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32,2 Transformational leadership and
human capital benefits: the role of
knowledge management
M. Birasnav
School of Management, New York Institute of Technology, Adliya,
Received November 2009
Revised April 2010 Kingdom of Bahrain, and
Accepted May 2010 S. Rangnekar and A. Dalpati
Department of Management Studies, Indian Institute of Technology Roorkee,
Roorkee, India

Purpose – In order to achieve sustained competitive advantage through developing human capital,
organizations, apart from human resource management practices, concentrate on developing
transformational leaders and implementing knowledge management (KM). To take part in their
efforts, this paper intends to explore leadership and KM literatures to examine the interrelationship
between transformational leadership, KM, and employee-perceived human capital creation or benefits.
Design/methodology/approach – A systematic literature review is carried out of traditional and
contemporary theoretical and empirical research studies to support the nexus of interrelationship
between transformational leadership, KM, and human capital. This review is mainly integrated using
a model and propositions that relate transformational leadership and KM with human capital benefits.
Findings – Transformational leaders have potential to affect their employees’ perceptions of human
capital benefits. They also have the greatest potential to augment these benefits through involving
them in the KM process, establishing organizational culture, and encouraging communication among
Research limitations/implications – This model suggests that human resource managers should
provide training to managers with regard to developing transformational leadership behavior, since
this behavior contributes to human capital creation by which an organization achieves competitive
advantage. Furthermore, this study mainly focuses on leaders as transformational leaders, since these
leaders are highly capable of stimulating their followers’ creativity. Therefore, this study only
considered the components described by Bass and Avolio.
Originality/value – This paper contributes to leadership literature by adding the notion of
transformational leadership as an antecedent of human capital creation.
Keywords Transformational leadership, Knowledge management, Organizational culture,
Communication, Human capital
Paper type Literature review

Developing competencies of human resources is a primary activity to be focused by
Leadership & Organization any organization that takes enormous efforts to overcome their competitors on product
Development Journal quality, customer service, and new product development. Many researchers have
Vol. 32 No. 2, 2011
pp. 106-126 concentrated a paradigm shift from human resources to human capital in firms in order
q Emerald Group Publishing Limited to sustain competitive advantage (Bontis and Fitz-enz, 2002; McGregor et al., 2004).
DOI 10.1108/01437731111112962 Bontis (2001, p. 5) particularly defined human capital as “the combined knowledge,
skill, innovativeness and ability of the company’s individual employees to meet the Leadership and
task at hand”. To develop human capital in-house or acquire human capital from the human capital
external labor market, firms implement human resource management (HRM) practices,
particularly, staffing, training, performance appraisal, and rewards (Snell and Dean,
1992). These practices are universally considered as the investments for human capital
development through which firms increase their economic value. In this direction,
Drucker (2002, p. 71) describes human capital development as “the sine qua non of 107
competition in a knowledge economy”. Through proper investments in human capital
augment organizational financial performance and productivity (Acemoglu and
Pischke, 1999), it is inevitable that these investments render certain benefits to
employees that represent human capital creation among employees.
Research studies carried out in firms to link leadership, particularly,
transformational leadership, knowledge management (KM), and human capital
benefits are limited. A few studies explored the role of transformational and
transactional leadership styles on individual employee’s performance and
organizational performance through knowledge acquisition, knowledge creation,
knowledge sharing, and knowledge exploitation (Bryant, 2003; Politis, 2001, 2002).
Although research studies (Smith, 1998; Darroch, 2003) described the relationship
between KM and human capital, the effects of KM hierarchical structure on human
capital development have not been much considered. Following Bryant (2003) who
focused knowledge process functions as mediators in the relationship between
transformational leadership and individual performance, the central focus of this paper
is to construct a framework to organize relevant literatures to support the connections
between transformational leadership, KM, and perceived human capital benefits
dimensions. In this framework (see Figure 1), KM process and KM infrastructure
(organizational culture and communication) play mediator roles in the relationship
between transformational leadership and perceived human capital creation or benefits.

Definition of transformational leadership

Importance is given to leadership development programs in the organizations due to
the reported direct relationship between leadership and organizational performance
(Aragon-Correa et al., 2007; Lowe et al., 1996). So leaders nowadays are at the central
focus of the organizations for which they set clear vision and immensely persuade

Figure 1.
Mediation role of
knowledge management
LODJ followers to achieve the vision. Tannenbaum et al. (1961, p. 24) defined leadership as
32,2 “interpersonal influence, exercised in a situation, and directed, through the
communication process, toward the attainment of a specified goal or goals”. The
way through which they accomplish goals and improve organizational performance is
the behavior or characteristics they possess. For instance, transactional leaders do not
voluntarily involve with employees’ work until any failure occurs (Bass, 1985);
108 transformational leaders act as role models for employees, motivate them, and
stimulate their intelligence (Bass, 1985).
Although each kind of leadership style has its own merits and demerits,
transformational leadership draws much attention in organizations since it contributes
to firm innovation, organizational learning, and employees’ creativity skills (De Jong
and Den Hartog, 2007; Aragon-Correa et al., 2007). In view of reaping greater human
capital benefits for employees, transformational leadership, a neocharismatic
leadership theory, is immensely concentrated in this study. Following Burns (1978),
who identified the concept of transformational leadership style, many researches have
examined this leadership in various disciplines (for example, Bass, 1985; Yammarino
and Bass, 1990; Schepers et al., 2005; Rafferty and Griffin, 2004). Researchers define
transformational leadership in terms of idealized influence, inspirational motivation,
intellectual stimulation, and individual consideration (Bass, 1985; Nemanich and
Keller, 2007). Some researchers also described the first component, idealized influence,
as charisma (Schepers et al., 2005; Dubinsky et al., 1995), and further, a few researchers
mentioned the first two, idealized influence and inspirational motivation, as charisma
(Kark et al., 2003; Avolio et al., 1999). Idealized influence displays leaders as most
respectful, trustable, and admirable, shows the characteristics of setting vision and
articulating it to accomplish, and describes leaders’ risk sharing with their followers in
line with ethical principles (Bass, 1999; Bass et al., 2003). Inspirational motivation
describes how leaders encourage their employees to achieve vision through creating
individual and team spirit (Bass et al., 2003). The component, intellectual stimulation,
explains how leaders promote their employees’ innovative and creative skills by
solving problems entirely in new ways without criticizing employees for mistakes
(Bass, 1999; Bass et al., 2003). Finally, individual consideration emphasizes leaders’
mentor role on developing their employees’ potential, focusing employees’ needs for
achievement and growth, and developing learning opportunities (Bass, 1999; Bass et al.,
2003; Bass and Riggio, 2006).

Definition of knowledge management variables

In today’s turbulent economic environment, organizations face high competition,
technological obsolescence, and globalization. In this situation, none other than
intangible assets i.e., knowledgeable employees could not help their organizations to
achieve competitive advantage (Perez and de Pablos, 2003). Therefore, firms take
immense efforts in creating new knowledge among employees and through which they
develop organizational knowledge. Davenport and Prusak (1998, p. 5) described
knowledge as “a fluid mix of framed experience, values, contextual information,
insight that provides a framework for evaluating and incorporating new experience
and information. It originates and is applied in the minds of knowers”. Further,
knowledge is characterized by transferability, capacity for aggregation,
appropriability, and specialization, and therefore, it could be utilized throughout a
firm (Grant, 1996). Apart from individual employee knowledge, there are generally two Leadership and
types of knowledge mentioned in the literature, which are explicit knowledge and tacit human capital
knowledge. Knowledge that is structured, documented, and shared through
information technologies is explicit knowledge; whereas tacit knowledge is prevalent
only in employees’ minds and is delivered through their behaviors and perceptions
(Yahya and Goh, 2002). Interactions between these types of knowledge with individual
employee knowledge enormously support firms to create organizational knowledge, 109
and thus, firms exploit the benefits of competitive advantage when the developed
organizational knowledge is rarely available in other firms, valued more in current
firm, and unimitatable by other firms (Perez and de Pablos, 2003; Barney, 1991).
Therefore, organizations are highly concerned about the issues of managing
KM is “the management function responsible for regular selection, implementation
and evaluation of knowledge strategies that aim at creating an environment to support
work with knowledge internal and external to the organization in order to improve
organizational performance” (Maier, 2005, p. 433). However, this definition mostly
concentrates on strategic process of KM according to Bukowitz and Williams (1999).
Importantly, literatures emphasize that the process involved in KM should be
integrated with employees who lead their organization towards achieving competitive
advantage (Yahya and Goh, 2002; Perez and de Pablos, 2003; Davenport and Prusak,
1998). In this direction, tactical KM process is given much consideration, and it
comprises knowledge acquisition, knowledge documentation, knowledge transfer,
knowledge creation, and knowledge application (Filius et al., 2000). According to Filius
et al. (2000) on implicitly defining KM process, employees acquire knowledge from
external networks and customers; they document solutions for the problem in the
brainstorming sessions and consequently, frequent changes take place in procedures
and policies; knowledge is distributed formally and informally among employees and
from mentor to employees; knowledge creation takes place through discussing
problems and failures and assigning employees to new high profile projects; and
knowledge is applied in the form of using customers’ experiences for product or service
Apart from knowledge process capability, Lindsey (2002) also emphasizes that the
effectiveness or success of KM depends on knowledge infrastructure capability of an
organization. Supporting the importance of knowledge infrastructure, Davenport et al.
(1998) identified from 31 KM projects that establishing a knowledge-friendly culture
and introducing knowledge transfer channels are the two among eight KM success
factors. While considering knowledge is a crucial factor behind sustainable
competitive advantage and overall success of a firm, it should be noted that
knowledge issues are closely interlinked with organizational culture (Davenport and
Prusak, 1998). Since culture has no fixed or broadly agreed meaning, many authors
have explained their views about organizational culture. Specifically, Miron et al. (2004,
p. 179) define organizational culture as “a set of beliefs and values shared by members
of the same organization, which influence their behaviors”. In this direction,
researchers explained various kinds of cultures, for example, innovation-specific
culture fosters expectations and guidelines for employee’s creativity, willingness to
experiment, and risk-taking skills (Jassawalla and Sashittal, 2002; O’Reilly et al., 1991);
supportive culture encourages employees to get involved in the decision making
LODJ process with mutual respect and trust (Bititci et al., 2004); detail-oriented culture
32,2 comprises of values of being analytical, paying attention to detail, and being precise
( Judge and Cable, 1997), and thus, such organizations maintain a high level of accuracy
in detailed work over a period of time to reduce problems by introducing
improvements that increase efficiency and maintain maximal continuity and stability
(Miron et al., 2004). Therefore, culture is not inside of employee’s head, but somewhere
110 among the heads of a group of employees of the organization where symbols and
meanings are publicly expressed through work group interactions, in board meetings,
and also in material objects (Alvesson, 2002). In addition, culture prevails in the
organization through artifacts, language in the form of jokes and metaphors, behavior
patterns in the form of rituals and ceremonies, norms of behavior, heroes, symbols,
symbolic actions, and history (Brown, 1995).
On defining communication, it is “a dimension of structure in which information is
transmitted throughout the organization to provide data for decision making, to
motivate employees, to exercise control, and to express satisfaction or dissatisfaction
with operations” (Loveridge, 1996, p. 9). In the organizations, employees should be
given information about the organizational activities, goals, and directions, and they
must be allowed to have channels to pass relevant information to management
(Rodwell et al., 1998). It is commonly believed that communication is central to four
management competencies such as management of attention, meaning, trust, and self.
Therefore, communication has a vital role in both organizational functioning and
organizational effectiveness improvement (Bush and Frohman, 1991).

Definition of human capital

Emphasizing human capital as a part of intellectual capital, human capital theory
acknowledges the contribution of employee’s human capital on developing intellectual
capital. Social capital, a component of intellectual capital as like human capital, also
inevitably contributes on human capital development. According to Nahapiet and
Ghosal (1998, p. 243), social capital is “the sum of the actual and potential resources
embedded within, available through, and derived from the network of relationships
possessed by an individual or social unit”. However, employees have a controlling
mechanism while investing on their human capital (Becker, 1975). Human capital is
referred to as employee’s knowledge, skills, capabilities, commitment, know-how, and
ideas and health, which add economic value to firms (Becker, 1962; Skandia, 1998;
Sullivan, 1999; Ulrich et al., 1999; Snell and Bohlander, 2007). Bart (2001, p. 320)
particularly defines human capital as “the collective knowledge, education, skills,
attitudes, and experiences of a firm’s employees”. On searching for specific attributes
or characteristics by which both human capital and human resources deviate each
other, Garavan et al. (2001) quoted that flexibility, adaptability, and employability are
the attributes which act as catalyst for revolutionalizing human resources into human
capital. According to human capital theory, investments on human capital would be
high when employees greatly benefit from the developed human capital (Wayne et al.,
1999). Such human capital benefits are high individual return on investment, increase
of compensation, being a future leader, opportunity to participate in high profile
project, and increase in status and authority (Ulrich et al., 1999; Harley, 1999; Bontis
and Fitz-enz, 2002; Motley, 2007).
These benefits are employee perceived benefits, and so the extent at which they gain Leadership and
these benefits will be related to the amount of employees’ perceived human capital human capital
creation. Bontis and Fitz-enz (2002) explained human capital benefits through human
capital effectiveness and human capital valuation in terms of human capital return on
investment and compensation factor respectively. Employees perceive their human
capital benefits when they have potential to deliver more return in terms of
contributing to intellectual capital creation over the investment made at them. Further, 111
they realize the degree of human capital improvement by the increase in pay.
Considering an employee as one of the future leaders by the organization is the benefit
derived from human capital since s/he has enormous potential to vertically move into
an influential position (Ulrich et al., 1999). These future leaders show their better
performance on the given responsibilities and work related activities. Further,
employees feel their human capital benefits when they get opportunity to participate in
high profile project or cross-functional teams (Ulrich et al., 1999). Finally, employees
also feel their human capital benefits when their authority and status increases. In this
moment, it should be noted that skill development is associated with change in
authority and status. In line with Harley (1999), these employees realize change in
authority as they are empowered.

Transformational leadership and human capital benefits

In the organizations, transformational leaders stimulate employees’ intelligence,
provide vision, recognize employees personally, and consider employees individually
(Rafferty and Griffin, 2004), and consequently “leaders and followers raise one another
to higher levels of morality and motivation” (Burns, 1978, p. 20). Leaders who are
perceived to possess the characteristic of idealized influence always have more
willingness to involve in risk-taking job activity and thus, they are more influential,
effective, and willing to trust their employees (Bass, 1990a; Bass and Riggio, 2006; Sgro
et al., 1980). Alternatively, these leaders create trust by providing employees with
autonomy and decision making to perform their tasks and thereby they promote
employees’ innovative behaviors and self-efficacy (Scott and Bruce, 1994; Conger and
Kanungo, 1988). On other hand, this type of empowerment or increased intrinsic
motivation improves employees’ creative performance (Speritzer, 1995; Amabile and
Gryskiewicz, 1987). Supporting employee perceived human capital benefits, London
(1993) and Harley (1999) assert that empowerment assists employees to gain authority
in their organizations. Further, Phillips (2005) considers employees’ innovative
behavior and creative performance as human capital measures since these attributes
enhance human capital effectiveness in the form of return on investment such as new
products or processes development, patents, and copyrights. To support these
arguments, Podsakoff et al. (1996) found from 1,539 employees that employees who
express more trust at leaders are perceived to have more ability, experience, and
Leaders possessing the characteristic of inspirational motivation augment
employees’ goal accomplishing capabilities or job performance to achieve the set
vision (Nemanich and Keller, 2007). In other hand, transformational leaders create
individual and team spirit among employees as they show enthusiasm and optimism at
employees through coaching, encouraging, and supporting. As a result, they enhance
employees’ performance while performing job activities and produce high return on
LODJ investment from employees (Yukl, 2006; Boerner et al., 2007). Leaders who
32,2 intellectually stimulate employees encourage them to solve task-oriented problems
in new and different ways and thereby leaders enforce their employees in challenging
organization-held beliefs and values (Yukl, 2006). From this, these leaders promote
employees’ ability to analyze and solve organizational problems (Rafferty and Griffin,
2004). Thus, leaders encourage employees’ professional growth to support employees
112 to attain human capital benefits (Turner et al., 2005).
Another characteristic of transformational leaders, individualized consideration,
supports employees in achieving self-actualization through fulfilling their expectations
by individual understanding (Rowe, 2007). Because of this individual consideration,
leaders promote high interpersonal relationships among employees to avoid any
conflict, and ensure enhanced employee productivity in the organizations (Nemanich
and Keller, 2007). Further, leaders provide employees who have human capital value
opportunities to participate in projects that contribute to achieve competitive
advantage (Schepers et al., 2005). At the work, transformational leaders significantly
promote individual employee’s innovative behavior through encouraging high quality
leader member exchange among employees (Krishnan, 2005; Scott and Bruce, 1994).
Supporting the studying relationship, Wayne et al. (1999) had found positive
relationship between leader-member exchange and employee salary progression and
formal authority with the help of 245 supervisor-subordinate dyads. However,
considering leadership competencies at this moment, Alimo-Metcalfe et al. (2008)
maintained that leadership competencies did not significantly predict organizational
performance. Further, Bolden and Gosling (2006) quoted that competencies reinforce a
traditional way of thinking. Importantly, Alban-Metcalfe and Alimo-Metcalfe (2009)
described that “how” of leadership significantly explained organizational productivity
rather than “what” of leadership. Following the above arguments on the influence of
transformational leadership on employee’s human capital benefits, we propose that:
P1. Transformational leaders significantly support employees to perceive human
capital benefits in the organizational life.

Mediation role of knowledge management process

The concept of a KM department is emerging in most of the organizations, and in the
past, KM functions were performed with other departmental functions. In view of
augmenting human capital benefits, tactical KM process should be considered rather
than strategic KM process since the former approach concentrates on employees’
day-to-day activities; whereas the latter focuses on alignment of knowledge strategy
with organizational business strategy (Filius et al., 2000). Although researchers (Politis,
2001, 2002; Bryant, 2003) had examined the role of transformational leadership on KM,
its impact on employee human capital development is scarce in the literature.
According to Filius et al. (2000), knowledge is acquired through participation in
professional networks, with customers and competitors, and research and
development. Connecting with professional networks is a kind of social capital
possessed by an individual employee (Friedman and Krackhardt, 1997), and through
these networks, employees are in contact with suppliers, customers, and competitors.
On exploring supporting literature for human capital benefits, Coleman (1988)
described that social capital is essential for human capital creation. Also, Lin and
Huang (2005) found that employees who involve in creating social capital have
received high potential evaluations in terms of positive career outcomes from their Leadership and
leaders. In this direction, transformational leaders support employees’ promotion human capital
through social capital creation among employees, and consequently, influence their
salary progression. In addition, a study conducted among 239 employees by Politis
(2002) revealed that transformational leadership behaviors, particularly, charismatic
leadership and intellectual stimulation are positively related to knowledge acquisition
but individual consideration is negatively associated with knowledge acquisition. 113
In the organizations, knowledge documentation consists of the processes of using
documented knowledge in the brainstorming sessions to solve organizational
problems, documenting learning from success and failures of the projects, and making
frequent changes in the procedures and handbooks (Filius et al., 2000).
Transformational leader’s risk-taking behavior frequently invites both success and
failure during execution of high valued projects (Hater and Bass, 1988). Accordingly,
they influence organizational learning by encouraging documenting these successes or
failures. In this direction, they promote firm innovation through individual employee’s
innovative behaviors in the form of creating and managing information and knowledge
(Aragon-Correa et al., 2007; Crawford, 2005). In addition, Crawford (2005) found, from a
research study conducted among 1,046 participants, that transformational leadership
behaviors are positively correlated with document creation. Thus, these leaders
support employees to achieve human capital benefits through documenting
Knowledge transfer takes place in the organizations formally or informally through
mentors and professional meetings (Filius et al., 2000). Owing to the individualized
consideration, transformational leaders act as mentors to those employees who wish to
develop their potential (Bass, 1990b). It is widely acknowledged that mentoring is a tool
for human resources development (Kim, 2007). Thus, implemented practices leading to
developing organizational people would have certain impact on employee perceived
human capital benefits. Following Sosik et al. (2004), that employees or protégés
consider mentors who have high learning goal-orientation as transformational leaders,
these mentors offer more challenging projects or assignments to develop protégés’
career and as a result, employees realize their human capital benefits (Kim, 2007).
Knowledge is created in the organizations through frequently assessing employees’
performance, discussing organizational problems and failures, incorporating new ideas
into product or process development, rewarding employees, and developing learning
groups (Filius et al., 2000). In this moment, it should be noted that transformational
leaders create new ideas and support employees to create and implement these ideas
into new product and process development. In this direction, positive relationship
between transformational leadership and employees’ in-role performance is observed
(Podsakoff et al., 1996). Further, organizations create knowledge through encouraging
creative performance among employees. To support this notion, Yahya and Goh (2002)
found a positive correlation between creativity and knowledge creation (r ¼ 0:44,
p , 0:01). Fostering creative performance, transformational leaders involve in
knowledge creation process by offering both monetary and nonmonetary rewards.
Even though such particular behavior is listed under transactional leadership, research
studies also revealed a positive relationship between transformational leadership and
contingent reward (Bass and Riggio, 2006; Goodwin et al., 2001). To enable employees
to achieve the set vision, transformational leaders voluntarily involve in rewarding
LODJ employees in terms of recognizing their behavior through corporate enthusiasm,
32,2 offering employee award, and offering reward for their competencies. Consequently,
employees perceive human capital benefits through salary progression.
According to Filius et al. (2000), an organization applies knowledge in the form of
using existing knowledge for new applications and customers’ experiences to improve
products or services. Connecting knowledge application with innovation, Woodman
114 et al. (1993) described organization innovation as the creation of new products or
services useful to customers. Transformational behaviors support leaders in insisting
on knowledge application in the organization and consequently, they promote
organizational innovation (Yahya and Goh, 2002; Crawford, 2005). The chances are
more for promoting organizational innovation through developing human capital by
means of improving employees’ creative or innovative performance. Thus, knowledge
application renders human capital benefits to employees.
Significantly, organizations are involved in implementing KM process for
organizational knowledge creation to achieve and sustain competitive advantage.
However, without affecting individual employee’s knowledge, building an
organizational knowledge is not certain. Therefore, implementing KM process in
any organization primarily refines employee’s knowledge. If knowledge is considered
as a component of human capital, the process of creating or improving employee
knowledge certainly has certain effects on employee’s human capital benefits. For
instance, those with knowledge, as high performers, deliver a high return on
investment, attract high profile project participation, receive a high salary, and
improve their status and authority:
P2. Transformational leaders involve in executing tactical knowledge
management process in the organization, and through which they improve
employees’ human capital benefits.

Mediation role of organizational culture

On explaining the link between transformational leadership and organizational
culture, leaders establish employee supportive culture and trusting culture in the
organization through their charismatic and individualized consideration
characteristics. According to Mendonca and Kanungo (1996), high power distance
enables leaders to act as a mentor and coach to create trust and promote employees’ job
performance. In this direction, because of the leader-mentorship function, employees
perceive human capital benefits in the form of enhanced leadership skills (Kim, 2007).
Regarding the quality of the deliverables, Miron et al. (2004) proved, from research
conducted among 349 employees working for a research and development company,
that quality performance is ensured by creating an attention to detail culture.
According to the set challenging vision and difficult to achieve goals, these leaders
modify organizational culture in line with internal and external organizational
environmental changes. Consequently, employees augment their performance in the
form of producing high return on investment (Mendonca and Kanungo, 1996; Bass,
1990b). Individualism focused culture promotes individual employee’s autonomy,
individual initiative, and emotional independence; whereas collectivism focuses on
group identity and distinction between in-group-out-group (Rhee et al., 1995). As
mentioned before, employee autonomy and initiative lead to improve human capital
benefits, and it is expected that transformational leaders would execute their functions
as effective as in the individualism culture. Equally, collectivism-oriented culture Leadership and
highly focuses on group orientation and commitment (Rhee et al., 1995; Cohen, 1999). human capital
According to Ulrich et al. (1999), commitment is equally required for human capital
creation. Exploring the kinds of above culture transformational leaders establish, Jung
et al. (1995) described that these leaders perform more effectively in collectivism culture
than individualism culture. Culture focusing on high uncertainty avoidance follows
organizational rules and regulations, norms, and procedures. Therefore, employees’ 115
innovative behavior is stimulated in the low uncertainty avoidance culture (Den Hartog
et al., 1999). Thus, transformational leaders create low uncertainty avoidance culture to
induce employees’ innovative skills. Such skill development enhances employee’s
salary progression and authority through which an individual employee perceives
human capital benefits. According to masculinity-femininity culture, masculine
activities are characterized as goal setting and transactional processes whereas
feminine activities are characterized as employee development orientation and more
sensitive to employees’ needs (Kark, 2004). In this direction, transformational leaders
create femininity culture in the organization (Bass, 1985). Hereby, culture focusing
highly on self-actualization and employee development supports the prevalence of
human capital creation (Xenikou and Simosi, 2006).
An organization focusing on creating groups and developing employees
concentrates highly on flexibility and future orientation culture (Quinn, 1988). This
culture is encouraged by transformational leaders through an idealized influence, by
which they convey to employees that future changes are essential and meaningful for
achieving competitive advantage. Thus, employees perceive the necessity of
implementation of changes. In this vein, Lau et al. (2002) found from a study
conducted among 3,960 managers and employees that employees who view
organizational changes positively are highly committed. According to Ulrich et al.
(1999), human capital is described as both employee capability and commitment. Thus,
organizational culture affects employee perceived human capital benefits. Further,
through establishing achievement-oriented culture, leaders frequently deliver feedback
on the ongoing performance of employees, and thus, employees increase their
perceived competence and self-efficacy which affect employee perceived human capital
benefits (Xenikou and Simosi, 2006). The above arguments lead to propose that:
P3. In the organization, transformational leaders establish culture, which
supports employees to achieve human capital benefits.

Mediation role of communication

As mentioned before, spreading over the information through out the organization is
the process of communication. Communication is an essential part of KM system.
Therefore, it contributes to achieve competitive advantage, since open and easy
communication channels are necessary for achieving organizational goals and
accomplishing organizational activities (Zander, 1994). Developing an efficient
common network structure and organization-wide knowledge structure are essential
for ensuring ease flow of communication and to achieve KM system success (Jennex
and Olfman, 2005). It is not possible to attain KM system success without affecting
human capital in the organization. To analyze the prevalence of communication in any
organization, two types of communication are considered such as mass communication
and face-to-face communication. Mass communication is generated between
LODJ organization and employees through using an advanced technological infrastructure
32,2 and publishing a newsletter weekly or monthly; whereas face-to-face communication is
generated between an employee and manager through direct verbal communication.
On understanding the extent of the prevalence of communication, Budhwar (2003)
found that 65 per cent of the firms significantly share strategic information and
financial information with their management employees; whereas these practices are
116 not seen among 71 per cent of low-level employees. In the purpose of explaining the
relation between transformational leadership and communication, leaders
characterized by idealized influence are involved in communicating a clear vision or
organizational goals to employees throughout the organization. Through
communicating a shared vision, leaders force all employees towards organizational
learning (Aragon-Correa et al., 2007).
On the other hand, in order to accomplish vision, transformational leaders
encourage use of technology, for example, internet and intranet, since they support new
learning and frequently and effectively seek information from employees (Madzar,
2001). However, it is essential to analyze employees’ perceptions on usefulness and ease
of use of the technology while explaining the technological advantage for
communication. In this direction, Schepers et al. (2005) found, from a study
conducted among 226 departments, that transformational leadership is related to
perceived usefulness of new technology. Since these leaders stimulate employees’
intelligence to solve organizational problems in new and different ways, all employees
indirectly accept the usage of new technology through perceived usefulness of new
technology. Supporting the nexus of the relationship between communication and
human capital benefits, it was found that usage of new technology for communication
in the organization improves an employee’s personal innovativeness and trust
(Agarwal and Prasad, 1998; Gefen et al. 2003). As mentioned earlier, these personal and
interpersonal factors are related to perceived human capital benefits. Further, the
technical infrastructure or communication facility, for example, intranet facility,
established in the organization provides employees a collaboration opportunity and
facilitates organizational learning (Lai, 2001). Importantly, Lai (2001) found, from a
research study conducted among 23 Hong Kong companies, that the extent at which
the intranet implemented in the organization has significant contribution on
employees’ performance. As most of the firms are featured by top-down
communication, it is understood that communication originates from top
management. Budhwar’s (2003) findings show that firms communicate their
activities mainly through unions, weekly or monthly employee meetings, established
quality circles, and suggestion or feedback boxes. Employee development-oriented
leaders consolidate technical details of the process or methods and projects undergoing
in the firms and distribute to all employees, especially, to white-collar employees to
improve their technical and general knowledge. Thus, prevalence of communication in
the organization increases employees’ commitment (Rodwell et al., 1998), and as a
result, human capital development takes place.
On describing the existence of face-to-face communication in the firms, Dyer (1987)
indicates the prevalence of communication through increased listening, timely
feedback, and openness to suggestions. Leaders who possess the characteristic of
individualized consideration pay attention to their employees’ problems, provide
necessary feedback to their activities, and offer suggestions to accomplish job
activities. Thus, leaders ensure open communication or face-to-face communication in Leadership and
the organization to augment employees’ human capital benefits. From these ways, human capital
transformational leaders consider that direct face-to-face communication is a tool to
develop a higher level of employee potential, through which, they personalize the
interactions and are aware of their concerns. According to Dahle (1954), greater impact
on employee performance is obtained when leaders initiate face-to-face
communications with employees. Further, Smidts et al. (2001) found from a study 117
conducted among 402 employees that employee communication in the organization is
positively related to organizational identification that affects employees’ performance.
In contrast, Bass (1990b) asserts that mass communication delivered by a
transformational leader towards an individual employee highly affect his/her
performance than one-to-one communication between an employee and supervisors
in any level.
Comparing technology-oriented mass communication and face-to-face
communication, groups using computers for communication increase their
performance on idea generation than the groups that do otherwise (Bordia, 1997).
Further, employees using computer-mediated communication deliver better job
performance than employees using face-to-face communication when limited time is
given by leaders (Bordia, 1997). From a research study conducted among groups,
Valacich et al. (1993) found that groups using computer-mediated and electronic
communication for interactions generate more unique and high quality ideas than
groups using verbal communication. Generation of unique and quality ideas affects
employees’ human capital benefits. Thus, the above arguments lead to:
P4. In the organization, transformational leaders encourage prevalence of
communication among employees, which supports employees to achieve
human capital benefits.

Organizations immensely concentrate on the process of developing human capital. The
reason is that human capital contributes on intellectual capital creation in the
organization through which achieving and sustaining competitive advantage is viable
(Bontis and Fitz-enz, 2002). Therefore, firms take much effort in finding possible ways
to increase the contribution of the human capital pool in improving organizational
financial performance. In this study, a systematic literature review is conducted to
analyze the mediation role of KM in the relationship between transformational
leadership and employee perceived human capital creation or benefits. In specific, KM
is viewed as two dimensions in line with Lindsey (2002) such as knowledge process
capability and knowledge infrastructure capability. Tactical KM process is considered
under knowledge process capability. This process has greater impact on employees’
performance since it affects employees’ day-to-day knowledge-related activities. Under
knowledge infrastructure capability, organizational culture and communication factors
have been considered. Thus, a conceptual model comprising transformational
leadership, KM factors, and employee perceived human capital benefits is developed in
this study, and it has great potential in contributing to leadership, KM, and human
capital management literature.
Although literature has examined the relationships between leadership and human
capital (Edmondson, 1996; Bontis and Fitz-enz, 2002; Liu et al., 2003), these focused
LODJ entirely on organizational human capital rather than individual employee human
32,2 capital or employees’ perceptions on their human capital benefits. However,
emphasizing the significance of leadership on achieving human capital benefits,
current literature has already focused on individual employee’s ability, innovative
behavior, salary progression, and status (Rafferty and Griffin, 2004; Scott and Bruce,
1994; Wayne et al., 1999). Therefore, greater importance shall be given to develop
118 organizational human capital through supporting the development of an individual
employee human capital. In this direction, organizations should train their managers to
develop transformational leadership behaviors. This training would enforce leaders to
ensure the human capital development process, and augment their potential to direct
this capital development to achieve or sustain competitive advantage. Thus, an
empirical study is strongly recommended to examine the stated proposition that
directly link both transformational leadership and perceived human capital benefits. In
this purpose, Bass and Avolio (1995) have already constructed a questionnaire for
measuring transformational leadership behavior. In view of developing a construct for
employee perceived human capital creation or benefits, the notions of Ulrich et al.
(1999), Harley (1999), Bontis and Fitz-enz (2002), and Motley (2007) could be
In the literature, the relations between transformational leadership and KM factors
are greatly examined (Politis, 2001, 2002; Bryant, 2003, Crawford, 2005). Most of the
research studies examined this relationship ended up with KM activities. Only a few
studies have gone beyond the KM activities, for example, Politis (2001) examined this
relationship to predict organizational performance. This paper links transformational
leadership and KM relationship with human capital benefits. However, examining the
degree of contribution of this relationship on human capital benefits is essential in
future. Therefore, testing the above stated model empirically would help to formulate
the appropriate structure of the model. In this direction, for conducting empirical study,
constructs developed by Filius et al. (2000) and Birasnav and Rangnekar (2010) could
be used to measure tactical KM process. For organizational culture, O’Reilly et al.
(1991), Lai and Lee (2007), and Nemanich and Keller (2007) have constructed suitable
measures. Further, communication construct could be chosen from the studies of
Al-Alawi et al. (2007) and Lai (2001).
This paper analyzes employee perceived human capital benefits only in the KM
environment. In future, the mediation role of HRM practices instead of KM system
factors shall be analyzed. Although researchers had predicted the relationship between
HRM and human capital (Lepak and Snell, 1999; Snell and Dean, 1992; Birasnav and
Rangnekar, 2009), the extent of impact of HRM aspects is considerably little in this
study, for example, reward and mentoring issues are taken into account. In future, this
study could be also extended by focusing different leadership styles instead of
transformational leadership, for example, participative leadership (Ogbonna and
Harris, 2000), directive leadership (Sims and Manz, 1996), and charismatic leadership
(Den Hartog et al., 1999). Empirically examining the extent of impact of these
leadership styles on perceived human capital benefits would support organizations to
find the best way of a specific leadership style for increasing organizational financial
Since this study focuses on employee perceived human capital benefits, it should be
noted that employee’s demographic characteristics such as age, gender, education,
rank, and tenure would have certain impact on their perception. For instance, Leadership and
organizations purposefully provide more resources to develop younger employees’ human capital
human capital than older (Pennings et al., 1998). Men differentiate themselves from
women in terms of behavioral differences such as competing, being creative, and
risk-taking ( Johnson et al., 1997). On explaining the impact of education, Becker (1962)
described education as one of the components of human capital. Further, Judge and
Bretz (1994) described that higher rank and tenured employees have more 119
opportunities to learn from organizational environment and job throughout the
tenure. The organizational characteristics such as ownership and size must also be
considered in addition with employee’s characteristics for future research. For
example, knowledge sharing greatly occurs in small and medium sized firms since
these firms have simple organizational structure (Birasnav and Rangnekar, 2009).
Further, Lowe et al. (1996) found from the meta-analytic study that transformational
leadership is more prevalent in private organizations than public organizations. This
paper encourages conducting an empirical study to analyze the mediation role of KM
factors such as tactical KM process, organizational culture, and communication after
controlling for the above demographic characteristics and organizational
Finally, many researchers examined the interrelationship between knowledge
process capability, for example, KM process and knowledge infrastructure capability,
for example, organizational culture and communication (Park et al., 2004; Al-Alawi
et al., 2007; Connelly and Kelloway, 2003; Lai and Lee, 2007). As this study focuses on
the mediation role of KM, the interrelationships between knowledge process capability
and knowledge infrastructure capability are not considered. In future, researchers
could combine these interrelationship effects on employee perceived human capital
benefits. Further, cautious is required to interpret the findings of this study. Like
transformational leadership, many research studies were carried out to closely
represent transformational behavior of a leader, for example, the charismatic
leadership by Shamir (1995) and “nearby” leadership by Alimo-Metcalfe and
Alban-Metcalfe (2005). However, this paper entirely focused on Bass and Avolio’s
(1995) transformational behavior of a leader. Though research studies explained the
significant relationship between transactional leadership behavior and KM process (for
instance, Bryant, 2003), transactional behavior is not considered in this paper as it
doest not give much consideration on individual employee’s human capital.

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