A corporates responsibility to employees during a merger: organizational virtue and employee loyalty

Rosa Chun

Rosa Chun is based at the Manchester Business School, Manchester, UK.

Abstract Purpose A company may ignore its non-obligatory responsibilities to employees during a major change such as a merger, leading to their disaffection and feeling of insecurity. The purpose of this paper is to explore how employee views of the merged organization differ by their pre-merger background, and to explain the impact of the poorly perceived organizational virtue on employees emotional response to the merged organization including satisfaction, emotional attachment, job security and loyalty. Design/methodology/approach The methodology involved a questionnaire survey of employees from an organization in crisis following a merger due to poor employee morale and high labor turnover. Findings The two major ndings were: rst perceptions of organizational empathy, warmth and conscientiousness were strongly correlated with employee loyalty, perceived job security, satisfaction and emotional attachment. Second, company background prior to the merger had a contrary effect to that expected from existing literature; employees from the acquiring companies had more negative feeling towards the merged organization. Practical implications The research ndings highlight the importance of promoting the virtues of empathy and warmth as keys to ensuring the emotional attachment and loyalty of key employees to ensure the long-term success of the merger. Originality/value Despite growing interest in applying virtue ethics into business, empirical studies assessing organizational level virtue are rare. This empirical study of the organizational virtue advances, complements, and distinguishes itself from existing studies on merger, by demonstrating the importance of non-obligatory virtues (those beyond legal and economic responsibilities) perceived by employees. Keywords Corporate social responsibility, Acquisitions and mergers, Employees, Organizational behaviour Paper type Research paper

Merger and corporate social responsibility

Even during recessionary times companies are being advised that a merger or acquisition is a strategic opportunity, a formula for faster growth (Baghai et al. 2008; Epstein, 2008). This is despite the reality that 70 percent of mergers fail to meet their nancial objectives and to enhance shareholder value (e.g. Habeck et al., 2000). Although there are a growing number of studies dealing with different challenges in a merger, the study of corporate social responsibility (CSR) issues in a merger has been limited to legal and economic responsibilities, and pays much more attention to keeping the loyalty of shareholders or consumers. For example, the negative effect of the acquisition of CSR-led brands such as Body Shop or Ben & Jerrys on consumer loyalty is observed when the acquirer is perceived to have little understanding of CSR (Austin and Leonard, 2008). Considering nancial and legal responsibilities however did not provide an adequate explanation for why certain mergers succeed and others fail. Indeed, the low success rate of

DOI 10.1108/14720700910985016

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mergers is better related to human resource concerns and attributed to a lack of understanding of the human side of the merger during post merger integration (Buono and Bowditch, 1989, p. 10). Since the ultimate success or failure of a merger depends on the post-merger integration process (Pablo, 1994; Schweizer, 2005), an increasing number of merger studies have looked at internal issues such as organizational culture, organizational t (Chatterjee et al., 1992) and top employee turnover (Walsh, 1988). More recently, scholars have raised concerns that business ethics is less explored in the merger and acquisitions literature but has been widely studied in the areas of marketing, information management and labor relations (Lin and Wei, 2006). This is despite the notion that the ethicalness of a merger or acquisition should be based not only on meeting nancial objectives but also seen as dependent on the effects which the merger will have on all involved stakeholders (Donaldson, 1989; Heffern, 1989). This paper uses a virtue ethics approach to study a merger case in which low organizational virtue, as perceived by employees, led to an internal crisis. The purpose of the study is to explore the differences between employee views of the merged organization held by subgroups, and to explain the impact of the poorly perceived organizational virtue on employees emotional response to the merged organization including satisfaction, emotional attachment, job security and loyalty.

Organizational virtue and employee emotion

Whether or not an organization is seen to be responsible can be evaluated by considering its underpinning ethical stance. There exist three main approaches in business ethics, Kantian, Utilitarian and Virtue Ethics. Utilitarian and Kantian stances share the rationalistic approach in guiding ethical behavior but adopt different principles. The Kantian approach stresses obeying moral principles for human behavior such as dont lie, or dont steal, leaving no place for moral emotions or sentiments. In the context of a merger, the Kantian or duty based approach focuses on legal responsibilities such as job protection, employee rights (Hanly, 1992) in situations where there are lay-offs, redundancies or transfers (Serpa, 1988; Werhane, 1988). Utilitarianism shares rationalism with Kantianism but pays more attention to cost and benet relationships. The approach is illustrated by the view that there is no such thing as a good company that is not protable (Minow, 1996). A study of the effect of the ethical conduct of a merger on employee job performance would be one example (Lin and Wei, 2006). There are two distinctive features in virtue ethics that differentiate it from the other approaches; its ability to capture emotion and its concern for the happiness of the self as well as of others. Virtue ethics theory denies that making moral decisions is a matter of calculation or principle-based duties (Hartman, 1998; Stark, 1993). Instead, virtue ethics looks to motivate aspirational values and seeks to answer the question, what kind of organization should we be? There are six virtue character dimensions that have been validated at the organizational level. They include both moral and non-moral aspects of virtue: integrity, warmth, empathy, zeal, courage conscientiousness, and courage (Chun, 2005). The most frequently mentioned virtue dimension in the merger literature seems to be integrity. Integrity involves normative judgment such as being trustworthy and honest. The level of employee identication can inuence institutional trust during post-merger signicantly (Maguire and Phillips, 2008). Being honest about its strengths and weaknesses is an important virtue for a company to succeed during a merger (Weston, 1963). The empathy virtue (reassuring, concerned, supportive) is particularly relevant to the sociological and psychological account with an emphasis on mutual feelings and relationships coming from interactions with other people. Within the psychological literature, one of the most comprehensive accounts of empathy and its relation to the moral development of a person is provided by the work of Martin Hoffman (Hoffman, 2000).

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Hoffman (1981) views empathy as a biologically based disposition for altruistic behavior; one empathizes because the others situation reminds one of ones own painful experience producing an empathic response. To put it simply, empathy is the ability to put oneself in anothers shoes. Trust based on the others care and concern is deeper (or less supercial) than trust based primarily on cognitive perceptions of predictable, dependable behavior (McAllister, 1995). Warmth and supportiveness have been used interchangeably with the notion of a trusting climate in an organization. The virtue of empathy is one of the most desirable characteristics leaders can display during the merger, a context which requires sensitivity particularly in negotiation (Goleman, 1998). Courage, an important cardinal virtue on the battleeld, is translated into modern business as competence, ambition and achievement orientation (Chun, 2005; Harris, 2001). Resource based theory argues that a merger or acquisition can help a company to access complementary resources to build production competence in a specic area, and moreover to enhance organizational capabilities (Mayer et al., 1995). While the virtue of courage can provide an effective mechanism for maintaining growth or nancial success, unlike other virtues, an excessive level of courage can become a vice. Some apparently successful and large multinational companies could be seen as arrogant because of their excessive level of ambition, creating harm to their stakeholders such as the local community in host countries, suppliers and, competitors. Enron for example, who claimed to have developed an innovative business model, would have been seen as courageous at one stage, but no longer.

Case study
Preliminary research The empirical context for the research is a UK operation of a global company whose merger with an American competitor drew a series of concerns for the senior management team. Prior to beginning the main study, a number of interviews with employees followed by an initial meeting with their European Managing Director were conducted to identify research questions and to guide the research design. The following section summarizes ndings from the preliminary research. Background. An American manufacturer of security systems, Googen, acquired a leading competitor based in Germany, Maris (both names are disguised to protect their identity). The two companies had operated in the UK and these units were merged soon after the takeover under the name Googen-Maris Systems. While the two businesses were complementary in the markets they served, the companies had their own points of difference, one of which being culture. Eighteen months after the merger, these cultural differences were causing concern to senior management. The European Managing Director saw several negative signs indicating that the UK operation had an internal crisis and one that was affecting their business. Clients were being lost to competitors. There was a high employee turnover especially among managers. Organizational structure. Googen-Maris had decided to use the same ofce building that had been occupied by the Maris business before the merger. While the name above entrance had been changed to Googen-Maris, the company still used the Maris name, for example, on its Corporate headed letter and invoices. Figure 1 depicts the organizational structure of Googen-Maris. The darker boxes represent departments or people who were predominantly ex-Maris people, the lighter boxes represent those largely from a Googen background, while the white boxes represent mainly people who had joined since the merger. The sales/marketing and technical departments were staffed mainly by ex-Googen people except for the marketing manager who had joined after the merger. Customer-facing employees were also predominantly ex-Googen people. For example, service engineers, and staff working in Customer Service and the sales department met customers face-to-face

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Figure 1 Organizational structure chart

frequently. Staff working in the Credit Control department also had contact with customers but mainly by telephone or mail. The signs of crisis. Staff turnover had been extremely high. The resignation of a line manager was causing job insecurity among their subordinates. Once a line manager resigned, a series of resignations followed soon after. Some groups set up similar businesses and others joined competitors. Countless negative rumors were created every day and spread rather publicly, and sometimes proved to be true. People felt isolated from each other. Induction training for new staff did not exist. There were too many new faces working in the same building, on the same oor and even in the same department. Cooperation between departments was not good. Staff complained that there was no way to nd out who was in charge of what. Work procedures as dened by Googen and Maris had been totally different and arguments as to whose approach was the better were frequent. Stock control was poor. Customers were confused by the dual identity of the company. They were not sure to whom they were paying. Promises to customers were not being kept as staff left the company and nobody appeared to take responsibility. Orders customers placed were frequently delayed. Employees have to implement the change and shape the vision of the new rm during the post-merger period, and therefore their emotional attachment and perceived job security to the merged rm are particularly important. The following research questions were developed based on the literature review and the preliminary research with the company: how does organizational virtue, as perceived by employees, differ by employee background prior to the merger; and what are the relationships between the six dimensions of organizational virtue perceived by employees and the negative feeling employee have toward the merged organization, which eventually led to high turnover. Research methods A questionnaire survey was conducted with all 160 employees in the UK operation of Googen-Maris. The six dimensions and 24 associated items of the organizational virtue ethical character scale labeled: integrity, empathy, warmth, courage, conscientiousness, zeal (Chun, 2005) were used to measure the organizational virtue of Googen-Maris, as perceived by employees. The respondents were asked to imagine that Googen-Maris had

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come to life as a human being and to rate each trait from strongly disagree (1) to strongly agree (5) that described the merged company. A number of emotional outcome variables were also included in the questionnaire. They are two items to measure satisfaction (e.g. I am overall satised with Googen-Maris), and two items to measure emotional attachment (e.g. I am pleased to be associated with Googen-Maris), both scales were used in the previous studies (e.g. Davies et al., 2003; Chun and Davies, 2006). Perceived job security (people here feel condent and certain about the future) and employee loyalty (I would be happy to work for Googen-Maris for the rest of my career) measures were taken from Goffee and Jones (1998). Each was assessed with ve-point Likert-type scale ranging from strongly disagree (1) to strongly agree (5). The reliability alpha for each scale was above the acceptable level of 0.7. In total, 134 replies (a response rate of 84 percent) were received from employees of which 128 contained complete data and are included in the analysis. Among the respondents, 40 had worked for Googen prior to the merger (referred to as ex-Googen), 64 for Maris (referred to as ex-Maris) and 24 had joined since the merger (referred to as new joiners). Ex-Googen respondents tended to have more frequent customer contact than the others (many worked in sales). Among the total of 49 who did not have customer contact, only 7 were from Googen, 31 from Maris and 11 were new joiners. Among the 44 respondents who had contact with customers once a week or more, 28 were from Googen, 13 from Maris. Production (82.8 percent) and supervisory roles (66.7 percent) were dominated by ex-Maris, while management, administrative/commercial and technical roles were relatively well balanced between ex-Googen and ex-Maris. Findings Three major ndings emerged from the survey. First, the average score of the six organizational virtue dimensions perceived by employees and of the three outcome variables, in particular of perceived job security, were very low. Second three different views of Googen-Maris existed: one from those previously employed in Googen, one from those previously employed in Maris and another from those who had joined since the merger, and the differences on almost all variables were signicant (Figures 2 and 3). The average of the new joiners views was signicantly different from the two original companies. Overall, ex-Googen employees had the poorest view, falling below the views held by ex-Maris employees, whereas those who had joined since the merger had the most favorable view of Googen-Maris on all six dimensions of the organizational virtue. The biggest gaps between the two groups, ex-Googen and ex-Maris employees were observed on empathy (concerned reassuring, supportive, sympathetic), warmth (friendly, open, pleasant, straightforward), conscientiousness (reliable, hardworking, proud, secure). Specically employees previously employed in Googen, the acquirer, saw the merged Googen-Maris as having less empathy, warmth and conscientiousness. Googen-Maris management needed to consider the implications of those employees having more customer facing roles (more from a Googen background) being the least well disposed towards their company. An ANOVA F-test revealed that the differences between three groups were overall signicant at 0.05 or 0.1 levels on all dimensions (empathy F 3:348, p 0:038; conscientiousness F 3:232, p 0:043; courage F 4:678, p 0:011), including one marginally signicant at 0.05 level (warmth F 2:867, p 0:061), except for (Integrity F 1:795, p 0:170). The biggest gap was observed on courage (represented by ambitious, achievement oriented, competent, leading) on which the new joiners views were extremely positive compared to employees who have worked for the company before the merger. Overall the employees of Googen-Maris, regardless of their pre-merger background the organizations virtue poorly. A similar trend was observed on the emotional consequences variables (see Figure 3). Again, new joiners had the most positive emotional reaction to the merged organization followed by ex-Maris and then ex-Googen employees whose emotional reaction to the

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Figure 2 Organizational virtue compared

Figure 3 Emotional consequences compared

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merged organization was the most negative. The differences were the most signicant at or around 0.05 level on satisfaction (F 5:848, p 0:04) and job security (F 2:905, p 0:058), followed by emotional attachment (F 2:581, p 0:08). Employees who had joined since the merger showed the highest emotional attachment and satisfaction level and ex-Googen employees had the lowest level of satisfaction. However, the differences on employee loyalty (F 1:838, p 1:63) were not signicant. Interestingly, new joiners whose overall views of the organization were signicantly more positive than the others had a similarly low level of loyalty. Both ex Googen and ex-Maris employees saw their job security level as very low. Generally employees at Googen-Maris, regardless of whether they came from before the merger; or whether they joined before or after the merger, were not happy to stay with the company for the rest of their career, and the feeling was particularly strong amongst ex Googen employees. Finally there were signicant correlations between the six dimension of organizational virtues and emotional consequences (Table I). First of all, all six virtue dimensions are signicantly correlated with all emotional outcome variables but the strength of each association differs. Empathy, warmth and conscientiousness had the strongest correlations with emotional attachment. Warmth and conscientiousness followed by empathy had the biggest effect on job security and loyalty, and warm as strongest predictor for satisfaction. Courage had the least effect on all emotional outcome variables particularly on job security. Integrity had the second lowest correlations with these emotional outcome variables. Zeal virtue played a great role on employee emotion compared to integrity and courage.

Discussion
Organizational virtue, job security and satisfaction Existing studies of mergers rarely focus on the issue of corporate responsibility from an employee perspective beyond the legal and economic responsibilities. Such primary or obligatory responsibilities are required by law and to survive in business but they do not really explain the high failure rate of corporate mergers. Scholars agree the success or failure of the merger is determined by how much managers pay attention to the human side of the psychological integration processes that are beyond such obligatory responsibilities. There is very little opportunity for members of the public to learn how non-obligatory responsibilities for employees are managed within the merged organization and how they affect employee emotion and success of the merger. But employees are certainly affected. Of the six dimensions of virtue ethics two can be considered to be obligatory for a business, integrity and courage. Without integrity (honest, sincere, socially responsible, and trustworthy) a company will be criticized and shunned by customers and employees alike. Without the virtue of courage (ambitious, achievement oriented, leading, competence) a company will fail to meet its contractual obligations and its market position. However of the 6 dimensions of organizational virtue, these obligatory virtues showed the lowest impact on the employee emotional outcome variables. The courage virtue had the lowest impact on all four employee emotional consequence variables; job security, emotional attachment, satisfaction and loyalty. The inuence of courage on job security was the lowest out of 6 Table I Correlations between organizational virtue and emotional consequences
Empathy Emotional attachment Satisfaction Job security Loyalty 0.51 0.60 0.41 0.38 Warmth 0.51 0.65 0.51 0.46 Integrity 0.47 0.52 0.36 0.39 Conscientiousness 0.51 0.56 0.51 0.47 Courage 0.42 0.40 0.27 0.29 Zeal 0.50 0.54 0.39 0.42

Note: All gures are signicant at 0.05 level

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dimensions of the organizational virtues. Integrity showed the second lowest impact on employee emotion variables. Their impact on job security was particularly low. On the other hand, the non-obligatory virtues such as empathy, warmth, conscientiousness and zeal showed the stronger impact on employee emotions. This research is a study of a merged company that showed signs of crisis mainly due to the high voluntary turnover, while still receiving positive comments from media about their legal and economic responsibilities. The research identies a lack of focus on their non-obligatory responsibilities for their employees as a major source of the problem, all the more surprising perhaps as the study was untaken 18 months after the merger. The fact that no-one was taking responsibility for the non-obligatory aspects of the post-merger was translated into poor organizational virtue as perceived by employees. The lack of empathy (concerned, reassuring, supportive, sympathetic) and warmth (friendly, open, pleasant, straightforward) that represent non-obligatory virtues had the most signicant effect on the employee emotional reaction to the merged company including perceived job security, satisfaction and emotional attachment. The study then demonstrates how non-obligatory virtues can play a bigger part in determining the success of a merger than obligatory virtues. Three distinctive groups Three different pictures were emerged by employees pre-merger background. Ex-Googen staff had the lowest scores for satisfaction, intention to stay and job security. They tended to have the weakest perceived organizational virtue as well. A lack of empathy (concerned, reassuring, supportive, sympathetic) and warmth (friendly, open, pleasant, straightforward) was felt most strongly by employees from a Googen background, the acquirer rm. The low empathy and warmth led them to feel highly insecure about their jobs and their future and to leave the organization. Unfortunately most employees from Googen background worked in the customer service department and when they left, they took their customers and subordinates with them.

Contribution and implication

This research shows there were three distinctive groups according to prior merger background in the way employees see their organization from an ethical perspective. However, this study demonstrates a case where employees from an acquirer background had much lower satisfaction and job security level with the merged organization. This nding contradicts the common notion in the existing literature where employees from the acquirer rm have typically more positive views and emotional disposition towards the merged company. Existing literature rarely compares the views held by new joiners with those of existing employees. The research ndings suggest that new joiners had much more positive views compared to the employees who carried the emotional baggage from their pre-merger employment stage. While the new joiners are much more satised with, and emotionally attached to, and perceived much higher job security than those who had worked through the merger, towards the merged organization, their loyalty or intention to stay with the company in the long term is as weak as that of their colleagues. This research suggests this is because of the two poorly perceived non-obligatory virtues, conscientiousness and warmth which had the highest correlation with employee loyalty. The research approach was an in-depth study of a single merger case, one where emotions were running high. The research was conducted on a relatively small sample but one that was representative of the company due to a high response rate. The study lls a gap in the existing merger literature which is concerned more with legal and economic responsibilities and which has ignored the ethical perspective. Using a virtue ethics approach in assessing employee views and their experience of the merged company, the research found that

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non-obligatory virtues such as warmth and empathy are the more important in creating a positive employee emotional response to the merged organization. A merged company may show positive gures in their balance sheet and boast about the nancial success of the merger, but often ignore responsibilities that are not required by the law and by their shareholders. Companies who do not pay attention to the important role of non-obligatory virtue as demonstrated in this research are not only irresponsible but also will face their employees suffering from poor morale, dissatisfaction and insecurity, leading to poor employee loyalty and ultimately organizational crisis. The ndings have a number of practical implications. Reassuring and engaging employee through an effective communication program during a merger is particularly important when an organization is going though a turbulent time. Uncertainty is more painful than bad news and poor communication creates uncertainty (Larkin and Larkin, 1996, p. 97). In such periods of uncertainty, employees ll any communication voids with rumors that attribute the worst possible motives to those in control. Employees perceived job insecurity was correlated strongly with organizational virtue as perceived by employees; in particular, whether or not the employees saw the merged rm had the virtues of empathy and warmth. This research also highlights the importance of engaging employees who are in contact with customers on a day-to-day basis during post merger integration. The crisis at Googen-Maris was driven by the high turnover from ex-Googen employees who later became competitors in the same area. The high turnover was driven by a perceived lack of virtue in the organization. Promoting empathy and warmth seem to be the keys to ensuring the emotional attachment and loyalty of key employees during turbulent times. A merger represents a context where one group of stakeholders, shareholders, wish to benet from a major organizational change. It is tempting to add that their gain might be at the expense of employees who can be disaffected by that same change, as illustrated here. The strength and consequences of those feelings are highlighted by taking a virtue ethics perspective, emphasizing that companies should have a responsibility to their employees, over and above that of pay and conditions. If managers cannot address this aspect of post-merger integration, then it is not surprising that mergers often fail to meet the expectations of investors.

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Rempel, J.K. and Holmes, J.G. (1986), How do I trust thee?, Psychology Today, Vol. 20, pp. 28-34. Stueber, K. (2008), Empathy, The Stanford Encyclopaedia of Philosophy, available at: http://plato. stanford.edu/entries/empathy/

About the author

Rosa Chun is Professor of Business Ethics and Corporate Social Responsibility at Manchester Business School, England. Her research focuses on corporate reputation and virtue ethics, and has appeared in the Harvard Business Review, Journal of the Academy of Marketing Science (JAMS), Journal of Business Ethics, Industrial Marketing Management, International Journal of Management Reviews, and Corporate Reputation Review. Rosa Chun is the corresponding author and can be contacted at: rosa.chun@mbs.ac.uk

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