Human resource management

Business Management
Study Manuals

Diploma in
Business Management

HUMAN RESOURCE
MANAGEMENT

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The Association of Business Executives (ABE) and RRC Business Training

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Diploma in Business Management

HUMAN RESOURCE MANAGEMENT

Contents

Unit Title Page

1 HRM and its Context 1
People as an Organisation’s Key Resource 2
Ways of Theorising about HRM 4
The Tension between the Individual and the Organisation 5
The Psychological Contract 6
HR Professional and Line Manager Roles in Managing and Developing
People 8
The Impact of Organisational Culture on HRM 12
The Impact on HRM of the Unpredictable Global Environment 18

2 Ethics and Corporate Social Responsibility in HRM 22
Ethics – Competing and Contradictory Theories 23
Ethics Applied to Management 29
Ethics at Organisational Level – Corporate Social Responsibility 32
Equality and Diversity for All and in Every Aspect of HRM 41

3 Human Resource Planning (HRP) 51
The Purposes and Importance of Human Resource Planning 53
The Processes of Human Resource Planning 54
Redesigning the Organisation 60
Changing Patterns of Work 63
External Supply Forecasting 68
HRP and Horizontal Integration 69
HRP in Today’s Unpredictable Global Environment 70

4 Recruitment and Selection 73
The Recruitment and Selection Process 75
Defining the Vacancy 76
Casting the Net 83
Selection Procedures 89
Employee Induction 100

5 Performance Management – An Overview 105
What is Performance Management 107
High Performance Working 109
The Contrasting Objectives of the Employer and the Employee 112
Reward and Motivation 113
Need Theories of Motivation 121
Process Theories of Motivation 128
Excellence Theory and Motivation 132

Unit Title Page

6 Job Design 133
Definitions of Job Design 135
Empowerment 138
Centralisation and Decentralisation 144
Elements of Good Job Design 150
Delegating and Monitoring Work 153
Flexible Working 159

7 Performance Appraisal 161
What is Appraisal? 163
Appraisal in the Context of Performance Management 166
Different Approaches to Appraisal 167
Typical Processes of Appraisal 168
Personal Objective Setting 173
Managers Need to Have Appraisal Skills 179
Self-appraisal 186
Continuous Appraisal 187

8 Learning and Development 189
Learning, Training, Development or Education? 190
Value of Learning 191
Identifying Learning Needs 195
Theories about Learning 196
Ways of Delivering Learning 202
Aligning the Individual’s Needs to Those of the Organisation 206

9 Talent Management 209
The Importance of Career Development 210
The Individual’s Contribution to Career Development 211
The Employer’s Contribution to Career Development 212
Self-Assessment and Keeping Aware of Career Opportunities 214
Continuing Professional Development (CPD) 217

10 Employee Reward 221
The Elements of Reward 222
Financial Reward 223
Non-Pay Reward 231
Flexible Benefits 231

11 Discipline and Grievance 235
Disciplinary Procedures 237
Grievance Procedures 245
Disciplinary Penalties 247
Appeals Processes 250
The Right to be Accompanied 252
Redundancy 252

Unit Title Page

12 Employee Communication, Involvement and Engagement 255
Communication in Organisations 256
The Communication Process 263
Methods of Communication 267
Effective Communication 272
Negotiation 279

13 Health, Safety and Welfare 287
Tensions Between the Legal, Ethical and Business Implications of H&S 289
The Size of the Challenge 290
The H&S Responsibilities of the Employer 290
Stress 293
Occupational Health 295
Working Hours 296
Substance Abuse 296
The H&S Responsibilities of the Employee 298
Risk Assessment 298

1

Study Unit 1
HRM and its Context

Contents Page

A. People as an Organisation’s Key Resource 2
To employ or not to employ – that is the question 3
What do we mean by the word ‘organisation’? 4

B. Ways of Theorising about HRM 4
What is human resource management? 4
What is horizontal integration? 5
What is vertical integration? 5

C. The Tension between the Individual and the Organisation 5
Why is there a tension between staff and employers? 5

D. The Psychological Contract 6
What is the psychological contract? 6
Is it the same as the legal contract of employment? 6
What happens if the contract is broken? 7
Does the contract change over time? 7
Is the psychological contract the same as the employer brand? 7
Can you give some examples of the contract terms? 8

E. HR Professional and Line Manager Roles in Managing and Developing People 8
How do organisations use hr professionals? 8
How did the role of the HR professional develop? 11

F. The Impact of Organisational Culture on HRM 12
What is organisational culture? 12
What sorts of organisational culture are there? 13
What influences an organisation’s culture? 14
Where do I look to analyse the culture of my organisation? 16
Can culture be changed? 16

G. The Impact on HRM of the Unpredictable Global Environment 18
Is globalisation an issue for HR? 18
What impact has globalisation had on managers? 18

© ABE and RRC

2 HRM and its Context

A. PEOPLE AS AN ORGANISATION’S KEY RESOURCE
“Our people are our most important resource.”
“If that were true you wouldn’t treat us like this.”

For as long as owners and managers have been claiming that their people are their greatest
asset, HR professionals and academics have been looking for the evidence that connects the
way people are treated to the success of their organisation. (If we can demonstrate that
business success depends upon good people management and development, key decision
makers are much more likely to pay attention to HR issues.) The good news is that evidence
is now available and widely accepted. The bad news is that there is no one right way to
manage and develop people, which will guarantee an organisation’s success. There are
many other variables to be taken into account.

Case Study 1

In 2003 the UK Chartered Institute of Personnel and Development (CIPD)
published a study into the HR practices, staff views and performance in 11
large UK organisations, including Jaguar Cars, the Nationwide Building
Society, Selfridges (a large and successful London store) and Tesco (the
UK’s largest supermarket chain). The University of Bath in the UK had
carried out the research. One of the key conclusions was that the most
carefully thought through HR strategy was useless, unless it was embraced
by line managers with the skills and understanding necessary to engage
and motivate employees.
Research had already demonstrated the powerful statistical impact of
people management practices on overall business performance. In this
study, they wanted to understand more about why and how these practices
influenced organisational performance – to unlock what has been termed
the ‘black box’.
The study, “Understanding the People and Performance Link: Unlocking the
Black Box” confirmed the powerful relationships between HR practices,
employee commitment and operating performance. It tracked
organisational performance over a three-year period and found that where
effective HR practices were not in place, levels of employee commitment
were up to 90% lower.
Other key conclusions included:
(a) An organisation needs a clear direction and purpose, beyond the
bland mission statement or generic goal of financial returns, which
engages, enthuses and unites people. At The Nationwide Building
Society this is a commitment to mutuality. At Royal United Hospital
(RUH) Bath it is saving lives. This 'big idea' appears essential in
motivating and directing people behind the strategy of the
organisation.
(b) High performing organisations invariably employ some form of
balanced performance scorecard or methodology. Be it the
stakeholder value model employed at Selfridges, the six-sigma
methodology at Jaguar or a quality framework at the Court Service,
this demonstrates the importance of different stakeholder groups to
the organisation's success, and links individual and corporate goals.

© ABE and RRC

HRM and its Context 3

(c) The research confirmed that there was no universal 'best HR
practice'. It is all about having a broad and integrated 'bundle',
tailored to the needs of the organisation. For example, the practices
employed at technology company AIT would be unlikely to go down
well on the production line at Jaguar. Yet every worker there could
tell you Jaguar's latest position in the international quality league
table.
Strong attention to team working, extensive employee communications and
involvement, and positive perceptions of training and careers, emerged as
common ingredients in the performance-driving HR mix.
Leadership – not at the top of the organisation but at the front line -
appeared to be holding back many UK organisations. Middle managers
and supervisors set the context in which the HR/business performance
relationships happened, or did not happen.
For example, at the UK supermarket retailer Tesco, where 88% of staff feel
loyal and share the company's values, a typical section manager described
their role as, "mobilising the team with a goal, motivating people". Building
management capability is a core component of the UK government tax
office’s HR strategy.
Another example is hospital nursing staff, describing the change after a
new ward manager worked with her HR colleagues on a range of new
policies, such as flexible shift working and 360 degree appraisal.
Comments included:
"I'm much more motivated now, there's training; the atmosphere's totally
different."
"Communication is excellent now…our manager is very approachable."
"When I came here it was unsettled. Now we have a strong team…you
want to do the job to the best of your ability."
The high level of staff turnover in the ward had since fallen to almost zero.
Organisations can make progress very quickly. They need to survey
employee attitudes and commitment; assess, train, coach and support their
first line managers and integrate HR policies with goals and values. Once
these processes are underway there is a very high likelihood of
transformation.

To employ or not to employ – that is the question
Until the 1970s it was natural, outside industries such as construction and assembly
industries such as car manufacturing, for tasks to be performed by employed staff working
full time. This meant a high headcount. The move towards subcontracting and flexible
employment practices (calling upon staff when they were needed rather than having them
there all the time) made many employers look at people as a human resource. Rather like
money, building, equipment or stock, people need managing. This is the mindset of the HR
manager and distinguishes it somewhat from the more workforce orientation of the personnel
manager. HRM calls for investment in the people who will pay back that investment with
interest; the principle is one of added value. These people do not always need to be
employees. Similarly, some staff are regarded as a more disposable asset and offer only
small returns on investment in their career, their learning or their engagement with the
business. Those posts are either contracted out or regarded as peripheral.

© ABE and RRC


What do we mean by the word ‘organisation’?
If we use the word ‘business’ it suggests a profit making company. The word ‘organisation’ is
wider and embraces the public sector, as well as not for profit bodies like charities, religious
organisations and professional associations.

B. WAYS OF THEORISING ABOUT HRM
What is human resource management?
“Ask any three economists for a definition of economics and you will get
four different answers!”
The same can be said of human resource management. People are unique, complex and no
single definition fully captures the developing and multifaceted nature of this remarkable
subject. Dividing HRM up into its constituent parts no more captures the subject than a study
of anatomy captures what it means to be human. But definitions are necessary.

Organisational
HR processes Lead to  HR outputs Lead to 
success

The division based on HR processes is:
 HR strategy – A long term perspective that addresses the big questions about how the
best return can be obtained from the human resources available now and in the future.
 People resourcing – Getting the right number of the right sorts of people in the right
place at the right time and ethically getting rid of them when they are not needed.
 Learning and development – Creating an environment in which employees and
others associated with the organisation (contractors, owners, governors, associates)
get the necessary knowledge, skills and attitudes.
 Organisation development – Managing the hard (structure, systems) and soft
(culture, values) features of the organisation.
 Performance management, reward and recognition – Creating structures that
maximise recruitment, retention and motivation; obtaining the best performance from
the people available to you.
 Employee relations – Creating a workforce that is appropriately supportive, involved
and engaged with the business.
An alternative way is to look at the four HR outputs:

© ABE and RRC


1. Staffing the organisation
Sufficient numbers of the right
people in the right place at the
right time

4. Employment
2. Organisational
administration
The Four performance
Keeping the organisation
within the law, getting Objectives of Engaging and supporting
the workforce so that
staff paid, developing
policies and HRM people make their best
contribution
administrative practices

3. Organisational change
management
Aligning culture, structure, learning
and development etc to advance
the business

For these objectives to be met HRM must be integrated horizontally and vertically.

What is horizontal integration?
One of the beauties of HRM is that all of these topics integrate with each other. Your
organisation’s long term HR strategy leads to a resourcing plan for getting the people you
need. Recruitment (part of people resourcing) overlaps with induction (learning and
development). However, induction also involves finding ways to engage the new member of
staff with the decision-making processes of the business (employee relations). Induction will
involve setting work objectives (performance management) that take account of the direction
in which the business is going (organisation development). Those objectives will only be met
if sufficient rewards are available. We could go on.
We call this horizontal integration. Without it HRM is dysfunctional.

What is vertical integration?
The activities of line managers and HR professionals need also to be integrated with the
strategy and business plans of your organisation. If an organisation’s business plan is to
increase productivity by 3% next year and to reduce costs by another 3% this will probably
need to be reflected in the way performance is managed and in pay settlements for next
year. Hence HRM must be vertically integrated with top-level business decisions.
If your organisation is also subject to control from outside (such as by government or by a
regulator) your HRM decisions will need to be vertical integrated with that external
environment too.

C. THE TENSION BETWEEN THE INDIVIDUAL AND THE
ORGANISATION
Why is there a tension between staff and employers?
This is an old and somewhat political question. The left wing (pluralist) approach is that the
interests of owners and managers are served by getting high productivity for low cost. In this
model workers are seeking high rewards for as little effort as they can get away with. Clearly
managers believing in this model will take an adversarial approach – seeing the interests of

© ABE and RRC


the two sides of industry in opposition. However, the right wing (unitarist) approach suggests
that prosperous employers produce prosperous employees and therefore, the interests of
both sides are the same – the prosperity of the employing organisation.
(Are you a unitarist or a pluralist? What are the views of the people you work with?)
 By ‘employer’ do you mean ‘owner’?
Good point. The ‘employer’ is the body that makes an offer of employment. It is
usually the same as the organisation.
 So are the managers the employers?
Not as individuals – they are usually employees themselves. It is the organisation that
does the hiring of labour and is, therefore, the employer.
 So are owners the same as managers?
Not usually. We ought to distinguish between the owners of an organisation and those
who manage it day by day. Shareholders own public companies, not for profit
organisations are usually ‘owned’ by a board of trustees and public bodies are owned
by the state. It is not the shareholders, the trustees or the state that runs them day by
day – that is the job of managers, who will remain answerable to the owners.

D. THE PSYCHOLOGICAL CONTRACT
What is the psychological contract?
Although first used in the early 1960s, the term became popular in the early 1990s. It has
been defined as:
‘The perceptions of the two parties, employee and employer, of what their mutual
obligations are towards each other'
(Guest, DE. and Conway, N. (2002),
Pressure at work and the psychological contract. London: CIPD)
It is often expressed as the unwritten understandings between the two parties. Such
understandings are usually informal and imprecise and may be inferred from:
 History
 Statements made by either side, e.g. during the recruitment process or in a
performance appraisal.
Like all contracts, the psychological contract contains both promises and expectations. The
important thing is that these are believed to be part of the relationship.

Is it the same as the legal contract of employment?
No. The latter will, in many cases, offer only a limited and uncertain representation of the
reality of the employment relationship. The employee may have contributed little to its terms
beyond accepting them. The nature and content of the legal contract may only emerge
clearly if and when, it comes to be tested in a court.
The psychological contract on the other hand looks at the reality of the situation as perceived
by the parties. It may be more influential than the formal contract in affecting how employees
behave from day to day. It is the psychological contract that, effectively, tells employees what
they are required to do, to meet their side of the bargain and what they can expect from their
job. Although it may not be legally enforceable, a court may be influenced by it in reaching a
judgement.

© ABE and RRC


It is often summarised as the expectation that both sides will act fairly, in a trustworthy
fashion and deliver on its promises.

What happens if the contract is broken?
Where an employee believes that management has broken promises or failed to deliver on
commitments, this has a negative effect on job satisfaction, commitment and on the
psychological contract as a whole. This is particularly the case where managers themselves
are responsible for breaches, for instance, where employees do not receive promised
training, or performance reviews are badly handled. Managers cannot always ensure that
commitments are fulfilled - for example, where employment prospects deteriorate or
organisations are affected by mergers or restructuring - but they may still take some blame,
in the eyes of employees.

Does the contract change over time?
Yes. For example, it will be influenced by:
 The nature of jobs: More employees are on temporary contracts, more jobs are being
outsourced, tight job descriptions are out and functional flexibility is in. In many
countries there is an end to the concept of the traditional job for life.
 Organisations have downsized and delayered: Individual employees have to do more
with less. It is no longer possible to guarantee lifelong employment to anyone who will
simply stay out of trouble.
 Markets, technology and products are constantly changing: Customers are becoming
more demanding, quality and service standards are constantly going up.
 Technology and finance are less important as sources of competitive advantage:
'Human capital' is becoming more critical to business performance in the knowledge-
based economy.
 Traditional organisational structures are becoming more fluid: Teams are often the
basic building block; new methods of managing are required.

Is the psychological contract the same as the employer brand?
No. The employer brand is the bigger image of the organisation held by those inside or
outside the organisation. As such, the psychological contract is a small part of that overall
brand.

© ABE and RRC


Can you give some examples of the contract terms?

Employees are expected to: Employers are expected to
provide:

Work hard Pay according to performance
Uphold company reputation Training and development
Attend and be punctual Promotion opportunities
Be loyal and honest Recognition for innovation or new
Work extra hours when required ideas
Develop new skills and update old Feedback on performance
ones Interesting tasks
Be flexible, for example, by taking An attractive benefits package
on a colleague’s work Respectful treatment
Be courteous to clients and A pleasant and safe working
colleagues environment
Be honest Reasonable job security.
Come up with new ideas.

Case Study 2

The government of the UK was striving to make its National Health Service
(NHS) an employer of choice, to attract high-quality recruits. A study of
health professional staff looked at their psychological contract to see
whether it was likely to enhance the employer brand.
The most important aspects of the contract were found to depend on the
investment made in the employment relationship by both the employer and
employee. The employee expected high and individual human contact and
professional development. Employee satisfaction with this was good.
However, there was a growing breach in the areas the employer was
having the greatest difficulty providing (e.g. pay).
Despite this, the overall health of the psychological contract was classed as
good.

E. HR PROFESSIONAL AND LINE MANAGER ROLES IN
MANAGING AND DEVELOPING PEOPLE
How do organisations use HR professionals?
Managing people is a shared activity and many people play a part. The degree to which it is
delegated to line managers will vary from country to country, from sector to sector and even
from unit to unit within one organisation. It is always good to remember that the way you
have experienced HR is not the way it is organised everywhere else.

© ABE and RRC


It is helpful to separate:

Clerk of works HR Contracts manager HR HR Architect

Transactional HR Managerial HR Strategic HR
Dealing with individual Where HR is heavily Creative and innovative
casework and formalised and rule-bound and HR, with emphasis on
predominantly emphasis is on troubleshooting vertical integration and
administrative or staying on the right side of making best use of the
employment law (often strong available human
in a public sector or unionised resource – added value
environment) HR

(Based on: Tyson and Fell (1986))
It became increasingly common during the 1990s for transactional HR (the left hand box) to
be devolved to line managers and even the individual employee, if there was access to an
intranet containing an employee portal via which the employee can manage their leave,
change their hours of work, get a pay slip, apply for promotion, find out about conditions of
service etc.
But line managers are busy and cannot be administrative experts. So a new model became
increasingly popular in the early twenty-first century - the HR Strategic Business Partner
Model, proposed by David Ulrich in the USA in 1997.

Shared Services Centres of Excellence Strategic Partners

A single and sometimes Small teams of HR experts A small number of HR
large unit that handles all with specialist knowledge of professionals working
the routine transactional key areas of HR. closely with local business
HR activities for the managers, influencing
Typically reward, learning
organisation. strategy and steering its
and development,
implementation.
Typically: resourcing, employee engagement,
payroll, absence talent management, The task of strategic
monitoring, advice on the diversity and compliance. partners is to ensure the
simpler employee relations business makes best use of
issues. its people.

Low-cost but effective HR Delivers competitive Highlights to general
administration. business advantages managers the HR issues
through HR innovations. and possibilities they may
not see. It is also aims to
inform and shape HR
strategy, so that HR meets
organisational needs.

© ABE and RRC


Case Study 3

From Personnel Today magazine, 28 January 2008

BACKLASH AGAINST HUMAN RESOURCES BUSINESS
PARTNER MODEL AS MANAGERS QUESTION RESULTS
A backlash against the much-feted human resources (HR) business partner
model appears to have begun after research revealed that more than half
of managers were unconvinced by the structure. Only 47% of the
managers polled by research firm Roffey Park said that business partnering
was in any way successful in their organisation. One in four said the model
was ineffective, while the rest were undecided on the merits of the
increasingly popular system.
The business partner model has been hailed as the way forward for the
profession since HR academic Dave Ulrich first wrote about it in 1997. It
was supposed to modernise the function, making it more valuable to chief
executives, and is now the most common structure, according to the
Chartered Institute of Personnel and Development (CIPD). Almost half of
the 479 managers polled had business partners in their organisation.
However, those critical of the model said all too often it had only involved a
change in title, and had not resulted in strategic thinking, with comments
such as: "Too much reliance on the intranet", and "Greater conflict within
HR" in the survey.
Gabriele Arend, HR director at beauty products manufacturer Elizabeth
Arden, said she disagreed with any model splitting HR professionals into
recruiting, training and employee relations experts. Her company is moving
towards a more traditional structure, where HR staff are trained to develop
generalist knowledge. "This encourages a trust relationship between staff
and their HR partner, but also allows department heads to discuss their
issues with one HR partner rather than three," she said.

Case Study 4

Job Advertisement

HR Business Partner - Various locations
At last, a chance to join an efficient organisation who have a modern HR
strategy that works within this huge global organisation. Our client delivers
an HR service focused on developing the skills of the managers, so they
are truly capable of managing every aspect of the employee lifecycle - from
an unhappy team member, through to under performance to career
development and beyond.
The overall objective of the HR team is to skill managers in all the basic
areas of HR - offering guidance - but not hand holding as happens so often
in less sophisticated organisations.

© ABE and RRC


HR professionals at middle and senior levels in organisations are increasingly seeking
professionally qualified recruits. That is probably one of the reasons why you are pursuing
an ABE qualification.

Exercise 1
The exercises in this manual are designed to encourage you to think about particular ideas or
approaches to HRM in the light of the preceding text. There are no right answers (and none
provided) – just think about the questions and perhaps make some notes about your
response.
1. What should be the respective contributions of the HR professional and the line
manager in recruiting someone for that manager’s unit?
2. Why have you split the responsibilities between the two parties in that way?
3. Is there any other way to split the responsibilities?

How did the role of the HR professional develop?
 Welfare
As a result of the industrial revolution, humans in organisations were often looked upon
as adjuncts to machines – doing the things that machines were not yet able to do.
They were managed accordingly. Little surprise, then, that society developed a need
for welfare workers, to make best use of the welfare provisions available to workers
and their families. This continued through the two world wars. ‘People professionals’
were engaged in largely welfare roles – representing the interests of workers.
 Industrial relations
In the 1960s improved communication and collaboration saw the increased growth in
the power of trade unions as a counterbalance to the powerful employer – in both the
public and private sectors. The emphasis was on industrial relations – keeping the
workers at work. People management professionals began to be looked upon as
neither management nor unions – they were the independent arbitrators between the
two and the title ‘personnel manager’ was adopted. Government direct labour was
high. The relationship between employer and employed was often adversarial and the
power of the trades union was high.
 Human resource management
The 1980s saw a dramatic shift. Competition increased, low productivity meant low job
security and management seized back the power (with some drama, such as in the UK
miners’ strike and in the newspaper printing industry). The job for life culture
disappeared, along with the need for an independent arbitrator between the employer
and the employee. Personnel managers were doomed to extinction unless they found
a new role. The result? Personnel managers became human resource managers and
clearly identified themselves with the interests of the employer.
In Europe this coincided with a mushrooming of employment legislation, which naturally
fell to the new breed of HR professional. By the start of the new millennium the key
contributions of the HR professional became enhancing human performance, change
management and keeping the employer on the right side of the law.

© ABE and RRC


F. THE IMPACT OF ORGANISATIONAL CULTURE ON HRM
Management experts are placing increasing importance on the study and understanding of
what is sometimes termed ‘organisational’ and other times ‘corporate’ culture. Excellence
theorists, like Tom Peters, place strong emphasis on the part played by organisational culture
in influencing the success or failure of organisations in their pursuit of excellence.

What is organisational culture?
Culture may be defined as
“the sum total of the beliefs, knowledge, attitudes of mind and customs to which
people are exposed in their social conditioning. Through contact with a particular
culture, individuals learn a language, acquire values and learn habits of
behaviour and thought.”
Organisations possess some of the ingredients of a subculture. They have distinctive shared
beliefs and values that sometimes translate into policies and practices. People can
instinctively get a “feel” of an organisation that is often difficult to define but represents some
intuitive “gut reaction” to the nature of the business. Outside commentators will often say
that a progressive business has a “buzz” about it or a conservative one feels “stuffy and
formal”. Organisational culture, then, refers to the deep-seated values of an organisation as
they are manifested in the ways in which people are expected to behave. The culture of an
organisation can be observed in the way in which it is structured (e.g. centralised or
decentralised); in the way authority is distributed (e.g. authoritarian or employee empowered)
and along the lines of the analysis described below. Organisational culture affects
organisational climate.
Organisational climate refers to the ways in which people involved with the organisation (its
stakeholders, customers and its competitors) perceive that organisation. How customer
friendly is it? How concerned is it with the welfare of its employees? To what degree does it
empower its employees?
Culture becomes apparent through many observable features of an enterprise:
 Formal or informal structure
 Centralised or decentralised decision-taking and whether decisions are taken by
committees or individuals
 The extent to which innovative thinking is promoted and encouraged
 Freedom of various levels of staff and management to take decisions and responsibility
(empowerment)
 Openness of communications and even whether people are on first name terms
 Layout and appearance of the factory or office
 Formality of dress
 Leadership styles adopted by managers
 Educational attributes and intellect of employees
 Acceptance or adversity to risk
 Attitudes to teams
 Attitudes to training and development
 Attitudes to change and particularly, technology
 Commitment to service and quality.

© ABE and RRC


As all these features contribute to the culture of the organisation, it must follow that each will
be unique to its particular organisation. A textile company will have a different culture to an IT
company. It is perhaps less obvious that the organisational culture in Sainsbury’s will differ
from that of Tesco.

What sorts of organisational culture are there?
There are many different ways of analysing culture and several popular models. Building on
an article by Roger Harrison in 1972, Charles Handy identified four organisational cultures.
These may not apply through the whole business – different constituent parts of the business
may have differing cultures.
(a) Power Culture
Handy gives names of Greek gods to illustrate each of the cultures. The power culture
is attributed to Zeus. Like Zeus, the manager in this culture is the source of all power.
It typifies the owner-manager who initially founds the business and takes all the
decisions and all the risks.
Despite power emanating from a central source, there may be a limited amount of
formalisation, rules, procedures and policies. The workers will rely on what has gone
before.
As the organisation is not rigidly structured, it can often adapt quickly to change,
although its ability to do so efficiently depends entirely on the quality of those few key
individuals trusted with decision-taking power.
As these organisations grow, the power of key decision-takers is likely to diminish, as
they cannot control everything. In smaller businesses, the power culture can work well.
(b) Role Culture
This is a quasi-bureaucratic culture, which works by logic and reason. The role culture
is represented as Apollo, the God of Reason.
The role culture is typified by policies, procedures and practices that are formally laid
down. Authority is clearly defined, as too are job descriptions, procedures for
communications and other internal processes.
Role culture enterprises are likely to have a narrow band of senior managers at the top,
with a highly structured organisation set out below, each constituent part knowing its
function.
The role of the person is more important than the person in it, as the basis of
appointment is the ability of the individual to perform that role.
Fine examples of role culture are found in the British Civil Service and in the European
Commission.
Role culture is at its strongest during a period of little change; organisations that fit this
stereotype can find it extremely hard to adjust to changes in the external environment.
While things remain the same, the individual is comfortable and secure in the role
culture. However, during rapid change the roles have to be redefined and the person
has to adapt or move on.
An ambitious person can find the role culture frustrating, unless they happen to find
that their talents fit into progressively more attractive “boxes” as they attempt to move
up the organisation.

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(c) Task Culture
The task culture is one based on jobs or projects to be carried out. It is best illustrated
by the matrix organisation used in some companies, where a line and staff organisation
structure is complemented, or replaced altogether, by project or task forces.
The emphasis here is on completing the job. Handy apportions no Greek god to this
culture, as getting effective performance is more important than power or individuals.
The task culture is very different to the role culture in that the former is flexible and
changeable to suit the job in hand. This is the opposite of the more rigid, bureaucratic
role culture.
Task culture can be ideal when the enterprise has to adapt quickly to changes in the
external environment of its market place. It tends to thrive when:
 Markets are rapidly changing or volatile
 Speed of response to the customer is important
 Product life cycles of products and services are short.
Many large accountancy and consultancy firms now aspire to the task approach. It is
quite usual, for example, for accountants employed to carry out auditing duties to be
assigned to different teams while an audit is under way. The employee will, therefore,
have different colleagues and a different boss, depending on what week it is.
The most difficult issues for managers in the task culture are:
 Control of work
 Coordination of resources
 Achieving economies of scale
 Budgeting.
(d) Person Culture
This is an existential culture, in which the individual is the main focus. The organisation
and its structure exist to serve the individual’s objectives and aspirations. The person
culture is about being able to “do one’s own thing”. Handy chooses Dionysus as its
symbol, the Greek god of the self-orientated individual.
This culture is found in diverse businesses such as some solicitors’ offices (where the
principals choose their own specialisms and interests if they can), small businesses
and small consultancies. Thus, if a self-employed training consultant likes working in
Scotland, he may well try harder to develop business in Scotland to suit his own
purposes. If the consultant wants to specialise in “training the trainer” courses, this is
where the main focus of his marketing efforts will lie.
Handy states that it is rare to find organisations with this culture, but two examples are
The Body Shop and the Virgin Group, certainly in their early days. The organisations
were founded on the idiosyncratic interests of the founders. In the case of Virgin, you
find diversity of interests today that could never have been predicted.
Handy argues that modern organisations are marked by the change from role culture to task
culture.

What influences an organisation’s culture?
Whilst it is difficult to tie down a meaningful definition of a culture, it is perhaps easier to
identify those factors that will influence the culture of an organisation and hence the structure
it adopts to pursue its objectives.

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(a) Origins
The founding principles of the organisation will have a strong impact, particularly where
there remains a founding family involvement or a tie-in to some particular set of values.
(b) Size
The organisation will tend towards adoption of the role culture if it is big and
cumbersome. In such a business the person culture would be almost impossible to
adopt – the structure tends to be more formal. Some US aerospace companies have
been able to move in the direction of the task culture with widespread applications of
matrix organisation. Some of the multinational accountancy firms have moved the
same way.
(c) Technology
Companies that employ technology in their production processes generally have to
sacrifice non-routine tasks for routine ones. In turn, routine operations are best suited
to the role culture. If the technology is expensive and needs close controls and
supervision, this too suits role culture. If, on the other hand, the company employs
technology for short job runs and individual batches of output, the power or task
cultures may apply.
(d) Goals and objectives
Obviously, if one or just a few very powerful individuals lay down goals and objectives,
the power culture is likely to apply.
In decentralised organisations, where the business is broken down into divisions or
semi-autonomous units, it is quite likely that the task culture and even the person
culture will be evident.
(e) External environment
The external environment is made up of those forces which impact on the organisation
from outside. There are six such sets of forces:
 Political
 Economic
 Social
 Technological
 Competitive
 Demographic.
Environmental change can critically affect organisational culture. If change is swift and
relentless, the role culture is difficult to sustain. Similarly, the person culture may be
vulnerable if the markets move against the interests of the decision-taker.
Diversity in the external environment can lead to a task culture being employed – get
the job done, as the tasks are different to suit different segments. If, on the other hand,
there is a standardised environment, this might suit a role culture.
The power culture is best equipped to cope with external threats in the environment,
provided the select group of decision-takers can complement their power with effective
decisions.
(f) Human resources
People are the most diverse resource of all to the organisation and so the culture that
suits best will depend on personal values, attitudes and beliefs.

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The individual who prefers the job tightly defined and prescriptive will almost certainly
prefer the role culture, or in some cases the task culture. So, too, will the person who
wants an undemanding and repetitive job.
The expressive, creative, individual thinker, strong on conceptual ideas, will prefer the
person culture but may also flourish in a task culture and even a power culture.

Where do I look to analyse the culture of my organisation?
(a) Mission Statement
This is the starting point of culture analysis of the organisation. Is it clear and well
defined; is it communicated to and embraced by all levels of the organisation?
(b) Behaviour patterns
Do actual patterns of behaviour match the organisation’s expected patterns of
behaviour? This analysis can apply to the interaction between the organisation and its
stakeholders.
(c) The structure of the organisation
Whether the structure is flat or tall; centralised or decentralised; bureaucratic or
relatively free of administrative rules, is a useful indicator of organisational culture.
(d) The nature of leadership and the distribution of authority
These are key indicators of the type of culture in an organisation. Leadership may be
authoritarian or democratic; authority and decision-making may be concentrated at the
top or spread downwards to teams working close to customers by the empowerment of
employees.
(e) The values of the organisation
Values can be tested, in practice, by assessing the responsiveness to stakeholder
needs and expectations.
(f) Entrepreneurial spirit
The entrepreneurial spirit of the culture is revealed by the degree of enterprise,
innovation, competitiveness, flexibility and drive for excellence of the organisation.
(g) Receptiveness to embrace change
An important cultural quality of an organisation is its willingness to embrace change
arising from changes in its environment. Analysis asks whether the culture is proactive
(anticipating and planning for change) or reactive (coping with change as and when it
arises
(h) Cultural climate
Cultural analysis pays particular attention to the nature of the cultural climate, i.e. how
employees and other stakeholders view and evaluate the organisation. Cultural
climate elements pose questions whether the organisation is friendly or formal/distant;
is people oriented or task oriented; is characterised by conflict or co-operation between
teams and departments.

Can culture be changed?
The function of culture management is to foster the most appropriate pattern of the culture
elements revealed by analysis to achieve organisational goals. This puts particular focus on
the ability to cope with change. Culture management may have to bring about change in
some culture elements, while reinforcing other elements of the existing culture.

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Excellence theorists argue that successful organisational cultures must have two key
characteristics:
 The culture must be coherent. This means that all the cultural elements must be
following a similar style and direction.
 The culture must be flexible enough to cope with rapid changes in the environment.
It is not always easy to combine coherence, which builds up over time, with flexibility that
implies change.
Schein points to the importance of leadership when managing cultures. Organisational
culture can be shaped by what elements or behaviour leaders rate as important, i.e. what
leaders of organisations, departments or teams set out to measure and control, and what
forms of cultural behaviour leaders reward e.g. what earns promotion and higher status in a
given organisation.
Excellence theorists have their ideas of what makes an excellent organisational culture to
inform modern culture management. Heckman and Silva follow Schein in stressing the
crucial role of leadership, i.e. good leadership and clear vision should be customer oriented,
stressing quality and meeting market requirements.
Excellence supporters argue that the culture of the work place should encourage employees
to thrive and develop, making contributions through empowerment and being valued for their
contributions. People are an organisation’s most important asset.
Organisational cultures should be proactive, anticipating change and getting to the source of
problems before they become critical.
Culture should encourage vision so that everyone knows where the organisation is heading,
not just concentrating on the present.
The structure of an organisation should be simple and flat. Culture can be changed for the
better by re-engineering, usually delayering (stripping out layers of management) and
empowering teams with decision making authority in their work situations; but core values
like quality and customer care should be universal.
Managers should be out and about in the organisation talking and particularly, listening to
employees and customers.
Organisational culture should have a focus on what the organisation does best.

Exercise 2
Think of three very different organisations with which you are familiar and then consider the
following questions.
1. Describe their respective cultures.
2. Why have they developed those cultures?
3. What pressures to change are there?

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G. THE IMPACT ON HRM OF THE UNPREDICTABLE
GLOBAL ENVIRONMENT
In a global economy, business processes can be copied anywhere in the world.
Work requiring little training or specialist skill will go to the lowest cost operators. Producers
in Asia, where labour costs are significantly lower, have overtaken manufacturers in Europe
and America. Likewise, call centres have moved to India. In the twenty first century it is the
quality and added value of your people that will determine whether or not your organisation
will be successful. Work will go to where staff are competent and where the costs are lowest.

Is globalisation an issue for HR?
Globalisation is the process by which national barriers are breaking down in the market
within which organisations operate. Some companies already regard the entire world as their
target market, whilst for others this will not be so for many years. For example, Coca Cola is
a truly world brand, readily identifiable by consumers in virtually every country. On the other
hand, the giant life assurance industry has few global players – even when companies such
as Zurich Insurance and Allianz work across frontiers, their products tend to follow the
requirements of each single market place.
The move towards a global market place has been accelerated by the growing acceptance
that barriers to trade are essentially unproductive and serve only to reduce the level of
demand for goods and services overall, as well as inhibit customer choice. Initiatives by the
World Trade Organisation (formerly GATT) constantly improve the prospects of free trade.
Whereas once, the existence of trading blocs such as the European Union was seen to
favour only the select few member countries to the detriment of outsiders, the increase in
cooperation between different nations and trading organisations is gradually breaking down
the barriers.
The most vivid illustration of global markets is in money business. The UK and more
specifically London, is an acknowledged global financial centre, although the various markets
for money and financial products and services is not yet a perfect one. Different institutions
know the considerable advantages of trading across international frontiers as well as the
many drawbacks.
Paul Hirst, writing in 1992, stated that
“national economies and cultures are dissolving before the great flows of trade,
finance and information.... unconstrained global markets for capital and goods
allow companies to allocate resources to maximise benefits for consumers”.
This supports the view that the world is becoming a single market as if borders did not exist.
The global market is an aspiration rather than a reality. In Britain you can buy a car made at
home (Rover), the EU (BMW), Japan (Mitsubishi) or Malaysia (Hyundai). This does not
automatically mean that the global market is with us yet. Many services remain subject to
trade restrictions and others will never cross international frontiers due to their very nature.
The global market for labour has developed slowly, though it is unlikely that this will ever
mature to a significant level, given immigration controls and different international emphases
on skills and other technical requirements.

What impact has globalisation had on managers?
Although globalisation is a modern trend, multinational companies have been with us for
some time. Managers in such companies have to be aware of the different dimensions
brought to their organisations by the home and host countries’ sets of values, customs and
attitudes.

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If the entire world is the market place, it follows that this market must be observed not only in
the context of the final product but also in terms of resources for production, financing and
marketing. There are many aspects of this that affect the manager.
 Decision-taking
Different countries have entirely different cultures, so it is inevitable that decision-taking
processes will vary across frontiers.
For example, there has been much benefit for those UK companies that have imported
the Japanese quality circles concept and adapted it for their own use but it is
impossible to transplant an entire system successfully from one country to another.
One major difference between UK and Japanese companies is that the UK ones get
into action relatively quickly on a given problem, whereas the Japanese spend
significantly longer forming a consensus about what the problem actually is and
formulating alternative courses of action. This is partly due to different company
processes but may also be explained by the fact that the two relevant groups of
managers think in different ways. For a start, the UK is a Christian democracy whilst
the Japanese are Shinto Buddhists.
 Leadership Styles
Some countries have much more didactic (instructional) approaches to leadership.
In the UK we are taught to “consult before you decide” whenever possible – elsewhere
this may not be so. In France it is much more acceptable to “speak one’s mind” before
staff than in the UK. What a French person would regard as a frank discussion might
be taken as an insult by a British worker.
 Motivation
People from different cultures, understandably, respond to different motivational stimuli.
In developed countries, the manager can often focus on recognition, advancement and
meaningful, interesting work as motivators. In poorer countries, the lack of fulfilment of
Maslow’s lower order needs, such as basic physiological needs and safety security
needs, may predominate.
 HR Policies and Practice
Security of job tenure is extremely variable from country to country. So, too, are terms
and conditions of employment. A white-collar worker such as a teacher will get paid if
they take a day off due to illness. In many countries, there would be an automatic
deduction of one day’s salary for the sick leave, as the person is expected to insure
against loss of pay due to sickness; or the attitude would simply be that as the person
had not worked, it is logical to withdraw the remuneration.
Some EU countries have personnel policies that are more liberal than those in the UK,
partly due to legislation arising directly or indirectly through the Social Chapter.
 Organisation Structures
If companies are to operate globally, then organisation structures must inevitably
become more complex. Reporting lines may become extended and there must
certainly be less regular direct contact time between different parts of the enterprise.
 Communications
Globalisation has serious implications for the way different parts of the enterprise
communicate with one another. The potential for face-to-face communications must
recede, whilst dependence on more indirect methods (fax, e-mail, Internet, video-
conferencing, etc.) must increase. Perhaps Herzberg’s aspiration to lower quantity but
more quality in business communications will become a reality.

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When communication is face-to-face, the manager must be aware that cultural
differences are highly important. Personal presentation skills are very important to
American managers. Japanese managers instinctively “weigh up” the status of the
person with whom they are communicating before selecting the words they use. Polish
managers are extremely direct in manner but highly status conscious – they also
expect to tell the person with whom they are communicating when first name terms are
acceptable, just as the French reserve the right to switch from “vous” to “tu”.
 Geographical Dispersal
Dispersed production and marketing bring new challenges to the manager. In some
cases a good will be produced in one country, processed in another and then exported
back to the original country, posing control and coordination problems for the manager.
Look at Fayol’s mechanics and dynamics of management, set out in the first study unit
of the course. Virtually all of them are affected in this situation.
 Technological Transfer
Technology is a critical variable in establishing competitive differential advantage but
are the technologies employed in different countries compatible? An otherwise
straightforward implementation programme in a single country can be complicated by
such problems. Lawrence and Lorsch point out the extreme difficulties of harmonising
the efforts of generalist managers and specialists in a single country – this problem
multiplies across frontiers.
 Costs
If a company produces and markets its products on an entirely domestic basis, the
relative costs of labour and capital are known and choices can be made. The trade-off
between these costs may be different in other countries, making allocation decisions
less straightforward.
 Legal Environment
Each country has its own laws in respect of manufacturing, company statutes,
employment and marketing, etc.
 Planning
Planning is made more difficult in a global market due to such issues as:
(i) Greater risk
(ii) Less knowledge of local conditions
(iii) Lack of market intelligence
(iv) Currency risk
(v) Different inflation rates
(vi) Differing worker expectations of the enterprise.
The global market, therefore, presents managers with the opportunity to use their skills in a
wider context but with this come inevitable new management issues to resolve.

Exercise 3
Search ‘globalisation HR’ on the Internet. Can you draw any conclusions from the results?

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21

Study Unit 2
Ethics and Corporate Social Responsibility in HRM

Contents Page

A. Ethics – Competing and Contradictory Theories 23
What do we mean by ‘ethics’? 23
Who must behave ethically? 23
To whom are organisations accountable? 23
What is the significance of the three stakeholder groups? 26
What is stakeholder theory? 27
How should we act when stakeholders want different things? 28
Can’t one stakeholder group sometimes want opposite things? 28
What is an ‘externality?’ 29

B. Ethics Applied to Management 29
How do managers make decisions ethically? 29
Aren’t managers torn between their best interests and those of the company? 30
How do we develop business ethics? 31

C. Ethics at Organisational Level – Corporate Social Responsibility 32
What is the social responsibility debate? 32
How can we improve our Corporate Social Responsibility? 36
How do we combine our legal and our social responsibilities? 36
What relevance does CSR have to HRM? 37
What is whistle blowing? 37
The case for whistle blowing 40
The case against whistle blowing 40

D. Equality and Diversity for All and in Every Aspect of HRM 41
Aren’t all HR professionals discriminating all the time? 41
So who experiences unfair treatment? 42
How is discrimination relevant to employment? 44
What behaviours are outlawed by the legislation? 44
What constitutes less advantageous treatment? 44
What is harassment? 44
What is in the equal pay legislation? 45
All discrimination is obvious isn’t it? 45
Who can bring a claim? 46

(Continued over)

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22 Ethics and Corporate Social Responsibility in HRM

What is a disability under the legislation? 46
Discrimination, equal opportunity, fair treatment or diversity? 47
Equality and diversity – in policy and practice 48
How do employers manage equality and diversity in the workplace? 49

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Ethics and Corporate Social Responsibility in HRM 23

A. ETHICS – COMPETING AND CONTRADICTORY
THEORIES
What do we mean by ‘ethics’?
Ethics is about morality - right and honourable conduct. It is significantly broader than the
common concept of choosing right from wrong and what is considered ethical will vary from
country to country. In a general sense it takes the Biblical dictum, ‘Do unto others as you
would have them do unto you.’ Whilst this is limited in business where there is the element
of competition between organisations, there must then be rules of ethical competition. In the
competitive labour market, for example, it is generally acceptable for you to draw staff from
other employers but it would not be acceptable to draw them in with promises that you were
not then willing to fulfil.

Who must behave ethically?
It is usually accepted that governments have a primary role to set the scene for society -
internationally, nationally and locally. Owners and managers hold the key responsibility for
determining and enforcing the acceptable standards within their organisations. And in that
they are expected to understand and follow the moral code prevalent within society – even if
this is not expressly stated in law or company policy. Hence ethics are always changing.

To whom are organisations accountable?
Managers have to reconcile their sometimes-conflicting responsibilities to a number of
different stakeholders. A stakeholder is simply a person or group of people who affect, or can
be affected by, an organisation's activities. We can consider stakeholder groups under three
main headings – internal, connected and external stakeholders.
(a) Shareholders
Being the owners of the company, shareholders must receive a return on their shares
and, eventually, the market value of their shares must appreciate. One problem here is
that in large business enterprises the gap between shareholders and the company
itself has grown wide, and original objectives may be obscure.
We can state what shareholders expect in terms of:
 Requirements concerning capital growth; and
 Requirements for a return on their original investment.
As a rule, we can say that both expectations will be in general agreement with the
company’s general aim. However, conflict arises where, for example, the firm wishes
to reinvest a large proportion of the profits to finance future investment for expansion,
rather than announce a larger share dividend. The only way to do this is to achieve a
profit large enough to satisfy shareholders and at the same time allow enough money
to invest in the future – clearly not an easy thing to accomplish!
If the shareholders’ interests are not satisfied then there may be a loss of financial
status, future borrowing problems for the company and difficulty in achieving plans.
(b) Employees
Irrespective of the kind of organisation, the interests of the employees must be
considered. Employers, of course, have certain statutory obligations to safeguard the
interests of workers (e.g. a duty to promote safe working practices) but moral
obligations also exist.
These moral obligations will be influenced by prevailing social attitudes that may be as
compelling as the legal obligations. In recent years many firms and governments have

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recognised a moral obligation to give workers a say in the running of the organisation
or a share in the profits. Employers that resist such moves may find it difficult to recruit
suitable staff.
The basis of the legal relationship between an organisation and its employees is that of
a contract of employment (a voluntary agreement into which employer and employee
freely enter under the terms of common law). Both sides have a duty to behave
reasonably and responsibly; employees should give faithful and honest service. In
addition, there is a legal framework to ensure the fair treatment of employees at work
and to prevent discrimination on various grounds.
The interests of employees are, of course, often channelled through trades unions.
(c) Suppliers
Most organisations depend upon an external source of supply and all business
enterprises depend upon outside markets. The well being of these external suppliers is
therefore vital. This emphasises the mutual interdependence of commercial bodies.
Many enterprises will take positive measures to ensure that their supply lines remain
intact, e.g. by offering long-term contracts of sale.
(d) Customers
There are very few true monopolies, largely due to the prevalence of substitute
products and brands. Competition tends to preserve the objective of customer
satisfaction in firms to a far greater degree than would otherwise be the case. There
has also been a considerable growth in consumer protection during recent years.
However, conflict occurs between customer expectation and the price and quality of the
goods being offered by the firm. The customer clearly desires low prices, conflicting
with the profitability objective. Managerial decisions have to reconcile the customers’
interests with those of the organisation. In the long term, organisational objectives may
be achieved only when the enterprise is able to satisfy the needs of sufficient
customers to generate adequate sales revenue.
In modern societies a movement has developed which sets out to guard and promote
the interests of consumers against what is seen as the considerable power of the large
firms who sell goods and services to the public. This movement is known as
consumerism. It is argued that the need for such a movement arises because of a
perceived imbalance between sellers and buyers. Sellers are seen as highly organised
with large resources and the services of experts to help them market their products;
consumers are seen as unorganised and lacking professional and expert advice.
In order to redress the balance, three broad developments have taken place.
 Firstly, legislation has been enacted to protect consumers by providing protection
for the consumer on the quality of goods; on their correct description; on fair
guarantees; against wrongful or misleading advertising; on the safety of goods for
their users; and against extortionate rates of interest being charged for credit.
 Secondly, consumer groups have been established which monitor the workings of
the above acts, and which promote further protection for buyers of goods and
services. There are also independent consumer groups like the Citizens Advice
Bureaux, and the Consumers’ Association.
 Thirdly, publicly funded regulators have been established to promote fair-trading
by formerly state-owned or near-monopoly enterprises such as mail,
telecommunications, rail and energy suppliers.
Consumerism has become an important feature in the organisational environment of
advanced societies, and as such managers have to take account of it. There have
been examples of conflict between firms and the consumer movement over the

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necessity for, or nature of, consumer proposals or demands. However, wise
management will take account of consumer ideas and use them to guide future
product/service developments and organisational policies.
The legal responsibilities of an organisation to its customers fall into two broad areas:
firstly, to provide consumer choice; secondly, to ensure fair dealing. The objectives are
that customers should get what they pay for and be able to have redress and
compensation if they do not.
These legal responsibilities to customers are governed by legislation and enforced by
institutions, e.g. the trading standards departments of local authorities. The legislation
is rooted in common laws that enable customers to receive fair dealing.
(e) Society
Current belief is that all organisations have an obligation to contribute to the well being
of the country’s economy and society as a whole. This may be thought of as an
obligation to the government of the day, but expectations now extend to all types of
organisations.
Managers should demonstrate awareness of responsibilities to society in general.
Many firms take great care in the provision of anti-pollution plans, even beyond the
boundaries of legal requirements. Organisations often have training and development
policies to assist in personal satisfaction. The long-term effect of such actions may well
be an improvement in profitability; nevertheless, policies of this kind indicate an
acknowledgement of general social needs.
The media (both within an organisation but more particularly within society as a whole)
have an ever-increasing role in helping society answer its ethical questions and
reporting on alleged unethical behaviour by organisations.
(f) Local communities
Within society as a whole organisations often have a significant impact upon the local
communities in which they trade – where products are grown, processed, distributed
and sold. In employment terms this means that employers have an ethical relationship
with residents within the travel to work areas of their organisations.

Exercise 1
Look at a newspaper, the Internet or TV news for items reporting on unethical behaviour by
organisations.
1. Who has determined what is right and wrong?
2. What pressures are there to regulate an organisation’s behaviour?

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Case Study 1

Enron Corporation– The Accounting Scandal of 2001
Enron was a large and well-reputed US energy company. However,
irregular accounting practices during the 1990s covered up a financial
collapse that was going on within the company. Much of its reported profits
and revenue were the result of financial deals with limited partnerships that
it controlled. The result was that many of Enron's debts and losses were
not reported in its financial statements. Enron’s auditors did not report this.
Once the true situation became known Enron shares became practically
worthless - an unprecedented and disastrous event in the financial world.
Enron filed for bankruptcy and the scandal brought down their accountancy
firm also.
Later on it was discovered that Enron’s lack of ethics in the financial
domain was mirrored by similar inconsistencies in other areas. But all of
this occurred within a company that made much of its corporate social
responsibility image.

What is the significance of the three stakeholder groups?
 Internal stakeholders
The objectives of employees and management are bound to have an influence on
how the organisation is run. They are likely to be interested in:
(i) Continuity of employment.
(ii) Growth of the organisation in order to share in its prosperity.
(iii) The esteem arising from identification with success where possible.
(iv) Individual interests and goals, such as personal development and psychological
growth as well as material well being.
 Connected stakeholders
Shareholders are not always part of the organisation itself, except in the case of
managers and staff who hold equity in the company. They will have distinctive interests
in the business, such as:
(i) A return on their investment in the form of dividends and an increase in the
capital value of their shares.
(ii) Concerns that the business performs within the law and reasonable ethical
parameters.
(iii) Participation in decision taking through exercising rights to attend the Annual
General Meeting and vote.
The organisation’s bankers will have specific concerns relating to the financial
performance of the company, so that any short and long-term financing will be repaid
with the minimum of risk. If the bank provides finance for a company, it will also wish to
ensure that it is kept informed of the company’s financial condition.
The customers of the enterprise require good quality goods and services at the right
price. They also want to have access to products through convenient, low cost
distribution channels. In addition, businesses are seeing increasing evidence of

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consumerism – customers being more demanding of enterprise not only in what they
produce, but how they conduct themselves generally.
The debate about a major football manufacturer using child labour in Asian countries is
evidence of this – not only did it impact on the manufacturer, but it had a major effect
on perceptions of large football league teams buying the merchandise.
Lastly, suppliers have interests in:
(i) Ongoing and mutually beneficial business relationships;
(ii) Being paid on time.
 External stakeholders
External stakeholders are those generally unconnected with the business but who
nevertheless have an interest in its activities. This category includes virtually everyone
else.
The government seeks compliance with legal requirements as well as:
(i) Ongoing creation of employment and wealth;
(ii) Revenues in the form of income tax, capital gains tax, corporation tax, National
Insurance contributions, value added tax and excise duties;
(iii) Information, such as statutory company returns and export/import information for
the Department of Trade and Industry.
Local authorities have a specific concern with the economic activity that can be
brought to their catchment area. They will also be interested in revenues through local
taxation. A wider concern is the impact of the business on the local environment.
The competitors of the business wish to ensure that there is fair competition and that
all businesses operating in a sector are behaving ethically and in a climate of mutual
respect.
Where a business has a professional body or trade association, this body will wish
to ensure that activities fall within any codes or statements of practice agreed by its
members.
Lastly, the community wishes to ensure that any organisation produces its goods and
services in a safe environment, protecting its workers and those living in the vicinity.
Other stakeholders in this respect are the education and training providers, such as
schools and colleges, who expect the business to provide information on job
opportunities, information on what the company actually does and its contribution to
society and (sometimes) a dialogue with secondary education providers to educate the
young on industry and commerce generally (many companies have their employees
make presentations to schools and colleges as public relations exercises to cement
business/community relationships).

What is stakeholder theory?
The act of balancing responsibilities to various stakeholders is a constraint on managers. In
order to assist managers to cope with this problem there has developed what is known as
the stakeholder concept.
The idea is that there are certain groups that have specific interests in a business. These
interests may differ from one group to another, and sometimes the interests of different
groups may actually conflict with one another.
The concept can also be used to analyse the contributions and rewards in a given
organisation. The behaviour of the various stakeholders will have a profound effect on the
organisation’s prospects.

© ABE and RRC


In addition, the concept can reveal the way in which problems in a stakeholder group can
threaten the well-being of the whole organisation, such as where workers make excessive
pay demands or customers transfer their loyalty to a competitor.

How should we act when stakeholders want different things?
Organisations have to balance rewards to stakeholders with the contributions that
stakeholders make to the firm. Some writers see dealing with stakeholders as an extension
of the marketing concept: the organisation must “market” its views and values to all
stakeholder groups.
Sometimes conflicts that arise have no obvious solution but have to be balanced carefully
and diplomatically.

Case Study 2

During the early 1990s a minerals extraction company wanted to open a
business at Rodel on the Isle of Harris in the Outer Hebrides. The positives
emerging from this development were jobs and the economic stimulation to
the area that always comes from a new enterprise setting up in a locality.
The development was opposed in the strongest terms, however, by some
in the local community as the firm considered it essential to have workers
come in on Sundays. This conflicted directly with the religious beliefs of a
sizeable section of the community, who as Free Presbyterians could not
agree to this.

Can’t one stakeholder group sometimes want opposite things?
Yes. Clearly there is a tension as to which stakeholder group is the dominant force,
particularly between customers and shareholders in the privatised utilities. Top managers
and directors have been criticised for awarding themselves large bonuses and share options
– the so-called “fat cat” debate where customers feel aggrieved.
However, the blurring of the lines between various groups has further complicated the
analysis of stakeholders.
 Many employees are also shareholders, due largely to being given bonus shares.
 In the case of retail stores and supermarkets, employees may be both shareholders
and customers.
 Many customers may be shareholders in the firms that they patronise, if not directly
then through pension or insurance schemes and unit trusts.
This blurring can cause a conflict of interests for individuals. For example, as a customer the
person may want lower prices, but as a shareholder the same person wants the firm to make
higher profits.
These developments make stakeholder analysis more problematic than when each
stakeholder group had only its own interests to promote. Most organisations use the
technique of “branding” to create an image of loyalty to unite the interests of stakeholders.
Brands like “Virgin” give first priority to employees, because motivated staff will ensure
customer satisfaction that in turn will increase sales, thus improving the return to
shareholders.

© ABE and RRC


What is an ‘externality?’
Economists distinguish between “private costs” and “social costs”.
 Private costs are made up of the costs of production met by an enterprise, such as
wages and salaries, fuel, transport and so on.
 Social costs are the costs to society as a whole of the actions of the business.
When private and social costs diverge, assuming they can be measured at all, the effects are
called “externalities” and these can be positive or negative.
An example of a positive externality is the provision of street lighting in an urban area.
This is funded by local government, who in turn raise revenue from local taxation. The
residents of the area in which the lighting is installed benefit from it through greater physical
safety and less risk of road accidents. Others will benefit, however, such as people from
other districts and towns who did not pay for the lighting but nevertheless gain some
advantage from it.
A negative externality is the pollution caused by a factory. The private costs of production
are borne by the enterprise, whilst the social costs are born by society as a whole.
This negative externality can only be redressed by charging the cost of pollution to the
company that owns the factory, or forcing it to eliminate the pollution under threat of closure.
There are many other examples of externalities:
 The National Health Service provides free treatment to those who do not fund it, e.g. if
a foreign tourist collapses in the street.
 Vehicles cause pollution with widely accepted damage to the planet - in excess of any
financial recompense paid by motorists in higher taxation.

Exercise 2
1. Define unethical behaviour?
2. To what extent do you think is it important that organisation should have a code of
ethics?
3. Who are the stakeholders for your organisation?
4. What does your organisation do to keep its stakeholders in balance?

B. ETHICS APPLIED TO MANAGEMENT
How do managers make decisions ethically?
The terms “accountability” and ”social responsibility” refers to the way in which an
organisation is run and held responsible for its actions. The word “ethics” refers to actions
that are held to be right or wrong. The debate about business ethics centres on whether the
only responsibility of organisations and management is to maximise profits. This is the usual
driving force behind the founding of an enterprise and is an assumption of most
microeconomic models used to analyse the behaviour of firms.
Most decisions that organisations make will be founded upon one of four basic beliefs:
 Deontology: That the organisation has a responsibility to act in ways that respect the
fundamental rights of human beings (as if there is a set moral code that is larger than

© ABE and RRC


the organisation). The morality of the actions is to be considered, not just their
consequences
 Utilitarianism: That the business should serve the greatest good of the greatest
number
 Teleology: That the end justifies the means, irrespective of the damage that is caused
to people on the way to utopia
 Egoism: That moral behaviour should be considered in terms of personal self-interest.
These are wider views of management responsibility. They can, and often do, conflict with
the profit motive espoused by the purists.

Aren’t managers torn between their best interests and those of the company?
Ethics operate at two basic levels – the ethics of the individual manager and the wider ethics
of the whole organisation. Managers bring a set of values into their work situations, and
these operate in conjunction with the ethical culture of the organisation. Various
organisations have an ethical stance, which is revealed in general terms in their mission
statements.
Unethical behaviour can take place at the individual level – e.g. insider trading of shares,
leaking information to competitors, harassment of employees. Unethical conduct at
organisational level includes pollution of the environment, exploitation of staff and customers,
or a ruthless pursuit of profit at any cost.
The problems which face managements pursuing higher ethical standards include: the
pressures of competition and rapid change; cost cutting; a lack of public awareness and
scrutiny of the activities of the organisation; and clash of interests between the various
stakeholders of the organisation.
The duty of managers to the owners of the enterprise is indisputable. If the owners do not
receive a return on capital, they will withdraw the capital or close the business, cutting their
losses if necessary. Modern day businesses must, however, take account of broader
responsibilities for several reasons:
 Despite deregulation and a general contraction of state involvement in enterprise, there
are boundaries of tolerance shown by governments to certain practices (e.g. the
Camelot controversy in 1997 as described elsewhere in this chapter).
 The government imposes a greater financial burden on businesses whose activities
result directly or indirectly in divergence between social costs and private costs (such
as private motoring and smoking, resulting in decisions to impose increases in tax on
petrol and tobacco at higher rates of increase than the retail price index).
 There are strong pressure groups that make it their business to ensure that
organisations and their customers serve the general good (e.g. the Shell/Nigeria
controversy, also Barclays Bank/apartheid in the 1970s).
 New pressures arising from consumerism mean that businesses have to take account
of customer concerns in the wider sense (e.g. the Cooperative Bank’s policy of not
lending to countries with oppressive human rights records or to bodies associated with
blood “sports”).
 In industry itself, there are many entrepreneurs who support socially responsible
policies (such as the late Anita Roddick, founder of the Body Shop).
Ethical considerations focus on individual managers behaving in an honourable way.

© ABE and RRC

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