The Social Bottom Line and HRM (HRM Results)

Managing the Sustainable Enterprise2010Class 7

The social bottom line….key concepts

Concept of the firm – and the psychological contract.

Value of social capital and the problem of offshoring/downsizing

Concept of ‘externalities’ of HR – what impacts does your HR system have outside the firm?

Idea of measuring social bottom line – the problem with codes.

Key Questions

Key questions that must be answered about the employment relationship when determining how to manage a sustainable enterprise:

What is the nature of the psychological contract between employee and employer?

To what extent is social capital important to your employment decisions?

What happens when circumstances require a change in employment relationship?

How do you determine what your talent pool is, and where you want to seek it?

Conceptualizing the Employment Relationship Starts with Conceptualizing the Nature of the Enterprise

“Firm” = origins in Latin. Firmare in late Latin meant to confirm the signature. The firm was literally the imprint - the style under which the firm conducts business.

“Company” = roots in Latin also. Original meaning had to do with sharing. In its original use the word suggest a business that starts with people and relationships.

So when we think of company, the corporation is a living organism – a bundle of values and relationships-and it has its own character and personality; assets are there to be stewarded; and profits are necessary to enable you to fulfill your purpose.

When we think of firm, the corporation is a machine - a bundle of contracts and transactions. Assets are there to be seated; and profits are the reason for its existence. Mark Goyder, 2007.

What difference do these two conceptualizations make to the way in which people are managed in an enterprise?

Psychological Contract

What is a psychological contract (or employment contract) in Pfeffer’s terms? A psychological contract is the implicit and

usually tacit mental contract that exists between employee and employer concerning the nature of the employment relationship. It is based on the subjective belief in the nature of the reciprocal nature of the exchange relationship between the employee and the employer. E.g., ‘permanent employment’ in Japan.

How is the Psychological Contract Formed and Maintained?

Through the HRM system itself (types of employees it recruits, types of contracts it gives, basis of rewards) and through the corporate culture and management actions that an employee observes. Two main types of psychological contracts:

Transactional Relational

There can be varying degrees of each. IE, highly transactional and transitory, or somewhat transactional and moderately transitory.

Often a profession or occupation is characterized by one type of psychological contract or the other (although not always, and things change!)

The Job Markethttp://www.youtube.com/watch?v=3XGJq8wrw5I

In spite of greater emphasis on transactional employment relationships, there is little evidence that these arrangements have a positive effect on companies long term.

One key reason is because of their negative effect on social capital (and performance).

“Successful corporations need a healthy society….At the same time, a healthy society needs successful companies.”

Porter & Kramer

Social Capital is a critical connector between the two.

Ability to generate and regenerate sets limits on uses of resources

Utilizes Natural Capital – both input

and output – and ultimately is

constrained by time scales (discount rates) of Natural

Capital

Able to monetize costs of internalizing negative externalities

and work with time scales (discount rates) of Natural

Capital

Connecting Capitals

Social Capital ….on the Societal Level

“Social capital consists of the stock of active connections among people: the trust, mutual understanding, and shared values and behaviors that bind the members of human networks and communities and make cooperative action possible.” (Cohen & Prusak)

It has been found that the economic vitality of a community or region is strongly linked to its level of social capital. When there are strong social institutions that support the development of social capital, it flourishes.

Social capital is necessary for civic engagement, and civic engagement also leads to higher social capital.

Common groups through which people form social capital: church-related groups, school-service groups (PTAs), sports groups, professional societies, labor unions, fraternal groups, service clubs, veteran’s groups (Putnam, 1995).

Organizational Social Capital

This applies the concept to the company level, and looks at what managers can do to increase the organizational social capital in their companies. Three main components of

organizational social capital: Structural (who you know) Cognitive (what values/norms you share) Relational (how much trust and

cooperation you have towards others)

From an Organization’s Point of View, the Question Then Becomes…

How do I increase the connections between the employees, their internal networks?

How do I increase the shared mindset and values so that people can act in concert?

How can I increase the level of trust and reciprocity such that things are not delayed and decisions are made in the best interest of the company?

Increasing Organizational Social Capital

Structural: cross-functional teams; job rotations; career management.

Cognitive: cross-functional teams; job rotations; shared trainings; communications; socialization (politics, norms, expectations, history).

Relational: Open communication channels: clear vision, leadership transparency, clear accountability. Positive feedback and social recognition.

ALL are based on relationships built, nurtured and maintained over time.

Why Does Organizational Social Capital Matter?

Because companies now rely not on brute labor that is fungible and easily replaceable, but rather on highly skilled people whose intimate knowledge of the company, its workings, industry and clients as well as fellow employees, is essential to effective performance.

How long would it take someone to get up to speed and functioning effectively in your company?

Benefits of Organizational Social Capital

Better knowledge sharing – particularly of tacit knowledge (established trust relationships, common frames of reference, and shared goals).

Lower transaction costs (high level of trust and a cooperative spirit)

Greater coherence of action due to organizational stability and shared understanding. Cohen & Prusak, p. 10. See also Pearce & Randel.

How important are these to implementing a sustainability strategy?

Innovative, complex thinking (structural SC)

Ethical behavior (Cognitive SC)

Commitment to company’s values & goals, and willingness to perform sustainability tasks (motivation) (Cognitive & Relational SC)

Cross boundary sharing and cooperation (Structural & Relational SC)

We Already Know Some of the Best Practices for Commitment

Employment security Selective hiring of new personnel Self-managed teams and decentralization

of decision making Comparatively high compensation Extensive training Reduced status distinctions and barriers,

including wage differences Extensive sharing of financial and

performance information. Pfeffer, The Human Equation, 1998.

So What Happens When We Convey the Idea of ‘Employability’ as a Replacement for a Relational Psychological Contract?

“Boundaryless career” – it is particularly destructive to companies that rely on exploitative knowledge. But even in companies that rely on exploratory knowledge, a little turnover goes a long way.

So the company’s approach to career management somewhat determines its organizational social capital – and this in turn can affect its social bottom line as well as economic bottom line.

Finally, What is the Relationship Between Societal Social Capital and Organizational Social Capital?

When societal social capital decreases or is non-existent, it makes organizational social capital very difficult to form. (Fukuyama; Putnam)

EG: Japan & US, vs. China & France.

Just as important, when organizations create work conditions that make societal social capital difficult to maintain, it will eventually make organizational social capital difficult to form. “Outside-In Linkage” (Porter & Kramer). e.g. working hours; number of hours worked; travel;

relocations; lack of health care; unsafe work conditions.

There is a connection between nurturing societal social capital and organizational success (one example, J.M. Smucker Co. gives employees unlimited paid time off to volunteer in the community. Albina Bank in PDX does something similar).

Increases psychological well-being through enriched social support, which leads to higher life satisfaction and hence job satisfaction. Job satisfaction is related to performance (.3)

“These relationships imply that organizational actions that emphasize employees’ quality of life both inside and outside the workplace and take actions to prevent intrusions on their personal time are sound business decisions.” Luthans & Youssef, 2004.

e.g. PricewaterhouseCoopers created sabbaticals and great work-family programs and alternative work arrangements.

Other ways to measure social bottom line ….

Organizational Effects on Human Health and Mortality

“being a socially responsible business ought to encompass the effect of management practices on employee physical and psychological well-being ” (Pfeiffer, 2010: p. 36).

Health status and welfare of employees as a measure of social sustainability

Having health insurance significantly increases health outcomes – even short periods of not having health insurance can affect health outcomes. Also affects economic well-being. Also, providing health and wellness

programs can increase health outcomes.

Work hours and work-family conflict E.g. Compared to people who worked

less than 40 hours a week, those who worked more than 51 hours a week were 29% more likely to report having hypertension, even after controlling for socioeconomic status, gender, age, etc.

In Pfeiffer, 2010-pg. 38.

Work stress and job design Amount of control people have over

their work….e.g. If have little discretion over pace and content of work, and when socially isolating, job stress increases. So those at the bottom of hierarchy most likely to suffer from the effects.

Pfeiffer, 2010 – p. 39.

Layoffs and downsizing Research has shown that layoffs are

very harmful to the physical and mental health of those laid off….e.g., being laid off increases the likelihood that an individual will engage in violent behavior by some 600%” (Pfeiffer, 2010-p. 38).

Even in Sweden, mortality risk increased 44% in the four years following job loss.

So what happens when circumstances force a company to reduce costs by offshoring,

restructuring, and layoffs?

Value Conflicts

0 10 20 30 40 50 60

Downsizing

Investing in less-developed conutries

Natural resource exploration

Outsourcing production operations

Setting executive compensation levels

I nteracting with government officials

Finacial reporting

Conducting performace reviews

Managing personnel in manufacturing facilities/plants

Negotiating with suppliers or customers

Awarding stock options

Raising or borrowing capital

Not likely at all Somewhat likely Very likely

Assume you are engaged in each of the following business activities/ practices. How likely do you think it is that values conflicts would arise

The specter of restructuring! If you have a transactional

psychological contract, what will be your approach?

If you have a relational psychological contract, what will be your approach?

What are alternatives to downsizing, rightsizing, firing?

Alternatives….

Redeployment, freezing recruitment, disengaging contractors and other flexible workers, reducing overtime, career breaks and job-sharing and part-time work.

Wage cuts (e.g. Sumitomo; Thomas Cook in 2001 after terrorist attacks cut senior execs by 15%, next level by 3-10%)

Or imagine a world in which….

A company in a time of downturn….”sends employees on secondments to other organisations where they can develop their skills and contribute to the wider society, bringing employees back in when the economic environment improves.” PWC “Managing tomorrow’s people”

future of work to 2020.

3 Approaches to Downsizing (Wilkinson, 2005)

Worst: Workforce reduction strategies. “cutting headcount”. Fast, usually seen as unfair, often communicated badly, high stress and uncertainty. Leads to lower involvement and commitment and work effort by those remaining.

Better: Work redesign strategies.

Best: systematic strategies.

Three Types of Downsizing Strategies

Workforce reductions Work redesign Systems

Focus Headcount Jobs, levels, units Culture

Eliminate Implementation Time

People Quick Work Moderate Status quo Extended

Payoff Targets Short-term payoff Moderate-term payoff

Long-term payoff

Inhibits Long-term adaptabilitiy

Quick payback Short-term cost savings

Examples AttritionLayoffsEarly retirementBuy-out packages

Combine functionsMerge unitsRedesign jobsEliminate layers

Involve everyoneSimplify everythingBottom-up changeTarget hidden costs

Example of Responsible Downsizing..

In 2000, Alcan (aluminium and packaging co.) decommissioned a 91-old smelter in Scotland. Worked with its employees and the wider community six years prior to actual closure, donated land and buildings to the village to help create alternative jobs, and laid foundation for eco-tourism in the region. Prince of Wales HR and sustainable development

Several Questions …How Formal Do You Make These Commitments?

EG Nau put in its Articles of Incorporation fair wages and equal benefits. Could only be changed by 75% of shareholders (protects employees if the company is sold).

Motorola – if someone has worked for more than 10 years at Motorola, can only be fired with CEO’s consent (no longer applicable).

Another Question…How Do You Chose Which Aspect of Social Impact to Focus On?

Prioritizing Social IssuesGeneric Social Issues

Value Chain Social Impacts

Social Dimensions of Competitive Context

Social issues that are not significantly affected by a company's operations nor materially affect its long-term competitiveness.

Social issues that are significantly affected by a company's activities in the ordinary course of business.

Social issues in the external environment that significantly affected the underlying drivers of a company's competitiveness in the locations where it operates.

Source: Strategy and Society, December 2006

“Typically, the more closely tied a social issue is to the company’s business, the greater the opportunity to leverage the firm’s resources and capabilities, and benefit society.” Porter & Kramer

E.g. Marriott’s training of chronically unemployed job candidates.

All of This is Connected to the Key Question of …

Where do I find the talent pool for our company? The pros & cons of

outsourcing/offshoring! Why is offshoring in particular becoming

more common? What are the benefits to the company

(including its present employees) of offshoring?

What are the benefits to the employees in the offshore community?

What are the potential drawbacks?

What is the Effect of Offshoring on the Social Capital (and Culture) of Communities?

Those from which it departs –

Those to which it goes –

E.g. Young Chinese migration to large cities such Shezhen, Shanghai, etc. – effect on families, communities left behind.

Case of Michoacan, Mexico.

Keeping track of social bottom line: codes, standards and certifications

What codes, standards, principles are used regarding social sustainability?

Examples: UN Global Compact (2001) CERES Principles (1988) Caux Roundtable Principles (1994)

Best known Reporting Framework is the Global Reporting Initiative (GRI). About 1000 companies use it formally, many more informally or partially. Standardized, like GAAP, multi-stakeholder developed.

Components of the GRI

Labor practices and decent work

Human rights

Society

Product responsibility

Global Reporting Initiative

Accountability for Social Impacts: Verification & Certification & Consulting

Standard Setters (examples): SAI International (SA 8000); AccountAbility

(AA1000); Fair Labor Association; ISO CR standard (2008); other specific industry social accountability standards.

Consultants (examples): SustainAbility; Business Sustainability

Resource; Verite; PwC, Deloitte & Touche; Corporate Citizenship Company.

Some are for profit, some not-for profit.

Challenges of these codes….

There are a ton of them – which one is ‘good’? How can a consumer know?

Who designs the system – it can influence what is emphasized, or not!

Some codes have no assessment mechanisms, so compliance and improvement are impossible to assess.

Reliability and validity tend to be low or in need of improvement!

Chatyerji and Levine, 2006

Costs of pursuing social sustainability:

Costs of verification, consulting and certification.

Increased reputational risk from public goals and possible failures.

Unintended consequences of changing lives and communities. Unknown cultural values and goals.

Cross-Cultural Challenges of Social Accountability

Keen – had to have long discussions with their Chinese suppliers so that they could all agree on what ‘transparency and accountability’ mean.

The bottom line is….

Most companies put much more effort and thought towards defining and measuring their environmental bottom line, versus their social bottom line. Greater perceived cost savings. Difficulty of defining social bottom line

for the company.

Source Materials

Mark Goyder, “Tomorrow’s Company” section of the paper “Corporations and the 21st Century: How do Today’s Companies Need to Change to Meet Tomorrow’s Needs?”, from Academy of Management meeting 2007. Contact Sandra Waddock, waddock@bc.edu.

Putnam, Robert. “Bowling Alone: America’s Declining Social Capital”, Journal of Democracy 6, No. 1 (1995), 65-78.

Cohen, D. and Prusak, L. In Good Company. Harvard Business School Press, 2001.

Fukuyama, F. Trust. 1995. F. Luthans and C. Youssef. Human, social, and now positive

psychological capital management: investing in people for competitive advantage. Organizational Dynamics, 33(2): 143-160.

A. Wilkinson. Downsizing, rightsizing or dumbsizing? Quality, human resources and the management of sustainability. Total Quality Management. 16,(8-9), 2005: 1079-1088.

HR and Sustainable Development. HRH The Prince of Wales Business School; The World Business Council for Sustainable Development; The University of Cambridge Programme for Industry. See www.wbcsd.org.14

Pfeiffer, J. 2010. Building sustainable organizations: The Human Factor. Academy of Management Perspectives, 24(1): 34-45.