Wednesday, 24 March 2010

Senior Leaders, Organizational Performance and Sir Fred

When I'm doing presentatations on leadership, I often like to throw in the quotes from Jeff Pfeffer and Robert Sutton's well known book,  'Hard Facts, Dangerous Half Truths and Total Nonsense', which summarises the academic evidence on the (lack of) impact of senior leaders on organizational performance. 

'Scholars who conduct and evaluate the best peer-reviewed studies argue over how much leadership matters and when it matters most. But when they set aside their petty differences, most agree that the effects of leadership on performance are modest under most conditions, strong under a few conditions, and absent in others.
'Studies from leaders from large samples of CEOs…, university presidents to managers of colleges and professional sports teams show that organizational performance is determined largely by factors that no individual - including a leader - can control’. Pfeffer & Sutton, 2006 (p. 192).

However, they do make the point that senior leaders that senior leaders can have an enormous negative effect, especially on reputations!

In the august Academy of Management Journal this month, there is an excellent article which explains why Sir Fred Goodwin may have be one of the few leaders to have had a strong effect, positively and negatively on RBS - he went from hero to zero in a few years, like many of his counterparts in the banking crisis.  For those interested, the reference is Li, J. & Tang, Y. (2010) CEO hubris and firm risk taking in China: the moderating role of managerial discretion, Academy of Management Journal, 53: 45-68.

Popular views of the impact of leadership are that CEOs have a big effect on firm performance, partly explained by our need to attribute relatively simple causes to complex issues.  The underlying theory and data that Pffeffer and Sutton are referring to, however, comes from two different stables of research - popular ecology and neoinstitutionalist theories - both of which argue that CEO and senior leaders can have little effect on firm performance, except under certain conditions, because of overwhelming external forces such as market pressures, etc.  The two Chinese authors point to recent attempts to reconcile these views through something called 'Upper Echelon' theory, which highlightlights the role of managerial discretion.  In bringing this idea together with the notion of managerial hubris - the exagerated belief that some managers have about the their own judgements against objective standards - they help us understand the dark side of management.  For example, they point to research which shows that CEO hubris is associated with paying over the odds for acquisitions, and that cross-border acquisitions are often driven by managerial hubris.  Which brings us to Sir Fred Goodwin's impact on RBS's failure.

Li and Tang demonstrate in a Chinese context that CEO hubris is postively related to firm risk-taking, which is facilitated by the market context to support risk, the complexity of the market, room for opportunities to take risk and the degree of market uncertainty. When the context is munificent, when there are opportunities and when information is ambigious, overconfident CEOs can, and do, feel compelled to take greater risks.  At the organizational level, there are also key constraints on CEOs, including the age of the firm, its size, its resources and the governance structures of the board.  If a CEO has greater control over the board and has resources, s/he is more likely to act on the basis of hubris in making risky decisions.  What is evident from the RBS case is that most of these factors were evident, so providing a better good explanation than  some of the woolier theories of semi-detached, narcisisstic leadership and its negative effects.  What do readers think?

Saturday, 6 March 2010

Employee Voice and Engagement

A very good colleague of mine, Paul Gollan, from Macquarie University in Sydney has been writing and researching on employee voice for a number of years, assessing whether employee voice has a positive impact on participation and through it, key outcomes for organizations and employees. The usual distinction made in this important stream of literature is 'between direct communication, upward problem-solving, or representative participation. The first two of these are essentially direct and individually focused, often operating through face-to-face interactions between supervisors/first line managers and their staff. Some take the form of informal oral or verbal participation, while others are more formalized in the form of written information or suggestions. The third form centres on the role that employee or trade union representatives play in discussions between managers and the workforce, via mechanisms such as joint consultation, worker directors or collective bargaining in the form of problem solving communications' (Budd, Gollan & Wilkinson, 2010).
Paul and his colleagues have just produced a special issue on this topic for the journal Human Relations, which has some excellent articles in it.  He is also running a seminar series this month at the LSE which looks excellent (and, he tells me, is free!), where he will also launch a new book on this important strand of work.
Among the best (for me) papers in the Human Relations collection is one by Kim, McDuffie and Pil, who write about the impact of different kinds of voice and engagement in the automative industry, and their impact on productivity (see the last post).  The results of this study are complex but generally support the importance of employee voice as an engagement strategy, so resonating with the findings in the earlier post on Steve Wood's research.  Here's a summary of the Kim et al paper by the editors - no need for me to do it. 
'Turning from the determinants of individual participation in voice mechanisms to the effects of employee voice and participation, Jaewon Kim, John Paul MacDuffie and Frits Pil (this issue) analyse the effects of team voice and worker representative voice, as well as their interaction, on labour productivity in ‘Employee voice and organizational performance:

'Of particular note, this research centres on teams’ influence on key work-related issues and worker representatives’ influence on collective voice issues rather than simply assessing the presence of teams or unions. Drawing data from automotive assembly plants from around the globe, the findings reveal that when examined solely, neither channel of voice has a significant effect on labour productivity. Rather, the influence of team voice and representative voice on worker efficiency depends on the interaction between these channels of voice. These findings challenge the conventional assumptions of advocates of both direct and indirect voice because neither type of voice on its own consistently predicts better labour productivity. Significantly, even when the two forms of voice are combined, these findings suggest their relationship with labour efficiency is complex because the positive effects of one type of voice are partly offset by them being partial substitutes. Consequently, the two forms of voice can interfere with, or neutralize, each other’s positive effects on productivity. The findings suggest that this occurs more frequently than the mutual reinforcement some might expect. However, consistent with recent European policy-making on employee participation and voice, the combination of both forms of voice does ultimately have a positive impact on performance and productivity. Overall, the findings therefore reinforce the importance of increasing various forms of employee voice for greater positive organizational outcomes'.

Solid Evidence that HRM and Engagement can Work

As HR academics and practitioners we are consistently looking for good evidence that HRM actually works - that the adoption of high performance work practices pays off in terms of ley measures of performance, such as productivity, quality, customer service, etc. We need such evidence to build our respective cases, and there has been quite a bit of it around for the last twenty years beginning the Mark Huselid's large-scale statistical studies in the 1990s. Often, however, the academics have have failed to look at this issue over long periods of time, so demonstrating consistent and long terms effects of the use of high performance work practices and related engagement strategies, which, if done well, would represent something of a gold standard of proof that investment in HRM actually works.

This morning I and quite a few of my HRM academic colleagues were sent the results of a paper that goes some way to delivering such proof, though they are more modest and, like good academics, highlight their study's shortcomings. The work comes out of the Institute of Work Psychology stable at Sheffield University, run by Stephen Wood. Here's his summary of the paper and its contribution in the email he sent out.

'My colleague, Lilian de Menezes, and I examined the integrated use in British manufacturing of a set of lean management practices in which employee empowerment was a major component over 22 years. We found in all 22 years that those firms that used the integrated lean approach (my emphasis) has higher levels of productivity (measured by value-added). In addition, we found that the pioneers of the high lean approach continued to outperform even those that subsequently adopted it. These later adopters gained the performance advantages associated with the integrated approach, but their productivity growth was not sufficient to catch up with those which had adopted it earlier. This shows that the employee engagement, so central to lean production, achieves its aim of continuous improvement.

The practices included in the study are: empowerment, intensive training and development, team work, TQM, Just-in-time, integrated computer-based technology, and supply-chain partnering

The study was financed by the ESRC and will appear in: L. de Menezes, S. Wood and G. Gelade, ‘A longitudinal study of the latent class clusters of modern management practices and their
association with organizational performance in British manufacturing’, Journal of Operations Management'.

Lilian, Steve and Gerry acknowledge the limitations of their study, suggesting that gold standard proof would need to consider not only productivity data but also evidence on quality and lead times in manufacturing. Nevertheless, this study represents an important step forward and substantial argument for integrating engagement strategies - team working and empowerment - with lean techniques. Given the widespread adoption of the latter in healthcare in the UK, maybe its time to puut in place a similar study to test the impact of these large scale and somewhat controversial initiatives.