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Winter 2004 CalBusiness  
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Leading by Example or by Sacrifice: Two Methods for Effective Leadership

By Ute Frey

What makes effective leaders is often perceived to be a function of outstanding leadership qualities, such as having charisma or vision. For Benjamin Hermalin, Willis H. Booth Professor of Banking and Finance, however, the one thing that undeniably makes a leader is the fact that he or she has followers.

While Hermalin does not dispute the value of leadership characteristics, he has focused his research on the dynamics that exist between leaders and followers. Since following is a voluntary act, Hermalin writes, it is the followers who determine their leaders.

Hermalin has used economic modeling techniques to show how leaders inspire others to follow and what tools they use to be effective. Following up on a 1998 paper, in which he described leadership dynamics in a single situation, a more recent paper, issued this year, looks at these dynamics in repeated interactions and shows how leaders and followers influence each other over time.

A leader’s reputation for honesty is critical because, as Hermalin says, "people follow because they believe in their leader, not because they were coerced or rewarded for doing so."

His recent paper demonstrates that followers are most likely to accept a leader when they are most uncertain about what action to take. Therefore situations of uncertainty offer opportunities for leaders to strengthen their reputations.

But reputation is not always sufficient in getting followers to cooperate. Sometimes leaders need tools to convince their followers of their trustworthiness. Whether knowingly or unknowingly, leaders draw on two basic methods to signal their trustworthiness, according to Hermalin: leading by example and leading by sacrifice.

In leading by example, leaders signal their followers by being the first to take an action. This approach is inherently known by most people. For example, parents often set the example when teaching their children appropriate behaviors, such as stopping at red lights.

A second approach, leading by sacrifice, allows leaders to demonstrate to their followers the importance of an action by offering a gift or making a sacrifice. Examples range from world-changing events, such as Mahatma Gandhi’s hunger strike to end the violent uprisings in India, to the mundane, such as a parent offering refreshments at a PTA meeting to entice other parents to attend.

Followers, in turn, can affect the dynamic by how they respond to the leader’s action.

If a leader is dishonest, followers can punish him/her by ceasing to trust or by ceasing to pay tribute. The future cost of being dishonest today is often sufficient to motivate the leader to be honest.

"A lot of leadership is based on trust," says Hermalin, "which is easy to maintain during good times." However, he explains, during bad times a leader has to balance the short-term loss of the followers’ trust by communicating a bad state of affairs with the long-term benefit of a maintaining a reputation for honesty. "You have to be able to walk the walk," says Hermalin, "especially when times are difficult."

A word of advice to aspiring leaders: "Think about the symbolic value of making sacrifices," says Hermalin. "Your passion will show that something is worth doing."

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Benjamin Hermalin

Benjamin Hermalin, the Willis H. Booth Professor of Banking and Finance in the Economic Analysis and Policy Group.
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