A_corporate's Responsibility to Employees During a Merger. Organizational Virtue and Employee...

A corporate’s responsibility to employeesduring a merger: organizational virtue andemployee loyalty

Rosa Chun

Abstract

Purpose – A company may ignore its non-obligatory responsibilities to employees during a major

change such as a merger, leading to their disaffection and feeling of insecurity. The purpose of this

paper is to explore how employee views of the merged organization differ by their pre-merger

background, and to explain the impact of the poorly perceived organizational virtue on employees’

emotional response to the merged organization including satisfaction, emotional attachment, job

security and loyalty.

Design/methodology/approach – The methodology involved a questionnaire survey of employees

from an organization in crisis following a merger due to poor employee morale and high labor turnover.

Findings – The two major findings were: first perceptions of organizational empathy, warmth and

conscientiousness were strongly correlated with employee loyalty, perceived job security, satisfaction

and emotional attachment. Second, company background prior to the merger had a contrary effect to

that expected from existing literature; employees from the acquiring companies had more negative

feeling towards the merged organization.

Practical implications – The research findings highlight the importance of promoting the virtues of

empathy and warmth as keys to ensuring the emotional attachment and loyalty of key employees to

ensure the long-term success of the merger.

Originality/value – Despite growing interest in applying virtue ethics into business, empirical studies

assessing organizational level virtue are rare. This empirical study of the organizational virtue advances,

complements, and distinguishes itself from existing studies on merger, by demonstrating the

importance of non-obligatory virtues (those beyond legal and economic responsibilities) perceived by

employees.

Keywords Corporate social responsibility, Acquisitions and mergers, Employees,Organizational behaviour

Paper type Research paper

Merger and corporate social responsibility

Even during recessionary times companies are being advised that a merger or acquisition is

a strategic opportunity, a formula for faster growth (Baghai et al. 2008; Epstein, 2008). This is

despite the reality that 70 percent of mergers fail to meet their financial objectives and to

enhance shareholder value (e.g. Habeck et al., 2000). Although there are a growing number

of studies dealing with different challenges in a merger, the study of corporate social

responsibility (CSR) issues in a merger has been limited to legal and economic

responsibilities, and pays much more attention to keeping the loyalty of shareholders or

consumers. For example, the negative effect of the acquisition of CSR-led brands such as

Body Shop or Ben & Jerry’s on consumer loyalty is observed when the acquirer is perceived

to have little understanding of CSR (Austin and Leonard, 2008).

Considering financial and legal responsibilities however did not provide an adequate

explanation for why certain mergers succeed and others fail. Indeed, the low success rate of

DOI 10.1108/14720700910985016 VOL. 9 NO. 4 2009, pp. 473-483, Q Emerald Group Publishing Limited, ISSN 1472-0701 j CORPORATE GOVERNANCE j PAGE 473

Rosa Chun is based at the

Manchester Business

School, Manchester, UK.

mergers is better related to human resource concerns and attributed to a lack of

understanding of the human side of the merger during post merger integration (Buono and

Bowditch, 1989, p. 10).

Since the ultimate success or failure of a merger depends on the post-merger integration

process (Pablo, 1994; Schweizer, 2005), an increasing number of merger studies have

looked at internal issues such as organizational culture, organizational fit (Chatterjee et al.,

1992) and top employee turnover (Walsh, 1988). More recently, scholars have raised

concerns that business ethics is less explored in the merger and acquisitions literature but

has been widely studied in the areas of marketing, information management and labor

relations (Lin and Wei, 2006). This is despite the notion that the ethicalness of a merger or

acquisition should be based not only on meeting financial objectives but also seen as

dependent on the effects which the merger will have on all involved stakeholders

(Donaldson, 1989; Heffern, 1989).

This paper uses a virtue ethics approach to study a merger case in which low organizational

virtue, as perceived by employees, led to an internal crisis. The purpose of the study is to

explore the differences between employee views of the merged organization held by

subgroups, and to explain the impact of the poorly perceived organizational virtue on

employees’ emotional response to the merged organization including satisfaction, emotional

attachment, job security and loyalty.

Organizational virtue and employee emotion

Whether or not an organization is seen to be responsible can be evaluated by considering its

underpinning ethical stance. There exist three main approaches in business ethics, Kantian,

Utilitarian and Virtue Ethics. Utilitarian and Kantian stances share the rationalistic approach

in guiding ethical behavior but adopt different principles. The Kantian approach stresses

obeying moral principles for human behavior such as ‘‘don’t lie’’, or ‘‘don’t steal’’, leaving no

place for moral emotions or sentiments. In the context of a merger, the Kantian or duty based

approach focuses on legal responsibilities such as job protection, employee rights (Hanly,

1992) in situations where there are lay-offs, redundancies or transfers (Serpa, 1988;

Werhane, 1988). Utilitarianism shares rationalism with Kantianism but pays more attention to

cost and benefit relationships. The approach is illustrated by the view that there is no such

thing as a good company that is not profitable (Minow, 1996). A study of the effect of the

ethical conduct of a merger on employee job performance would be one example (Lin and

Wei, 2006).

There are two distinctive features in virtue ethics that differentiate it from the other

approaches; its ability to capture emotion and its concern for the happiness of the self as

well as of others. Virtue ethics theory denies that making moral decisions is a matter of

calculation or principle-based duties (Hartman, 1998; Stark, 1993). Instead, virtue ethics

looks to motivate aspirational values and seeks to answer the question, ‘‘what kind of

organization should we be?’’

There are six virtue character dimensions that have been validated at the organizational

level. They include both moral and non-moral aspects of virtue: integrity, warmth, empathy,

zeal, courage conscientiousness, and courage (Chun, 2005). The most frequently

mentioned virtue dimension in the merger literature seems to be integrity. Integrity

involves normative judgment such as being trustworthy and honest. The level of employee

identification can influence institutional trust during post-merger significantly (Maguire and

Phillips, 2008). Being honest about its strengths and weaknesses is an important virtue for a

company to succeed during a merger (Weston, 1963).

The empathy virtue (reassuring, concerned, supportive) is particularly relevant to the

sociological and psychological account with an emphasis on mutual feelings and

relationships coming from interactions with other people. Within the psychological

literature, one of the most comprehensive accounts of empathy and its relation to the

moral development of a person is provided by the work of Martin Hoffman (Hoffman, 2000).

PAGE 474 jCORPORATE GOVERNANCEj VOL. 9 NO. 4 2009

Hoffman (1981) views empathy as a biologically based disposition for altruistic behavior;

one empathizes because the other’s situation reminds one of one’s own painful experience

producing an empathic response. To put it simply, empathy is the ability to ‘‘put oneself in

another’s shoes’’.

Trust based on the other’s ‘‘care and concern’’ is deeper (or less superficial) than trust based

primarily on cognitive perceptions of predictable, dependable behavior (McAllister, 1995).

‘‘Warmth’’ and ‘‘supportiveness’’ have been used interchangeably with the notion of a

trusting climate in an organization. The virtue of empathy is one of the most desirable

characteristics leaders can display during the merger, a context which requires sensitivity

particularly in negotiation (Goleman, 1998).

Courage, an important cardinal virtue on the battlefield, is translated into modern business

as competence, ambition and achievement orientation (Chun, 2005; Harris, 2001). Resource

based theory argues that a merger or acquisition can help a company to access

complementary resources to build production competence in a specific area, and moreover

to enhance organizational capabilities (Mayer et al., 1995). While the virtue of courage can

provide an effective mechanism for maintaining growth or financial success, unlike other

virtues, an excessive level of courage can become a vice. Some apparently successful and

large multinational companies could be seen as arrogant because of their excessive level of

ambition, creating harm to their stakeholders such as the local community in host countries,

suppliers and, competitors. Enron for example, who claimed to have developed an

innovative business model, would have been seen as courageous at one stage, but no

longer.

Case study

Preliminary research

The empirical context for the research is a UK operation of a global company whose merger

with an American competitor drew a series of concerns for the senior management team.

Prior to beginning the main study, a number of interviews with employees followed by an

initial meeting with their European Managing Director were conducted to identify research

questions and to guide the research design. The following section summarizes findings from

the preliminary research.

Background. An American manufacturer of security systems, Googen, acquired a leading

competitor based in Germany, Maris (both names are disguised to protect their identity). The

two companies had operated in the UK and these units were merged soon after the takeover

under the name Googen-Maris Systems. While the two businesses were complementary in

the markets they served, the companies had their own points of difference, one of which

being culture. Eighteen months after the merger, these cultural differences were causing

concern to senior management. The European Managing Director saw several negative

signs indicating that the UK operation had an internal crisis and one that was affecting their

business. Clients were being lost to competitors. There was a high employee turnover

especially among managers.

Organizational structure. Googen-Maris had decided to use the same office building that

had been occupied by the Maris business before the merger. While the name above

entrance had been changed to Googen-Maris, the company still used the Maris name, for

example, on its Corporate headed letter and invoices. Figure 1 depicts the organizational

structure of Googen-Maris. The darker boxes represent departments or people who were

predominantly ex-Maris people, the lighter boxes represent those largely from a Googen

background, while the white boxes represent mainly people who had joined since the

merger.

The sales/marketing and technical departments were staffed mainly by ex-Googen people

except for the marketing manager who had joined after the merger. Customer-facing

employees were also predominantly ex-Googen people. For example, service engineers,

and staff working in Customer Service and the sales department met customers face-to-face

VOL. 9 NO. 4 2009 jCORPORATE GOVERNANCEj PAGE 475

frequently. Staff working in the Credit Control department also had contact with customers

but mainly by telephone or mail.

The signs of crisis. Staff turnover had been extremely high. The resignation of a line manager

was causing job insecurity among their subordinates. Once a line manager resigned, a

series of resignations followed soon after. Some groups set up similar businesses and others

joined competitors. Countless negative rumors were created every day and spread rather

publicly, and sometimes proved to be true. People felt isolated from each other. Induction

training for new staff did not exist. There were too many new faces working in the same

building, on the same floor and even in the same department. Cooperation between

departments was not good. Staff complained that there was no way to find out who was in

charge of what. Work procedures as defined by Googen andMaris had been totally different

and arguments as to whose approach was the better were frequent. Stock control was poor.

Customers were confused by the dual identity of the company. They were not sure to whom

they were paying. Promises to customers were not being kept as staff left the company and

nobody appeared to take responsibility. Orders customers placed were frequently delayed.

Employees have to implement the change and shape the vision of the new firm during the

post-merger period, and therefore their emotional attachment and perceived job security to

the merged firm are particularly important. The following research questions were

developed based on the literature review and the preliminary research with the company:

how does organizational virtue, as perceived by employees, differ by employee background

prior to the merger; and what are the relationships between the six dimensions of

organizational virtue perceived by employees and the negative feeling employee have

toward the merged organization, which eventually led to high turnover.

Research methods

A questionnaire survey was conducted with all 160 employees in the UK operation of

Googen-Maris. The six dimensions and 24 associated items of the organizational virtue

ethical character scale labeled: integrity, empathy, warmth, courage, conscientiousness,

zeal (Chun, 2005) were used to measure the organizational virtue of Googen-Maris, as

perceived by employees. The respondents were asked to imagine that Googen-Maris had

Figure 1 Organizational structure chart


come to life as a human being and to rate each trait from strongly disagree (1) to strongly

agree (5) that described the merged company. A number of emotional outcome variables

were also included in the questionnaire. They are two items to measure satisfaction (e.g. ‘‘I

am overall satisfied with Googen-Maris’’), and two items to measure emotional attachment

(e.g. ‘‘I am pleased to be associated with Googen-Maris’’), both scales were used in the

previous studies (e.g. Davies et al., 2003; Chun and Davies, 2006). Perceived job security

(people here feel confident and certain about the future) and employee loyalty (I would be

happy to work for Googen-Maris for the rest of my career) measures were taken from Goffee

and Jones (1998). Each was assessed with five-point Likert-type scale ranging from strongly

disagree (1) to strongly agree (5). The reliability alpha for each scale was above the

acceptable level of 0.7.

In total, 134 replies (a response rate of 84 percent) were received from employees of which

128 contained complete data and are included in the analysis. Among the respondents, 40

had worked for Googen prior to the merger (referred to as ex-Googen), 64 for Maris (referred

to as ex-Maris) and 24 had joined since the merger (referred to as new joiners). Ex-Googen

respondents tended to have more frequent customer contact than the others (many worked

in sales). Among the total of 49 who did not have customer contact, only 7 were from

Googen, 31 from Maris and 11 were new joiners. Among the 44 respondents who had

contact with customers ‘‘once a week or more’’, 28 were from Googen, 13 from Maris.

Production (82.8 percent) and supervisory roles (66.7 percent) were dominated by ex-Maris,

while management, administrative/commercial and technical roles were relatively well

balanced between ex-Googen and ex-Maris.

Findings

Three major findings emerged from the survey. First, the average score of the six

organizational virtue dimensions perceived by employees and of the three outcome

variables, in particular of perceived job security, were very low. Second three different views

of Googen-Maris existed: one from those previously employed in Googen, one from those

previously employed in Maris and another from those who had joined since the merger, and

the differences on almost all variables were significant (Figures 2 and 3).

The average of the new joiners’ views was significantly different from the two original

companies. Overall, ex-Googen employees had the poorest view, falling below the views

held by ex-Maris employees, whereas those who had joined since the merger had the most

favorable view of Googen-Maris on all six dimensions of the organizational virtue. The

biggest gaps between the two groups, ex-Googen and ex-Maris employees were observed

on empathy (concerned reassuring, supportive, sympathetic), warmth (friendly, open,

pleasant, straightforward), conscientiousness (reliable, hardworking, proud, secure).

Specifically employees previously employed in Googen, the acquirer, saw the merged

Googen-Maris as having less empathy, warmth and conscientiousness. Googen-Maris

management needed to consider the implications of those employees having more

customer facing roles (more from a Googen background) being the least well disposed

towards their company.

An ANOVA F-test revealed that the differences between three groups were overall significant

at 0.05 or 0.1 levels on all dimensions (empathy F ¼ 3:348, p ¼ 0:038; conscientiousness

F ¼ 3:232, p ¼ 0:043; courage F ¼ 4:678, p ¼ 0:011), including one marginally significant

at 0.05 level (warmth F ¼ 2:867, p ¼ 0:061), except for (Integrity F ¼ 1:795, p ¼ 0:170). The

biggest gap was observed on courage (represented by ambitious, achievement oriented,

competent, leading) on which the new joiners views were extremely positive compared to

employees who have worked for the company before the merger. Overall the employees of

Googen-Maris, regardless of their pre-merger background the organization’s virtue poorly.

A similar trend was observed on the emotional consequences variables (see Figure 3).

Again, new joiners had the most positive emotional reaction to the merged organization

followed by ex-Maris and then ex-Googen employees whose emotional reaction to the


Figure 2 Organizational virtue compared

Figure 3 Emotional consequences compared


merged organization was the most negative. The differences were the most significant at or

around 0.05 level on satisfaction (F ¼ 5:848, p ¼ 0:04) and job security (F ¼ 2:905,

p ¼ 0:058), followed by emotional attachment (F ¼ 2:581, p ¼ 0:08). Employees who had

joined since the merger showed the highest emotional attachment and satisfaction level and

ex-Googen employees had the lowest level of satisfaction.

However, the differences on employee loyalty (F ¼ 1:838, p ¼ 1:63) were not significant.

Interestingly, new joiners whose overall views of the organization were significantly more

positive than the others had a similarly low level of loyalty. Both ex Googen and ex-Maris

employees saw their job security level as very low. Generally employees at Googen-Maris,

regardless of whether they came from before the merger; or whether they joined before or

after the merger, were not happy to stay with the company for the rest of their career, and the

feeling was particularly strong amongst ex Googen employees.

Finally there were significant correlations between the six dimension of organizational virtues

and emotional consequences (Table I).

First of all, all six virtue dimensions are significantly correlated with all emotional outcome

variables but the strength of each association differs. Empathy, warmth and

conscientiousness had the strongest correlations with emotional attachment. Warmth and

conscientiousness followed by empathy had the biggest effect on job security and loyalty,

and warm as strongest predictor for satisfaction. Courage had the least effect on all

emotional outcome variables particularly on job security. Integrity had the second lowest

correlations with these emotional outcome variables. Zeal virtue played a great role on

employee emotion compared to integrity and courage.

Discussion

Organizational virtue, job security and satisfaction

Existing studies of mergers rarely focus on the issue of corporate responsibility from an

employee perspective beyond the legal and economic responsibilities. Such primary or

obligatory responsibilities are required by law and to survive in business but they do not

really explain the high failure rate of corporate mergers. Scholars agree the success or

failure of the merger is determined by how much managers pay attention to the human side

of the psychological integration processes that are beyond such obligatory responsibilities.

There is very little opportunity for members of the public to learn how non-obligatory

responsibilities for employees are managed within the merged organization and how they

affect employee emotion and success of the merger. But employees are certainly affected.

Of the six dimensions of virtue ethics two can be considered to be obligatory for a business,

integrity and courage. Without integrity (honest, sincere, socially responsible, and

trustworthy) a company will be criticized and shunned by customers and employees

alike. Without the virtue of courage (ambitious, achievement oriented, leading, competence)

a company will fail to meet its contractual obligations and its market position. However of the

6 dimensions of organizational virtue, these obligatory virtues showed the lowest impact on

the employee emotional outcome variables. The courage virtue had the lowest impact on all

four employee emotional consequence variables; job security, emotional attachment,

satisfaction and loyalty. The influence of courage on job security was the lowest out of 6

Table I Correlations between organizational virtue and emotional consequences

Empathy Warmth Integrity Conscientiousness Courage Zeal

Emotional attachment 0.51 0.51 0.47 0.51 0.42 0.50Satisfaction 0.60 0.65 0.52 0.56 0.40 0.54Job security 0.41 0.51 0.36 0.51 0.27 0.39Loyalty 0.38 0.46 0.39 0.47 0.29 0.42

Note: All figures are significant at 0.05 level


dimensions of the organizational virtues. Integrity showed the second lowest impact on

employee emotion variables. Their impact on job security was particularly low. On the other

hand, the non-obligatory virtues such as empathy, warmth, conscientiousness and zeal

showed the stronger impact on employee emotions.

This research is a study of a merged company that showed signs of crisis mainly due to the

high voluntary turnover, while still receiving positive comments from media about their legal

and economic responsibilities. The research identifies a lack of focus on their non-obligatory

responsibilities for their employees as a major source of the problem, all the more surprising

perhaps as the study was untaken 18 months after the merger. The fact that no-one was

taking responsibility for the non-obligatory aspects of the post-merger was translated into

poor organizational virtue as perceived by employees.

The lack of empathy (concerned, reassuring, supportive, sympathetic) and warmth (friendly,

open, pleasant, straightforward) that represent non-obligatory virtues had the most

significant effect on the employee emotional reaction to the merged company including

perceived job security, satisfaction and emotional attachment. The study then demonstrates

how non-obligatory virtues can play a bigger part in determining the success of a merger

than obligatory virtues.

Three distinctive groups

Three different pictures were emerged by employees’ pre-merger background. Ex-Googen

staff had the lowest scores for satisfaction, intention to stay and job security. They tended to

have the weakest perceived organizational virtue as well. A lack of empathy (concerned,

reassuring, supportive, sympathetic) and warmth (friendly, open, pleasant, straightforward)

was felt most strongly by employees from a Googen background, the acquirer firm. The low

empathy and warmth led them to feel highly insecure about their jobs and their future and to

leave the organization. Unfortunately most employees from Googen background worked in

the customer service department and when they left, they took their customers and

subordinates with them.

Contribution and implication

This research shows there were three distinctive groups according to prior merger

background in the way employees see their organization from an ethical perspective.

However, this study demonstrates a case where employees from an acquirer background

had much lower satisfaction and job security level with the merged organization. This finding

contradicts the common notion in the existing literature where employees from the acquirer

firm have typically more positive views and emotional disposition towards the merged

company.

Existing literature rarely compares the views held by new joiners with those of existing

employees. The research findings suggest that new joiners had much more positive views

compared to the employees who carried the emotional baggage from their pre-merger

employment stage. While the new joiners are much more satisfied with, and emotionally

attached to, and perceivedmuch higher job security than those who had worked through the

merger, towards the merged organization, their loyalty or intention to stay with the company

in the long term is as weak as that of their colleagues. This research suggests this is because

of the two poorly perceived non-obligatory virtues, conscientiousness and warmth which

had the highest correlation with employee loyalty.

The research approach was an in-depth study of a single merger case, one where emotions

were running high. The research was conducted on a relatively small sample but one that

was representative of the company due to a high response rate. The study fills a gap in the

existing merger literature which is concerned more with legal and economic responsibilities

and which has ignored the ethical perspective. Using a virtue ethics approach in assessing

employee views and their experience of the merged company, the research found that


non-obligatory virtues such as warmth and empathy are the more important in creating a

positive employee emotional response to the merged organization.

A merged company may show positive figures in their balance sheet and boast about the

financial success of the merger, but often ignore responsibilities that are not required by the

law and by their shareholders. Companies who do not pay attention to the important role of

non-obligatory virtue as demonstrated in this research are not only irresponsible but also will

face their employees’ suffering from poor morale, dissatisfaction and insecurity, leading to

poor employee loyalty and ultimately organizational crisis.

The findings have a number of practical implications. Reassuring and engaging employee

through an effective communication program during a merger is particularly important when

an organization is going though a turbulent time. Uncertainty is more painful than bad news

and poor communication creates uncertainty (Larkin and Larkin, 1996, p. 97). In such

periods of uncertainty, employees fill any communication voids with rumors that attribute the

worst possible motives to those in control. Employees’ perceived job insecurity was

correlated strongly with organizational virtue as perceived by employees; in particular,

whether or not the employees saw the merged firm had the virtues of empathy and warmth.

This research also highlights the importance of engaging employees who are in contact with

customers on a day-to-day basis during post merger integration. The crisis at Googen-Maris

was driven by the high turnover from ex-Googen employees who later became competitors

in the same area. The high turnover was driven by a perceived lack of virtue in the

organization. Promoting empathy and warmth seem to be the keys to ensuring the emotional

attachment and loyalty of key employees during turbulent times.

A merger represents a context where one group of stakeholders, shareholders, wish to

benefit from a major organizational change. It is tempting to add that their gain might be at

the expense of employees who can be disaffected by that same change, as illustrated here.

The strength and consequences of those feelings are highlighted by taking a virtue ethics

perspective, emphasizing that companies should have a responsibility to their employees,

over and above that of pay and conditions. If managers cannot address this aspect of

post-merger integration, then it is not surprising that mergers often fail to meet the

expectations of investors.

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stanford.edu/entries/empathy/

About the author

Rosa Chun is Professor of Business Ethics and Corporate Social Responsibility atManchester Business School, England. Her research focuses on corporate reputation andvirtue ethics, and has appeared in the Harvard Business Review, Journal of the Academy ofMarketing Science (JAMS), Journal of Business Ethics, Industrial Marketing Management,International Journal of Management Reviews, and Corporate Reputation Review. RosaChun is the corresponding author and can be contacted at: [email protected]


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