Corporate Reputations, Executive Pay and Shaping the Future of HR

This coming Friday I'm co-hosting an event in Glasgow for a group of senior HR professionals in Scotland with the CIPD as part of their flagship 'Shaping the Future' programme. At that event, we are going to debate a series of questions on the current economic and financial services crisis, which are particularly relevant in Scotland given its large financial services sector. Two of these questions relate to how the present situation came about and what HR professionals can do about it.

On that issue, a series of events have taken place in the town near where I live that illustrates some of the problems of this crisis for the Scottish economy. The events relate to the decision taken by Ohio-based multinational NCR, one of the world's leaders in the design, development and production of ATMs, to cease manufacturing in Dundee and relocate to Hungary and China. This closure is particularly close to my heart since NCR Dundee was something of a personal laboratory for me for a period of ten years. The Dundee plant had developed and manufactured NCRs first ATMs in the early 1980s. It then became one of Britain's great development and manufacturing success stories, winning the best factory in Britain award twice, the Queens Award for Exporting and one of the very few British companies to feature on a Harvard Business School video as an excellently-led company. These achievements were gained on its way to becoming the world leader in its field for some twenty plus years, in and bringing great pride and much needed quality jobs to Dundee. I wrote a number of articles, book chapters and cases about the NCR Dundee story explaining why, three of which were the role of serendipity in strategic decision-making, committed and engaged leadership that had the Dundee plant's interests at heart, and HR practices way ahead of their time but largely based on the 'old deal' of high commitment in return for job security and career development.

The final closure of the manufacturing function of ATMs in Dundee (some design and development is still located there, but for how long?) is a good example of some of the causes of this present economic and financial crisis, which is, in part at least, a failure of leadership and corporate governance, and perhaps a failure of senior HR leaders to engage in this debate. I say this because at the same time as manufacturing was being closed down in Dundee, the site that had given NCR much of its revenue and had helped it survive as a global concern since the early 1980s, its CEO in the USA, Bill Nuti, was awarded a $5.6 million bonus. The local newspaper in Dundee, reflecting on this local tradegy, calculated that Nuti's bonus was enough to pay the manufacturing workforce a salary for a year of £22,000, maybe enough time to see the company through the present crisis until demand rose again in the financial services industry. While the local paper's reasoning may be misplaced, it does raise issues that lies at the heart of HR's ability to secure high commitment and high performance working, which is the aim of the CIPDs Shaping the Future initiaitive - senior leadership and their pay.

I've just finished researching and writing a book chapter with a colleague on corporate governance and HR, so I have a number of figures at my fingertips that show how socially unhealthy senior executive salaries have become in relation to the normal worker in the USA, the UK and in other countries. Some might say this socially-generated 'disease'is a product of a system of shareholder value which gave CEOs enormous power, unchecked by weak boards (and weak HR), to arrogate to themselves a huge share of company profits, is now being called into question. Witness the punitive tax on bonuses at AIG introduced by the US government and the public outcry over Sir Fred Goodwin's pension and rewards at RBS in the UK.

The question is: why did this take so long to emerge as a potentially socially dislocating disease in damaging trust relations between employees and their employers? Even the chief protagonist of shareholder value, Jack Welch the former leader of GE who was apparently instrumental in promoting the idea in a speech he made in the early 1990s to the Business Rountable, has just recanted, claiming shareholder value as a principle of governance was a 'dumb idea' (see the great debate on the FT blog between Henry Mintzberg and Colin Mayer). And as academics with an interest in such matters, we have known the statistics for some time on the rapidly growing disparity between CEO pay and typical employees in the US, which grew from 42 times the average US worker in 1980 to 400 times in a twenty year period 1980-2000. This pattern of growth was less marked in most European countries but the pattern was evident neverthless, particularly in the UK, Switzerland, France and Germany. Moreover, most of this growth in disparity came about because of equity-based options, though salary and bonuses have accounted for a significant portion of total CEO (and other senior executive) remuneration. The rub is that most of these rewards are not linked directly to CEO performance directly, which is diffcult to measure but what evidence we have is not particularly supportive of their claims to adding value. And in many cases these bonuses have been awarded despite relatively poor long term performance and declining corporate reputations, as we are now beginning to see.

So why has HR as a profession been relatively silent on one of the worst demonstrations of leadership power over the last twenty years? I raise this because there is evidence to suggest that this among other things has has caused a widespread lack of trust by employees in senior managers and declining levels of employee commitment over the same period? What lessons are there from the NCR case and in the problem of executive pay for shaping the future of HR? This is important, not because HR could have prevented NCR closing down its Dundee manufacturing, which has been the story of much of manufacturing industry in developed countries, but because it is difficult to generate high commitment, high performance working in a context where the share of returns to ordinary employees has not grown much over the last 20 years and in countries like the USA has probably declined. My recent comments about the need for HR to promote higher values has to be seen in this light; technical solutions to engaging employees are unlikely to work unless basic issues of fairness are addressed, perhaps starting with some reforms in corporate governance that limit the powers of CEOs to dominate boards in the way in which many have do so in the recent past.

HRs Role in Governance

Been very busy with writing deadlines, so no posts recently. We've just finished writing a chapter for a book edited by Suzanne Young on Corporate Governance, a particularly important issue just now, especially given Gordon Brown's recent criticism of governance in the British financial services sector. We've argued in the past that HR has a key role to play in governance and sometimes a negative one. I'm thinking here of a paper written by Bert Spector in 2002 claiming the HR was the unindicted co-conspiritor in Enron because of its advocacy of a certain brand of McKinsey-style talent management.

Our focus in the chapter, probably quite apposite given the UK Government's 'nationalisation' of some of the UK banks to inject more responsible management (see John Kay's insightful comments on Newsnight last night), is to look at this issue in the public sector, particularly healthcare. To help us think about this issue, we've adapted some excellent work by Jaap Paauwe on four faces of governance and its relationship to risk. Our adaptation, which we have illustrated with material from current research into the Scottish healthcare system, shows how governance of the HR function itself - how it is organized and led - play directly into the 'three pillars of governance' in healthcare. Firstly, it does so by shaping staff governance (or climate governance) - the ways in which staff are encouraged to participate and exercise voice in their organizations. Secondly, staff governance has an obvious and important impact on clinical governance - the balancing of innovation in heathcare with risks to patient safety etc. Innovation is key to creating public value in any 'enterprising' public service, but there are often real risks to innovation that must be governed effectively (the banks have suffered from this because senior managers didn't seem to know what was going on in their innovations in the wholesale banking market for which they were responsible). Finally, clinical and staff governance directly impacts on the third pillar of financial governance, which in turn refracts back on these two other pillars. How NHS boards (with many lay members) are selected, developed and performance managed will have an enormous influence on the management of innovation in healthcare. In turn, the costs and demands by professional for greater innovation will impact on financial prudence among these authorities.

Our key message is that HR at a strategic level has to understand these causal links, and has to manage its own house to make an impact on these three pillars of governance in healthcare and in other industries. All three rely on effective people management, but aren't always seen as part of HRs role. HR should 'step up to the plate' to help make their organizations legitimate as well as different, which are the two central objectives of reputation management. As an aside, a good starting point for understanding the governance problems of the financial services industry would be to read Niall Ferguson's excellent book, 'The Ascent of Money', which was my Xmas reading and why I haven't had time to post

Why Organizations Succeed and Fail: A Corporate Reputations Perspective

For those of us interested in why organizations succeed and fail from a reputation management perspective, one of the books of the year is 'Taking Brand Initiative: How Companies can Align Strategy, Culture and Identity through Corporate Branding'. This book is especially timely because it helps explain important elements of the current crisis of financial services, and also helps us explain some of the problems being experienced in healthcare. The book's authors are two of the best academics in the field - Mary Jo Hatch and Majken Schultz. They have produced a practitioner-oriented work that should be read by all HR, corporate communication, marketing and strategy professionals. The book is based on an ongoing research programme and ideas that first saw the light of day in an article in the Harvard Business Review in 2001, material which we used in our corporate reputations, branding and managing people book. It is also based on an edited book written mainly for academics on organizational identity.

Using this lens and a theory of organizational identity, they restate their well-known idea that organizations should constantly work towards aligning their vision (for being different and legitimate), their image (or reputations among key stakeholders) and culture (how employees and managers think, feel and act) for corporate branding to work and for organizations to be sustainable in the long run. They cite many examples from their own research and the work of others to demonstrate the validity and usefulness of their model, as well as draw on a considerable body of sound theory that should give some comfort and to practitioners and academics alike. Though they don't use financial services companies as examples, their analysis, especially of organizational narcissism, should be required reading for banks worldwide, a line we took in a case in our corporate reputations and HR book questioning the future fitness of the financial services industry in 2006.

Some of the key messages of this book are as follows. First, the 'most successful corporate brands simultaneously communicate belonging and differentiation...' (p. 21), a simple but powerful message that applies to private and public sector organizations, including our current work on the health service which is faced with major difficulties in attracting talent in the longer term, in enaging its current employees and in having a lack of image among employees for being a patient-centred service. They argue that organizations which are able to manage the tensions between integration and differentiation, one of the key paradoxes in business, do so by conducting continuous identity conversations with employees, customers and other stakeholders to create strong organizational identities. These conversations attempt to reconcile the fundamental and ongoing questions of 'who are we' as an organization with 'what is their image of us'. The attendant identity dynamics often result in two different but related dysfunctional states - hyper adaptation and narcissism. The first of these is where organizations are over-reactive to what customers and the media (and sometimes employees) think of them, so they continuously search for 'coolness' and 'cutting edge' instead of having regard for their unique heritage and core competences. The second is where organizations fail to check their internal beliefs against what stakeholders, including employees, think. This is often associated with narcissistic, charismatic leadership, protected from reality by group think, which attributes past success to their own insightful decision-making rather than the often favourable contexts in which such decisions are made - the so-called fundamental attributional error. The limitations of charismatic leadership and problems of narcissism, the subject of a brilliant book by Rakesh Khurana, was behind Enron and other corporate governance distasters, and in also being used to explain the failure of many of our financial services firms in the UK and USA.

A second lesson concerns the valuation of brands (and by implication employer brands). They make an important point in highlighting the limitations of brand valuation models, which, among other problems, ignore the emotional and symbolic effects of brands. As recent research has shown, these are the two most important factors in making employer brands attractive to outsiders and engaging for insiders. To gain real insights into (employer) brand value they argue that brand equity and consumer research models are more appropriate because the uncover and account for symbolism and meanings through ethnographic research into how people (employees) interact with brands and qualitative research into the meaning that brands hold for them. Which is what we have been doing in the health sector in Scotland as a complement to large-scale quantitative research.

A third lesson that is especially important for HR is the nature of the endgame. Long terms effective and sustainable corporate branding is what most organizations are striving to achieve to remain successful. This requires organizations to go beyond (1) first wave branding, which is based on a marketing mindset and is dominated by marketing/communications departments, and (2) second wave corporate mindsets, which attempts to bringing together multifunctional teams of mainly internal stakeholders, but typically ends up being fragmented by incompatible models and mindsets. Instead they posit a third wave notion of enterprise branding, which is an interfunctional and and integrated way of bringing together internal and external stakeholders in the extended entreprise in constant cycles of identity conversations. They also flag the importance of Web 2.0 tools in conducting such conversations, a key message of our recent CIPD research in the field. This imagery of dynamic enterprise-wide conversation cycles is a particulary powerful one because it extends the notion of the corporation and gets us away from the typical brand 'programmatis', which is premised on the artifical notions of beginnings and ends of change. For HR, it also reminds us that employer brands are not the endgame but are merely an input into a continuous conversation of how organizations can remain successful.

The book is not without its shortcomings. In tantalising us with the notion of enterprise branding, I don't think they go far enough in fleshing out what this may look like - maybe they want us to write what we want into this open space? They also seem to misinterpret employer branding to mean recruitment, when it is usually taken to apply to both the attraction of new employees and engagement (read identity management) of existing employees. However, these are minor points and should not detract from an important book which should be read by for all practitioners, particularly chief executives and HR directors, interested in this field.

Corporate reputations, images and identity: how theory can help practitioners

I’m just about to begin a two-week stint running some courses and doing presentations on HR’s contribution to branding and reputation management in Australia and China. As always, I’m on the lookout for interesting material from academics to help me provide some insights into these important topics; hanging around airports and spending time on long plane journeys gives you plenty of time to do just that. So I brought with me the new edition of the Corporate Reputation Review (Volume 11, number3 for those interested). This special edition brings together leading people in the field of organizational identity to write about their emerging frameworks and data. In this increasingly arcane field, this special edition produces some gems. Though the papers are difficult to decipher, even for academics versed in the language of social identity and social actor theory, they yield some blindingly obvious-in-retrospect insights that cause me to re-think some of my ideas on employer branding, some research and consulting work we are doing in the field of employees’ images of healthcare organizations, and the nature of the HR.

The first is an examination of the well-worn distinction in the literature on reputation management between organizations’ needs to be simultaneously different and legitimate in terms of their organizational identities, the characteristics of which are their central, enduring and distinctive attributes (CEDs). Brayden King and Dave Whetten (the latter always a great bet for new insights) suggest that this ‘paradox of identity’ can be thought of in a rather different way than has hitherto been the case. Traditionally, this tension has been seen in terms of organizations attempting to solve seemingly incompatible needs for being different (i.e. branded) from competitors in product and labour markets but also being similar (social legitimate) to their comparators (e.g. being socially responsible, adhering to legal and governance standards, etc).
King and Whetten’s insight – rather obvious when you think about it - is that these needs are linked by the notion of ‘accountability standards’, which define norms of both appropriate behaviour (legitimacy) and esteemed performance (reputation).

Thus, when an organization seeks to become or remain a member of a business/ industry category, say a healthcare provider, it has to meet the minimum expectations of external and internal ‘audiences’ for patient care and the delivery of public value – the necessary, legitimacy-based conditions for membership. However, to become an esteemed member, it has to meet the ideal or aspirational standards of that group of businesses/ industry (reputation). The two, of course, are linked in the form of a continuum from minimum standards to ideal standards. And, because they are linked, changes in one have an impact on the other and vice versa. So, for example, as our expectations of the minimum standards of an employer change in relation to what might be expected, say, of an ‘employer of choice’, this leads to a ratcheting-up of our expectations of the ideal standards of an employer of choice - in other words, employer branding becomes a moving target. Similarly, as organizations compete harder to become employers of choice, such competition leads to a ratcheting-up of minimum standards. The probable results of this last dynamic is that the previously held ideal of an employer of choice becomes the the minimum table stakes, because audiences focus on, and increasingly use as their benchmarks, these prominent players in their industry and exclude reference to others.

Applying this line of thinking to the legitimacy and reputation of the HR function itself, you might be better able to understand how excellence in HR is no longer just associated with meeting the standards associated with cost control and service delivery to internal stakeholders, its two traditional and necessary functions (see Martin, Reddington and Alexander, 2008). Nor, we argue, is it good enough for HR to meet the aspirations of being ‘strategic’ (i.e. to contribute to corporate needs for innovation, customer satisfaction, productivity through high performance work systems, etc) , which has now become the prototypical expectation for HR excellence. Instead, HR needs to focus on the long term reputation and legitimacy of the organization itself by contributing to corporate branding, corporate governance and risk management, corporate social responsibility and ethics, and the creation of intellectual capital. These are all intangible assets, which, according to the well-known economist John Kay (2005), are the reason ‘why some nations are rich and others remain poor’.

The downside of this process, however, is that the market and competition over organizational and even professional identities leads to ever more risky behaviour, in much the same way that competition in financial services has seen firms develop riskier products and riskier HR strategies (talent management and bonuses). What will HR need to do next to help organizations become an employer of choice, and to become a function that rates high in the credibility stakes with CEOs?

The second article is by Kristin Price (who tragically died recently) and Dennis Gioia, both of whom featured in a recent blog. This time, their specific contribution is to raise the question: how can organisations improve their images in the marketplace for images – that is, among customers, employees, the media, prospective employees, shareholders, governments and the like? Building on their previous work on the notion of organizations having multiple, intended and unintended images, they propose the notion of the self monitoring organization. This concept is borrowed from the literature on individual differences. So just as high self monitoring individuals have to be vigilant about the multiple images of themselves (their own self concept, professional images, family members’ images etc), so high self monitoring organisations use a range of strategies and individuals to further the organization’s interests in reconciling self image with others’ images (the press, employees, prospective employees, shareholders, etc). Most of these are well known – brand ambassadors or even bloggers who are high in self-monitoring and become the eyes and ears of the organization, newcomers not yet socialised into the system, boundary spanning functions such as marketing, communications and, yes, and outward looking HR function, social networking and leadership liaison functions, which interact with outsiders, etc.

Two critical points emerge from this paper. The first is to expect multiple images in organisations and leadership difficulties in understanding them, especially if they aren’t high self monitoring as a group. The second is the problem of managing organizations with purposively different intended images, for example, a merger between two quite different companies even in the same industry. Both of these problems can be solved, to a degree at least, if organizations become high in self monitoring. As an afterthought, it in self-monitoring that Web 2.0 can make an enormous impact in helping act as the eyes and ears of the organization – another connection between technology and branding.