A model examining psychological empowerment, transformational leadership and innovation for school principals is proposed and tested within a School-Based Management (SBM) environment. Developed from management literature, the model was adapted for state school principals experiencing increased decision-making powers and accountability. Empirical results provide a level of support for the model. ‘role clarity’ and ‘access to resources’ were found to exert a positive influence on principals’ feelings of empowerment, though the value placed by principals on strategic information was found to have a slightly negative influence. The influence of empowerment on transformational leadership was not found to be as strong as anticipated. The paper includes a discussion of the implications of these findings for theory and policy development.