO and other senior mangers; employees lacking this commitment and motivation
and working in an environment characterized by rigidity and lack of trust will depress the leadership of
 W. Zhu et al. / The Leadership Quarterly 16 (2005) 39–52 43

the CEO and others. Hence, we argue that human–capital-enhancing HRM mediates the relationship
between leadership and outcomes in organizations.

2.4. Hypotheses

On the basis of this analysis of the transformational leadership and human–capital-enhancing HRM
literatures, we tested the following three hypotheses.
Hypothesis 1. Human–capital-enhancing HRM mediates the positive relationship between CEO
transformational leadership and subjective assessment of organizational outcomes.
Hypothesis 2. Human–capital-enhancing HRM mediates the negative relationship between CEO
transformational leadership and absenteeism.
Hypothesis 3. Human–capital-enhancing HRM mediates the positive relationship between CEO
transformational leadership and average sales.

3. Methods

3.1. Data collection

This study was funded by and jointly conducted with the Singapore Human Resources Institute
(SHRI), a professional institute for both academicians and practitioners in the HRM discipline. We
administered a total of 1050 questionnaires to senior HR executives and CEOs of selected firms drawn
from the Singapore Exchange Listing. We asked HR managers to respond to items related to CEO
leadership behavior and human capacity-enhancing HRM. We asked CEOs to respond to the items related
to organizational performance. We collected additional objective absenteeism data and sales from
company records. Thus, we collected data from three different sources to reduce common method
variance (Podsakoff, MacKenzie, Lee, & Podsakoff, 2003; Rousseau, 1985).

3.2. Sample characteristics

We received a total of 173 sets of responses, representing a response rate of 17%. We excluded
three respondents due to incomplete or missing data, bringing about a useable sample with 170
respondents. That is, we had complete data sets from CEOs, HRM managers, and absenteeism and
sales for 170 companies. Of these 170 respondent companies, 40% belonged to the service sector and
almost 31% belonged to the manufacturing sector. The remaining 29% was from construction,
property, information technology, retail, and other sectors. Exploratory analysis revealed that the group
(170) of respondents did not significantly differ from the original sample of 1050 with respect to
company size, number of employees, and industrial structure. Therefore, we concluded that the sample
of 170 firms was a representative sample of the original firm population. The respondent companies
were further grouped according to type of ownership and other characteristics. Nearly 70% of the
respondent companies was from Asia and 31% of the respondents was from western countries doing
business in Singapore, including the United States, the United Kingdom, Germany, France, and
Belgium.
44 W. Zhu et al. / The Leadership Quarterly 16 (2005) 39–52

3.3. Measures

3.3.1. Human–capital-enhancing HRM

We used the Youndt et al. (1996) measure of human–capital enhancing HRM in terms of four
key functional areas of HR: performance appraisal (9 items), staffing (11 items), training (11
items), and compensation systems (11 items). Items were rated on a five-point Likert scale ranging
from bstrongly disagreeQ (1) to bstrongly agreeQ (5). Cronbach’s alpha for performance appraisal
(sample item: bIn this organization, HR plans are done formally, spelt out in writing, and
supported by documentation and dataQ) was 0.85. Cronbach’s alpha for staffing (sample item:
bRecruitment for entry-level jobs is not coordinated with the strategic concerns of the
organizationQ) items was 0.86. Cronbach’s alpha for training (sample item: bIn this organization,
the training and development of the employees are in line with the overall organization mission
and objectivesQ) was 0.86. Cronbach’s alpha for compensation systems (sample item:
bPerformance is managed through the linkage of organizational goals to individuals and teams
appraisal rewardsQ) items was 0.78.
Following procedures recommended by Gorsuch (1983) and Youndt et al. (1996), we used a series of
chi-square tests to confirm the a priori factor structure of four dimensions (performance appraisal,
v 2=131.32, pb0.01; staffing, v 2=158.43, pb0.01; training, v 2=223.76, pb0.01; compensation systems,
v 2=322.22, pb0.01). Since different dimensions of HRM had similar relationships to core concepts in
this study, we averaged these items to construct scales representing human capital enhancing HRM, as
Becker and Huselid (1998) did.

3.3.2. Transformational and transactional leadership

CEO leadership style was evaluated by the short updated version of the MLQ (Bass & Avolio,
1997). The questionnaire included charisma (or idealized influence, six items, alpha=0.84; sample
item: bThe CEO talks about their most important values and beliefsQ), individualized consideration
(four items, alpha=0.84; sample item: bThe CEO treats me as an individual rather than just as a
member of a groupQ), intellectual stimulation (four items, alpha=0.85; sample item: bThe CEO
reexamines critical assumptions to question whether they are appropriateQ), contingent reward (two
items, alpha=0.85; sample item: bThe CEO makes clear what one can expect to receive when
performance goals are achievedQ), management by exception active (MEBA, two items, alpha=0.82;
sample item: bThe CEO keeps track of all mistakesQ), and management by exception passive
(MEBP, two items, alpha=0.79; sample item: bThe CEO delays responding to urgent questionsQ).
We did not use inspirational items because previous research (e.g., Avolio, Bass & Jung, 1999) has
shown that these items are very highly correlated with the remaining items. Respondents rated items
on a five-point Likert scale ranging from bNot at allQ (0) to bfrequently, if not alwaysQ (4). We used
a series of chi-square tests to confirm the a priori factor structure of transformational leadership
(individualized consideration, v 2=121.02, pb0.01; charisma, v 2=89.03, pb0.01; and intellectual
stimulation, v 2=123.76, pb0.01; contingent reward, v 2=78.03, pb0.01; MEBA, v 2=76.34, pb0.01;
MEBP, v 2=78.02, pb0.01).

3.3.3. Organizational outcomes

We used seven items from Delaney and Huselid (1996). Perception of organizational outcomes
required an assessment of the firm’s performance over the past 3 years relative to the performance of
 W. Zhu et al. / The Leadership Quarterly 16 (2005) 39–52 45

industry competitors (Dollinger & Golden, 1992; Powell, 1992). Sample items include bdevelopment of
new products, services, or programsQ, and bability to attract essential employeesQ. Reliability for this
measure was .87. Sales and absenteeism data were collected from company records over 3 years (i.e.,
1997, 1998, and 1999). Sales were in Singapore dollars (thousands), and absenteeism was measured with
the average number of days absent per employee per year.

4. Results

Table 1 presents descriptive statistics and zero-order correlations for all of the variables included in
this study. Consistent with prior work, the relationships between human capital enhancing HRM
practices, namely, performance appraisal, staffing, training and compensation systems, and subjective
perception of organizational outcomes, are positive. The magnitude of the relationships is generally
small to moderate, potentially raising questions about the importance of HRM practices (Delaney &
Huselid, 1996). Table 1 also shows that transformational leadership is positively associated with HRM
practices. The magnitudes of the relationships are close to each other, providing the justification to
summarize four HRM practices into one HRM index in further analysis. Since we did not have any a
priori expectations that individual components of transformational leadership would differentially be
associated with either levels of empowerment or commitment, we combined these scales into one higher
order factor (Avolio, Bass & Jung, 1999). Charisma, intellectual stimulation, and individualized
consideration also have similar positive relationships with key core concepts, such as HRM practices,
perception of organizational outcomes, and absenteeism, providing a basis to combine these three
separate dimensions into an index of transformational leadership.
In all of the regression analyses that follow, we first entered a series of control variables before testing
our hypotheses. These control variables included company size, industry, ownership, gender, and size of
the human resource team.
To test for mediation, we used the following four-step procedure outlined by Baron and Kenny
(1986): (1) whether there is a significant relationship between independent variable and mediator, (2)
whether there is a significant relationship between independent variable and dependent variable, (3)
whether there is a significant relationship between mediator and dependent variable, and (4) controlling
for the influence of mediator, whether the original relationships between independent variable and
dependent variable are reduced to nonsignificance or becomes smaller, which provides evidence for full
or partial mediation. Tests of hypotheses are presented in Table 2.
Model 1 shows that transformational leadership is significantly related to human capital-enhancing
HRM (b=0.63, pb0.01). Model 2 shows that transformational leadership is significantly related to
subjective assessment of organizational outcomes (b=0.59, pb0.01) and absenteeism (b= 0.18,
pb0.05). Model 3 shows that human–capital-enhancing HRM is significantly related to subjective
assessment of organizational outcomes (b=0.57, pb0.01) and to absenteeism (b= 0.19, pb0.05).
However, we did not find that transformational leadership was significantly related to average sales
(â=0.09, pN0.05). Thus, Hypothesis 3, which indicated that human–capital-enhancing HRM mediates
the relationship between transformational leadership and averages sales, was not supported.
Support for the mediation hypothesis would be observed if the initially significant relationships we
found between transformational leadership and subjective assessment of organizational performance and
absenteeism disappear or decrease after we add HRM into the regression equation. Indeed, as shown in
 46
Table 1
Descriptive statistics and correlations for all variables (N=170)

W. Zhu et al. / The Leadership Quarterly 16 (2005) 39–52

Variable Mean S.D. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
1. Company size 1085.26 6749.03
2. Industrya 0.39 0.49 0.07
3. Ownershipa 0.84 0.37 0.22 0.10
4. Gendera 0.40 0.49 0.10 0.11 0.11
5. HRM team size 6.58 14.82 0.48 0.07 0.04 0.14
6. Planning 3.25 0.96 0.09 0.13 0.01 0.01 0.27
7. Selection 3.04 0.87 0.03 0.14 0.01 0.02 0.17 0.76
8. Training 3.30 0.85 0.12 0.13 0.07 0.09 0.18 0.54 0.63
9. Compensation 3.46 0.75 0.19* 0.04 0.08 0.02 0.22 0.52 0.60 0.66
10. HRM 3.26 0.73 0.12 0.13 0.07 0.03 0.25 0.85 0.89 0.83 0.80
11. Charisma 2.02 1.05 0.01 0.12 0.17 0.06 0.14 0.52 0.51 0.60 0.61 0.66
12. Int. stimulation 2.13 1.05 0.01 0.13 0.10 0.04 0.10 0.43 0.47 0.55 0.55 0.59 0.76
13. Ind. consideration 2.21 1.01 0.05 0.15 0.08 0.02 0.12 0.48 0.52 0.52 0.50 0.54 0.86 0.92
14. Transformational 2.07 0.98 0.01 0.13 0.15 0.01 0.13 0.51 0.52 0.61 0.62 0.66 0.94 0.94 0.93
leadership
15. Transactional 2.62 0.95 0.05 0.20 0.03 0.09 0.10 0.34 0.33 0.35 0.42 0.42 0.54 0.62 0.63 0.63
leadership
16. Org. outcome 2.99 0.81 0.05 0.12 0.08 0.02 0.12 0.40 0.44 0.48 0.58 0.55 0.56 0.52 0.48 0.57 0.34
17. Absenteeism 4.60 3.22 0.01 0.02 0.02 0.06 0.04 0.08 0.16 0.16 0.17 0.16 0.15 0.19 0.18 0.16 0.25 0.15
18. Sales (millions) 2.16 1.03 0.02 0.06 0.06 0.06 0.02 0.01 0.01 0.04 0.08 0.04 0.06 0.07 0.08 0.07 0.02 0.09 0.01
N=170, correlations greater than 0.15 are (in absolute value) significant at pb0.05; those greater than 0.22 are significant at pb0.01.
a
Industry: 1=service, 0=nonservice; Ownership: 1=Singaporean, 0=Foreign; Gender: 1=Male, 0=Female.
Table 2

W. Zhu et al. / The Leadership Quarterly 16 (2005) 39–52

Hierarchical regressions for mediation tests (N=170)
Variable Model 1 Model 2 Model 3 Model 4
HRM Performance Absenteeism Sales Performance Absenteeism Sales Performance Absenteeism Sales
Control
Company size 0.01 0.01 0.02 0.01 0.01 0.02 0.01 0.01 0.02 0.01
Industry 0.14 0.14 0.03 0.06 0.14 0.03 0.06 0.14 0.03 0.05
Ownership 0.18* 0.05 0.02 0.06 0.05 0.02 0.06 0.05 0.02 0.06
Gender 0.09 0.01 0.05 0.06 0.01 0.05 0.06 0.01 0.05 0.06
HR team 0.25** 0.13 0.05 0.04 0.13 0.05 0.05 0.12 0.05 0.02
R2 0.12** 0.04* 0.01* 0.01* 0.04* 0.01** 0.01* 0.04 0.01* 0.04
Transactional 0.01 0.06 0.12 0.04
leadership
Transformational 0.63** 0.59** 0.18* 0.09 0.32** 0.10 0.10
leadership
R2 0.38** 0.30** 0.03* 0.02*
HRM 0.57** 0.19* 0.03 0.36** 0.15* 0.02
R2 0.29** 0.03* 0.02* 0.35** 0.03* 0.01*
* pb0.05.
** pb0.01.

47
48 W. Zhu et al. / The Leadership Quarterly 16 (2005) 39–52

Model 4 of Table 2, after human–capital-enhancing HRM is added to the regression model, the initially
significant relationship between transformational leadership and absenteeism is no longer significant
(b= 0.10, pN0.05). Therefore, Hypothesis 2, proposing that human–capital-enhancing HRM mediates
the relationship between transformational leadership and absenteeism, was supported. However, the
initially significant relationship between transformational leadership and subjective assessment of
organizational outcomes did not disappear (b=0.32, pb0.05). This result suggests that human–capital-
enhancing HRM only partially mediates the relationship between transformational leadership and
subjective assessment of organizational outcomes. Thus, Hypothesis 1, which argued that human–
capital-enhancing HRM mediated the relationship between transformational leadership and subjective
assessment of organizational performance, was supported.

5. Discussion and conclusion

In this study, our main research aim was to create and test an integrated model that links human–
capital-enhancing HRM, transformational leadership, and organizational outcomes. Our findings and
analyses indicate that both leadership and HRM are valuable resources for organizational outcomes and
competitive advantage. As predicted, human–capital-enhancing HRM fully mediates the relationship
between transformational leadership and absenteeism and partially mediates the relationship between
transformational leadership and perceived organizational outcomes. As expected, we found that
transformational leadership has a positive association with organizational outcomes. This finding makes
sense since the CEO plays an important part in the company’s success and essentially a transformational
CEO motivates and inspires other organizational members to excel towards both organizational and
individual excellence.
These findings are not surprising and are consistent with prior results of many scholars (Avolio et al.,
1999; Bass, 1997; Curphy, 1992; Hater & Bass, 1988; House, Spangler, & Woycke, 1991; Howell &
Avolio, 1993; Howell & Frost, 1989; Howell & Hall-Merenda, 1999, Jung & Sosik, 2002; Kirkpatrick &
Locke, 1996, Waldman et al., 2001; Walumbwa, 2002). We also found that human–capital-enhancing
HRM is positively related to subjective assessment of organizational outcomes and negatively related to
absenteeism. This finding confirms results of other researchers (e.g., Becker & Gerhart, 1996; Cascio,
1991; Delaney & Huselid, 1996; Guthrie, 2001; Huselid, 1995). Our study also suggests that human–
capital-enhancing HRM practices, in terms of staffing, training, performance appraisal, and
compensation systems, are distinctive ways to create highly empowered and committed employees.
Through these human–capital-enhancing HRM practices, companies are more likely to improve
employees’ knowledge, skills and abilities, enhance motivation, retain competent employees, and reduce
turnover and absenteeism.
Second, perhaps more importantly, we found that human–capital-enhancing HRM mediated the
relationships between CEO transformational leadership and perceived organizational outcomes and
absenteeism. This is the first study that combines human–capital-enhancing HRM and transformational
leadership. Specifically, we found that transformational CEOs are more likely to adopt human–capital-
enhancing HRM. This finding is consistent with the finding that transformational leaders have a clear
vision of what the company is going to be (Bass & Avolio, 1993), including human–capital-enhancing
HRM. This finding suggests that, in order to better communicate the vision of leaders and to carry out
their decisions, in addition to influencing employees directly through charisma and inspirational
 W. Zhu et al. / The Leadership Quarterly 16 (2005) 39–52 49

motivation, transformational leaders are more likely to create human–capital-enhancing HRM practices.
These practices include staffing, training, performance appraisal, and compensation systems to motivate
and empower their employees. In the process of creating human–capital-enhancing HRM, transforma-
tional leaders tend to listen attentively and pay attention to followers’ individual needs for achievement
and growth (individualized consideration) and try to satisfy their needs.
Contrary to our hypothesis, we did not find a significant relationship between transformational
leadership and average sales. One explanation is that industry type might explain more average sales
variance in this sample. For example, high-technology and high-value-added industries have higher
average sales than low-value-added and low-technology industries. Although we divided industries into
service and manufacturing in this study, we believe that such division is not adequate to grasp the whole
picture of industry complexity. Limited by the sample size, we were not able to further test the
association of industry type; further study might focus on similar industries to control the confounding
influence of industry on the leadership effect. This similar industry suggestion is consistent with the
argument of Liberson and O’Connor (1972).

5.1. Theoretical and practical implications

This research contributes to the leadership and HRM theoretical literature in several ways. First,
although many studies have been done on the relationships between leadership and firm performance or
between HRM and firm performance (e.g., Arthur, 1994; Becker & Gerhart, 1996; Guthrie, 2001;
Huselid, 1995; Waldman et al., 2001; Youndt et al., 1996), the present research is the first attempt to
integrate the two separate streams of research. Specifically, we found that human–capital-enhancing
HRM plays a mediating role in the relationship between CEO leadership and organizational outcomes.
This finding opens the bblack boxQ between CEO transformational leadership and organizational
outcomes and suggests that human–capital-enhancing HRM is one possible mechanism by means of
which transformational CEOs affect organizational outcomes and reduce absenteeism. This finding
supports our earlier contention that CEO transformational leadership may not always directly influence
organizational outcomes (Howell & Avolio, 1993; Howell & Frost, 1989; Howell & Hall-Merenda,
1999, Jung & Sosik, 2002; Kirkpatrick & Locke, 1996, Waldman et al., 2001; Walumbwa, 2002).
Second, these findings again provide insight into the ways HRM and leadership may provide
competitive advantage. The findings show that human–capital-enhancing HRM had a positive
association with organizational outcomes and a negative association with absenteeism. The findings
are not surprising, giving the strong theoretical and empirical links between human–capital-enhancing
HRM and organizational outcomes (Arthur, 1994; Becker & Gerhart, 1996; Guthrie, 2001; Huselid,
1995; Youndt et al., 1996). We found that transformational leadership had a strong association with
human–capital-enhancing HRM and organizational outcomes. These results strongly imply that the
enhancement of CEO transformational leadership may provide a competitive advantage, and it is one of
the most important sources of human–capital-enhancing HRM.

5.2. Limitations and recommendations for future research

A major threat in survey research of the type we conducted is common method bias. Similarity of
methods used to measure both independent and dependent variables may inflate the observed
relationships between independent and dependent variables. It is even possible to conclude that there is a
50 W. Zhu et al. / The Leadership Quarterly 16 (2005) 39–52

statistically significant relationship between two variables when in fact the relationship is entirely due to
method effects. In the present study, we defined method as a combination of respondent (or rater or
observer), instrument, time, and place (see Avolio, Yammarino, & Bass, 1991 for a similar view of
bmethodQ). If two measures share respondent, instrument, time, and place, we may expect these measures
to be positively correlated with each other in the absence of a substantive relationship.
We used two procedures in this study to minimize the effects of method variance on our conclusions.
First, we used three different methods. The CEOs rated subjective assessment of organizational
outcomes, and the HR managers assessed human–capital-enhancing HRM and CEO transformational
leadership (TL). Therefore, TL and organizational outcomes and human–capital-enhancing HRM and
outcomes did not share methods (different respondent, time, and place). The CEO and the HR manager
therefore constituted two methods. We also used objective absenteeism and sales data, which constituted
a third method. The major possible effect of common method bias in the project was in the relationship
between TL and human–capital-enhancing HRM because the HR manager measured both at one time.
Secondly, to deal with this issue of possible bias in the TL–human–capital-enhancing HRM
relationship, we made use of an additional construct, namely, transactional leadership, as measured by
the HR manager. We included this factor for the purposes of hypotheses testing and discriminant validity
(Campbell & Fiske, 1959) in a manner similar to the method proposed by Lindell and Whitney (2001).
Theoretically speaking, if there were common method bias, it should have equally affected the
coefficients involving transactional leadership as well as those involving transformational leadership. In
our actual results (Table 2), we found that the coefficients of TL and dependent variables were highly
significant, but none of the corresponding coefficients of TR and dependent variables were significant.
In particular, the coefficient of TL and human–capital-enhancing HRM was 0.63, pb0.01, whereas the
corresponding coefficient of TR and human–capital-enhancing HRM was 0.01(ns). These differential
results are particularly relevant because the transformational and transactional leadership items were
intermixed in the survey given to the HR managers.
A second limitation stems from the methodology we used. We relied on a cross-sectional research
design which limits inferences regarding causal direction, although we collected 3 years data on
absenteeism and sales. Data have been analyzed and discussed here either as associated or between as if
transformational leadership had both a direct association with human–capital-enhancing HRM and an
indirect association with organizational outcomes via HRM. To have a better understanding of the
various relationships among HRM, leadership, and organizational outcomes, we recommend that
longitudinal studies be carried out on the impact of CEO transformational leadership and HRM on firm
performance over multiple time periods that would allow researchers to trace the dynamics of these
relationships.

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