Transformational Leadership and Industrial Relation Instruments as a

Determinant of Firm’s Performance Mediated by Industrial Relation

Climate

DYAH GANDASARI1, DIENA DWIEDIENAWATI2*, M. FAISAL3, DAVID TJAHJANA4

1POLBANGTAN Bogor,

INDONESIA

2Departement Business Management,

Binus Business School,

Bina Nusantara University,

INDONESIA

3SB IPB, Bogor,

INDONESIA

4Multimedia Nusantara University,

INDONESIA

*Corresponding Author

Abstract: - Globally companies have faced conflict in the workplace which led to unfavorable impacts on

organizational performance. The dispute would cause an unfavorable workplace climate which leads to a

reduction in the level of the firm’s productivity and negatively impact the chance of the organization's survival.

The objective of the study is to confirm the relationship between Transformational Leadership and IR

instruments to IR Climate. And how IR climate relates to firm performance. A Descriptive quantitative study of

406 respondents from various industries in Indonesia was conducted. Participants of this study were from

various stakeholders in organizations such as Directors, Managers, Employees, Heads of Unions, and members

of unions from various types of organizations. The result shows that Transformational Leadership and

Industrial Relations Instruments positively influence Industrial Relation Climate. And Industrial Climate has a

positive relation to the Firm’s Performance.

Key-Words: - Firm’s Performance, Industrial Relation Climate, Industrial Relation Instruments,

Transformational Leadership

Received: September 28, 2022. Revised: May 14, 2023. Accepted: June 7, 2023. Published: June 23, 2023.

1 Introduction

Globally companies have faced conflict in the

workplace which led to an unfavorable impact on

organizational performance. The negative impacts

on the firm can be manifested in loss of money such

as revenue and assets lost and can be even worse in

the loss of people's lives, [1]. The dispute would

cause an unfavorable workplace climate which leads

to a reduction in reduction of the level of the firm’s

productivity and negatively impact the chance of the

organization's survival, [2].

On the contrary, [3], have reported that a

conducive environment in the workplace has a

positive impact on organizational performance.

Previous studies have revealed the positive

influence of the Industrial Relations (IR) climate on

employee satisfaction, loyalty, and commitment.

The study also proved that the relationship between

IR Climate and the productivity of the firm, and

organization efficiency is positive and significant,

[4]. The study, [5], argued that IR climate has a

positive influence not only on an organization's

level of performance but also on the employee's

level. Fostering a conducive IR climate is required

for survival in a highly competitive environment. To

establish a good IR climate, the organization needs

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to establish organizational flexibility to ensure

employees’ commitment, [2].

The current studies on IR climate mostly focus

on the outcome of IR climate such as [6], conflict

resolution and negotiation, [7], and organizational

performance, [8]. The study, [9], argued that an IR

climate that fosters collaboration has been linked

positively to profitability and revenue, [9]. The

study, [10], stated that a conducive IT climate

positively influences organization and employee

relationships. This favorable relationship between

the organization and the employee produces a

positive outcome such as better job performance,

positive behavior, and all levels of commitment. A

good IR climate affects a better attitude towards the

leader and the employee's performance. Therefore,

it is essential for an organization to develop and

establish a positive IR climate.

Even though the positive outcomes related to a

good IR climate are common knowledge,

however there are limited academic studies

available, [2]. The academic literature on IR cannot

catch up with the collection of facts and opinions

from case studies and surveys from the real world.

The possible reasons are such as what, [7], pointed

out. The first point is that practitioners of industrial

relations (IR) have little respect for theory and doubt

its usefulness in real-world applications. The second

point is that academics in the field tend to focus

more on analyzing and describing practical aspects

rather than delving into theoretical frameworks. The

third point is that IR issues have relatively low

priority on the political and practitioner agendas,

which is evident in the limited number of

publications on the subject.

A search conducted on the Science Direct

database using the keywords "industrial relation"

yielded only 149 results across all years. When

further refined to include only "research" and

"review" articles, the number decreased to a mere

118 publications. Among those 50 articles published

in the last five years. The objective of this study is

to contribute empirical evidence on the impact of

leadership and IR instruments on the IR climate.

It is critical to understand the factors that

influence a good IR climate. Previous studies

claimed that related factors for good IR climates are

such as leadership styles (e.g. ethical leadership

styles), [10], social dialogue, [11], [12], employee

voice, [13], employee representation, [14],

employee participation, [15], [16], involvement of

HR, [17], [18], trust, [19], organizational justice,

[19], [20], Corporate Governance, [21], Union

effectiveness, [22], [23], perceived labor-

management relation, [23], [24], management

participation, [25], and Organization culture, [26].

A qualitative study from [27], revealed how

leadership might play a critical role in the

effectiveness of an organization. The study, [27],

further confirmed that when participants claimed

that there is a positive IR climate, usually there is a

somehow top management involvement. This study

also revealed that transformational leadership is

considered effective leadership in fostering a

positive IR climate. Yet, the current study on

transformational leadership to IR climate is still

limited.

The objective of this study is to answer the

further study recommendation from [27], to confirm

the relationship between transformational leadership

style with IR climate. The studies confirm that

having a good organization structure supporting the

IR climate (IR instrument) is still lacking as well.

This study also aims to confirm the influence of IR

instruments on IR Climate. And how IR climate

relates to firm performance.

This study contributes to strengthening the body

of evidence of transformational leadership.

Transformational leadership is one of the most

studied leadership, however still limited to the IR

climate. This study also contributes to enriching the

literature on IR climate.

The structure of this writing starts with the

Introduction and is followed by Literature Review.

Afterward, the Methodology of the study is

depicted. The following parts are Study Results and

Discussion. This writing will be closed with a

Conclusion, Limitation, and Recommendation.

2 Literature Review

2.1 Transformational Leadership

The perceived knowledge of top management on IR

issues can be reflected by their involvement in IR.

The involvement of top management is the

reflection of how much the top management cares

and this will lead to the creation of trust and

reputation. The involvement of top management

leads to a better intra-organizational relationship.

Leadership has a critical role in the management

function to ensure the maximization of

organizational efficiency and to achieve the goals of

the organization. Studies showed that leadership is

critical in organizational effectiveness, [28].

Leadership plays an important role to make sure that

every resource allocation would have a positive link

to the organizational objectives. However, the

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relationship between leadership roles and IR

climate was only addressed by [10].

Transformational leadership refers to a

leadership style characterized by a leader’s ability to

collaborate with their team, cultivate team

identity, inspire and create an organizational vision,

drive organizational change, and foster team

commitment, [29]. Transformational leaders are

recognized for their utilization of the four I’s:

idealized influence, inspirational motivation,

individualized consideration, and intellectual

stimulation, as outlined in the four I’s of a

transformational leader, [30]. Available studies

showed that characteristics aligned with

transformational leadership are usually known as

characteristics influencing the crisis-handling

effectiveness of leaders. Transformational

leadership characteristics are such as building team

confidence and trust, creating hope and sharing the

big picture, building team relationships, and

strengthening teamwork. A transformational leader

is articulating a group vision or by encouraging

cooperation among team members to strengthen

their belief in their ability to overcome difficulties,

[31].

In the IR study, previous studies have shown the

role of leadership in a good IR climate. In [26], [1],

the authors state how leadership is critically

important in fostering a good IR climate in the

organization. According to [1], in order to foster an

effective IR climate, leaders should possess specific

qualities. These qualities include self-awareness,

which involves having a clear understanding of

one's own strengths and weaknesses. Balanced

processing refers to the ability to objectively

evaluate information and consider different

perspectives before making decisions. Relational

transparency involves being open and honest in

communication, fostering trust and cooperation

within the organization. Lastly, internalized morals

refer to leaders having a strong ethical compass and

adhering to moral principles in their decision-

making processes. These qualities are deemed

crucial for leaders in creating and maintaining a

positive and productive IR climate. How ethical

behaviors of leaders support the development of

positive employee relations in an organization is

raised by [10]. In [2], [32], the authors claim that

transformational leadership is positively linked to a

good IR climate.

A study from [27], showed that most words

raised to reflect effective leadership are

communicative, coaching, participatory, flexible,

supportive, harmonious, and valued.

Transformational leadership with the 4 I’s are close

to the described words.

H1: Transformational Leadership is positively

linked to IR Climate

2.2 Industrial Relations Instruments

In order to manifest the principles of industrial

relations in everyday interactions among the

participants of the production process, it is essential

to establish a conducive environment and

atmosphere that foster the growth and development

of the mental and social attitudes associated with

industrial relations, ultimately shaping the behavior

of all parties involved in their daily interactions. To

create such a supportive atmosphere, it is necessary

to enhance the fundamental infrastructure that

facilitates the implementation of industrial relations.

As defined in Article 1, number 16 of Law Number

13 of 2003 concerning Manpower (also known as

the ”Labor Law”), industrial relations represent a

system of relationships among the actors involved in

the production of goods and/or services, which

include entrepreneurs, workers/labor, and the

government. These relationships are based on the

values of Pancasila and the 1945 Constitution of the

Republic of Indonesia.

To establish a healthy and dynamic industrial

relations environment within a company, it is crucial

to have appropriate industrial relations facilities and

foster effective and meaningful communication

between company leaders and labor unions or

workers. The aim of this intensive, transparent, and

honest communication is to build mutual trust and

eliminate preconceptions and suspicions. The

success of such communication largely relies on

factors related to employee welfare, which reflects

their assessment of the facilities and support

provided by the company, [33].

Ensuring employee welfare is an integral aspect

addressed in the collective labor agreement (CLA),

with trade unions and bipartite institutions playing a

significant role in shaping industrial relations, [33].

Organizations that overlook the importance of an IR

climate are likely to face elevated production costs.

Poor IR practices can result in inefficiency,

unfavorable production outcomes, neglect of duties,

worker absenteeism, and high employee turnover

rates, [34].

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H2: IR Instrument is positively linked to IR

Climate

2.3 Industrial Relations Climate

The organization's IR climate can be defined as a

total measurement of the relationship of labor

management. Organization IR climate is a variable

that mediates IR inputs and outputs. The concept is

typically assessed using a range of factors that

encompass the norms, attitudes, emotions, and

actions that are common in the workplace, which

includes the principle of “fairness and mutual

respect”. Industrial relations can be defined as the

various activities associated with the dynamics of

workplaces, such as the organizational structure,

employment contracts, labor management,

resolution of conflicts, and the perspectives and

behaviors of workers within their workstations, [1].

The study, [35], referred to IR climate refers to how

management, employees, and their representatives

perceive and experience the relationships and

interactions between employees in the workplace.

IR climate is defined as the quality of labor-

management relationship, [4], [10]. A positive IR

climate is characterized by a trustworthy, respectful,

and healthy relationship between management and

employees, [10].

The dimensions of IR climate encompass

various aspects, including cooperation, trust, mutual

regard, joint participation, apathy, and hostility.

These dimensions capture different aspects of the

overall industrial relations climate within an

organization or workplace, [7]. The six dimensions

of IR climate are expected to depict the perceptions

of the members of the firms on the norms and

atmospheres in relation to union-management

relations practice in the organization.

According to Dunlo’'s book “Industrial

Relations System”, [36], several variables have been

identified as influencing the IR climate. These

variables include technology, labor, and product

market conditions, budgetary considerations, and

the distribution of power within the organization or

industry. These factors play a significant role in

shaping the overall dynamics and functioning of the

industrial relations system. The study, [37], expand

the variable with the goals, value, power of the

actors, and external factors such as ecological,

economic, political, legal, and cultural, are also

influencing the IR climate. The study, [38], state

that the process of HR is also one of the factors

influencing IR climate. The study, [39], points out

that the Union Commitment itself affects the IR

climate.

The Impact of organization size on IR climate

has been highlighted by [38]. They found that the

size of an organization is related to the frequency of

strikes and the level of technology utilized.

Additionally, the degree of organizational

dependence on various environmental resources,

including labor markets, has been explored by [40],

in relation to its influence on the organizational

climate.

The role of leadership factors in shaping the IR

climate has also been examined by previous authors.

The study, [26], states that, in addition to

organizational culture, the top management team

also has an impact on the IR climate. In [1], this

study argues that leadership qualities such as self-

awareness, balanced processing, relational

transparency, and internalized morals significantly

influence a positive IR climate.

The study, [7], identified several outputs of the

IR climate, which they categorized into consensual

and conflictual outcomes. Consensual outcomes

include agreement on work and trade union

organization, agreement on employment terms, and

perceived effectiveness of negotiations. Conflictual

outcomes, on the other hand, encompass strikes,

turnover, and perceived disharmony within the

organization.

In [4], their study state that IR climate has a

great impact on productivity and efficiency. The

study, [5], state that IR climate is positively linked

with organizational commitment and union loyalty.

The study, [20], argues that a good IR climate will

influence employee performance. This is because

fewer conflicts foster the work environment which

leads to better employee performance. The study,

[35], argues further that IR climate is influencing

organizational performance.

H3: IR Climate is positively linked to

Organizational Performance

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Fig. 1: Research Framework

3 Methodology

3.1 Research Design

The research design employed in this study is

descriptive quantitative to test the relationship

among latent variables. Before respondents

completed the questionnaires, they were provided

with a brief overview of the research and asked for

their willingness to participate. Only those who

provided informed consent were included in the

analysis. Data confidentiality and consent that the

result of the study will be published in the academic

paper were also disclosed.

Structured questionnaires were used as the

instrument for data collection. The questionnaires

were distributed through an online survey platform

from March to June 2022. The questionnaires

utilized a seven-point Likert scale, ranging from 1

(strongly disagree) to 7 (strongly agree), allowing

participants to rate their opinions. Additionally, the

questionnaire included demographic questions, such

as age, gender, years of service, work location,

industry, position, company size, and number of

unions.

3.2 Participants

In order to gain more insight, participants of this

study were from various stakeholders in an

organization such as Directors, Managers,

Employees, Head of Unions, and members of

unions from various types of organizations. Unit

analysis was individual. The population is unknown,

therefore the sample size for this study was

determined based on an unknown population. The

minimum sample required for this study is 387. This

study used the convenience sampling method.

3.3 Measurement

The measurement scales used in this study for the

four latent variables were derived from previous

studies. The framework and measurement approach

from the previous study served as a reference for the

current study (Table 1).

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Table 1. Measurement of Variables

Variable

Indicator

Reference

Transformational

Leadership

Company leaders give priority to finding new opportunities for the company.

[41]

Company leaders always clearly communicate the short-term goals of the Company.

Company leaders provide more motivation to company employees.

Company leaders play an important role in the company's operations.

Company leaders involve their teams in making decisions

Company leaders seek new perspectives in solving problems

IR Instruments

The Labor Union and Company Management respect each other's existence.

[40]

The Labor Union and Company Management hold joint discussions in finding solutions

to industrial relations problems in the company.

Trade unions and company management involve the local manpower office and the

industrial relations court if industrial relations issues cannot be resolved by both parties.

A collective Labor Agreement is a guide in the implementation of industrial relations in

the company

IR Climate

Trade Unions and Company Management work together in realizing harmonious

industrial relations in the company you work for.

[40]

Negotiations on industrial relations in the company took place in a conducive

atmosphere.

A collective Labor Agreement is considered good by employees in the company

Generally, employees in companies are interested in the quality of the union-

management relationship.

Employees assume the existence of a union.

The Trade Union has strong support from its members.

Trade Unions and Management exchange information openly within the Company.

Management seeks input from the Labor Union before initiating policy changes in the

company.

Management and labor unions did not take long to resolve industrial relations disputes

that occurred in the company.

The settlement of industrial relations disputes in the company does not end with a

demonstration/strike

Organizational

Performance

In general, our company is able to earn profit from sales as expected.

[42]

In general, the company is able to earn revenue as expected.

The company's performance can be maintained even better.

The company's sales can be maintained and even increased.

The company is able to produce successful innovative products

3.4 Data Analysis

The collected data were analyzed using LISREL

version 8.70. The analysis followed a two-step

approach, which involved:

a) Measurement model analysis: This step aimed to

assess the validity, reliability, and overall goodness

of fit of the variables in the model. It examined the

measurement properties of the latent variables and

their indicators.

b) Structural model analysis: In this step, the

predictive value and goodness of fit of the overall

model were evaluated. It focused on examining the

significant relationships between variables and

assessing the overall fit of the structural model.

Additionally, path coefficient analysis was

conducted to determine the level of impact of each

latent variable on its corresponding criterion

variable. This analysis provided insights into the

strength and direction of the relationships between

the variables in the model.

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4 Result

4.1 Demographic

The total number of returned and eligible

questionnaires is 406. All data is valid to undergo

further analysis. The survey results show male

dominance by 80% or as many as 325 respondents

from a total of 406, while the remaining 20% or 81

respondents are female. Of the total 406 companies

that took part in the survey, most companies have

employees above 1000 by 48%, companies with

employees below 500 as many as 31%, companies

with employees from 500 to 1000 as many as 18%

and the rest as much as 3%. Out of the total

companies that participated in the survey, it was

found that 49% of them had only one dominant

company with a union. The second largest group

consisted of companies that had multiple unions,

accounting for 36% of the sample. Additionally,

16% of the companies surveyed did not have any

union.

Regarding the current positions or positions of

the respondents, it was observed that out of the total

respondents, 42% were employees, indicating that a

significant portion of the participants belonged to

the employee category. The second-largest group

comprised Managers/Senior Managers/General

Managers, accounting for 33% of the respondents.

Labor union administrators represented 20% of the

respondents, while

Directors/CEOs/Commissioners/Company Owners

made up 5% of the participants.

4.2 Analysis

Based on the provided information, it can be

concluded that all the measurements used in the

study are valid. This conclusion is based on the fact

that all related indicators have outer loadings

exceeding 0.5 and T-values exceeding 1.96, which

are commonly accepted thresholds for validity.

Furthermore, the reliability of the measurements

is established as the Composite Reliability (CR) and

Variance Extracted (VE) for all indicators are

greater than 0.7 and 0.5, respectively. These values

indicate that the measurements are reliable.

Regarding the goodness of fit of the model,

several criteria were evaluated. The Root Mean

Square Error of Approximation (RMSEA) value of

0.078 is less than the accepted threshold of 0.08,

suggesting a good fit. The Goodness of Fit Index

(GFI) of 0.97, Comparative Fit Index (CFI) of 0.97,

and Normed Fit Index (NFI) of 0.96, all exceed the

recommended threshold of 0.90, indicating a

satisfactory overall fit of the model.

In conclusion, based on the validity, reliability,

and goodness of fit measures, it can be stated that

the measurements used in the study are valid,

reliable, and the overall model demonstrates a good

fit. From Figure 2 it can be seen that the

relationship between both transformational

leadership and IR Instruments to IR climate is

positive. The relationship between IR climate to

Organizational Performance is also positive.

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Fig. 2: Path Analysis Result

4.3 Hypothesis Testing

Table 2. Hypothesis Testing

Hypothesis

T-

Value

Direction

Conclusion

Transformational

Leadership  IR

Climate

34.27

Positive

H1 is

supported

IR Instrument 

IR Climate

45.59

Positive

H2 is

supported

IR Climate 

Organizational

Performance

8.58

Positive

H3 is

supported.

Table 2 showed the hypothesis testing result.

For all hypotheses, the T-value figure is all above

1.65. Therefore, it can be concluded that all

hypotheses are supported.

4.4. Discussion

The findings of this study indicate that the

transformational leadership style has a positive and

significant influence on the IR climate. This

suggests that leaders who exhibit transformational

leadership behaviors, such as inspiring and

motivating their teams, considering individual

needs, and stimulating intellectual growth, are

likely to contribute to a favorable IR climate within

the organization. The results highlight the

importance of transformational leadership in

shaping and fostering a conducive and harmonious

work environment that promotes cooperation, trust,

and mutual respect among employees and

management. In [26], [1], the authors pointed out

that leadership plays an important role in fostering

the IR climate. IR climate will foster if trust,

cooperation, mutual regard, and empathy are there.

Transparency, role model, and relationship are

important characteristics in fostering the IR

climate, [1].

Transformational leaders are characterized by

the four Is: idealized influence, inspirational

motivation, individualized consideration, and

intellectual stimulation, [30]. These leaders build

team confidence and trust, create hope and share a

compelling vision, foster strong team relationships,

and strengthen teamwork. The transformational

leadership style is often associated with charisma,

delegation, inspiration, effective communication,

and encouragement of innovation, [29].

Transformational leaders are known for their ability

to inspire and motivate their teams, empower

individuals, and stimulate intellectual growth,

ultimately leading to positive organizational

outcomes and a conducive work environment.

Transformational leaders are known to have

four Is which are idealized influence, inspirational

motivation, individualized consideration, and

intellectual stimulation, which are known as the

four I's of transformational leader, [30].

Transformational leadership characteristics are

such as building team confidence and trust, creating

hope and sharing the big picture, building team

relationships, and strengthening teamwork. The

transformational leadership style is charismatic,

delegating, inspiring, communicating, and

encouraging innovation, [29].

Transformational leaders are known to build

team confidence, resist the status quo, and

encourage change. This type of leadership

understands that building trust is important. They

also value the growth and development of the team.

Therefore, as this study revealed, the

transformational leadership style is suitable to build

a good climate in the organization including the IR

climate.

The result of this study also confirmed that the

impact of the IR instrument is greater than

transformational leadership. This might be due to

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the IR instrument is showed how the organization

implements its commitment in build a good IR

climate. The instrument implementation shows

that organizations first and foremost abide by the

law. The second, its implementation shows the

goodwill of the organization in search of a better

solution to the conflict. Its implementation also

shows how seriously the organization sees the

welfare of its employee.

This study confirmed previous studies that IR

climate influences organizational performance. A

previous study has shown that a good IR climate

enables harmony in the organization, [7]. A good

IR climate reduced the number of strikes and

conflicts. Therefore, it will increase productivity

and efficiency, [4]. A good IR climate also

influences absenteeism, it increases commitment

and reduces turnover, [7], [4], [5]. All of those will

lead to better organizational performance.

5 Conclusion

This study showed that the IR climate is positively

influenced by transformational leadership and IR

instruments. However, IR instruments show a

greater impact on IR climate than Transformational

Leadership. This is due to that IR instruments are

about real implementation which can be witnessed

by everyone. This study also confirmed that IR

climate positively links to organizational

performance.

This study possesses several limitations. First

of all, this study only reviewed two internal factors.

Other internal factors such as HR process, internal

communication, and organizational culture can be

recommended to be studied for future research.

This study does not consider external factors such

as government regulation, political and economic

conditions, and the impact of the crisis. Further

study to see the impact of external factors can be

recommended.

This study is using self-assessment. Further

study with mixed latent and fixed variables (such as

performance), can be recommended. Further study

to see the difference between the size of the

company and the type of ownership of the company

in fostering IR climate can also be suggested for

further study.

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Contribution of Individual Authors to the

Creation of a Scientific Article (Ghostwriting

Policy)

The authors equally contributed in the present

research, at all stages from the formulation of the

problem to the final findings and solution.

Sources of Funding for Research Presented in a

Scientific Article or Scientific Article Itself

This study is partialy funded by Bina Nusantara

University and Multimedia Nusantara University

Conflict of Interest

The authors have no conflict of interest to declare.

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(Attribution 4.0 International, CC BY 4.0)

This article is published under the terms of the

Creative Commons Attribution License 4.0

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n_US

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DOI: 10.37394/23202.2023.22.65

Dyah Gandasari, Diena Dwiedienawati,

M. Faisal, David Tjahjana

E-ISSN: 2224-2678

655

Volume 22, 2023