Required Changes for a Company with Organizational Problems - Coursework Example

ORGANIZATIONAL ANALYSIS AND REQUIRED CHANGES: FOR A COMPANY WITH ORGANIZATIONAL PROBLEMS INTRODUCTION: The problem of pension cut-backs for long-time workers and total closure of pension schemes for newcomers: at Caparo, a steel company in U.K. is studied in depth. The organizational problems which led to the stringency are considered in detail. Radical changes to be made in the organization, a complete overview of action plans for regaining employees’ trust; and related principles of management and organizational practice are discussed. It was seen that workers in several companies were facing the same problem. According to Sylvia Ascarelli1: Pensions became an important issue for European workers, who were becoming some of the biggest losers in the three-year stock-market downturn. Falling share prices combined with longer retirements, left many company pension plans far short of the amounts expected to be necessary, over the long term. The result was: wholesale shifts in the retirement plans companies were offering their employees; and in the way workers must plan for old age. The poverty of many pensioners today was a real crisis, of an unprecedented nature. The issue was most pressing in the U.K., where company-funded pension plans, often tied to salaries, made up a bigger portion of retirement income than elsewhere in Europe and where companies had traditionally put about three-quarters of their pension funds in the stock market. The schemes guaranteed members a pension income based on the number of years of service and the salary when the worker left the company. Companies said these plans had now become too expensive to maintain. Faced in many cases with huge deficits, they had a stark choice: either shore up the fund with hefty payments that could cut into profits - and hurt their share price - or cut back on pension benefits. Hence, these pension schemes were replaced with less-costly plans in which companies contributed money but did not guarantee a level of benefit. Actuaries said that many companies that closed their pension plans to newcomers, ended up closing them to existing members also, a few years later.(2002). From the companies’ perspective: many schemes have seen their funds shrink as a result of stock market falls. In such cases firms faced the possibility of having to make up any shortfall between the assets of the final salary scheme and the benefits promised to members. (BBC News 14th August, 2002)2. Companies were unwilling to contribute further funds into pension schemes. The growth in Britain’s ageing population, at the mercy of volatile financial markets, resulted in lower than expected pensions, and raised the risks to economic and financial stability in the nation. (Turner, David 2002). People facing poverty in retirement because their occupational pension schemes had been wound up leaving them little or nothing, may not even be entitled to the basic state pension. Many final salary schemes were contracted out of the state earnings-related pension scheme (Serps - now known as the state second pension), offering instead a "guaranteed minimum pension" to members as part of their benefits. However, many people have been shocked to learn that the money left in their wound-up schemes did not even stretch far enough to pay them that. Not only do people lose part of their pension or all of it when a scheme is wound up, but they also lose part of their state pension. ( Montagu-Smith, Nina 2003). ANALYSIS OF ORGANIZATIONAL PROBLEM: According to the BBC News Sept. 4, 2002, workers from Caparo Steel Plants campaigning against plans to close their final salary pension schemes, had taken their request through their union ISTC to the Prime Minister, Mr. Tony Blair3. They asked for a change in law, that pension surpluses should be classed as deferred pay, and the property of members. (epn 2002). They were the first group of workers to strike against pension schemes closure imposed by the family-owned company Caparo. In most companies, the pension fund grew to be several times the equity valuation of the company itself. In Britain the theft of private pensions by companies had been going on for years through the systematic plundering of pension funds to cover the fall in profits faced by industries, as a result of the deepening of the capitalist crisis. Throughout the 1990s, many companies stopped making contributions to occupational schemes. They saved themselves an estimated eighteen billion pounds. They believed that a strong stock market would cover their theft, and they did not tell their staff about the matter. Workers continued to make their payments into the fund, discovering the fraud when the companies ditched their final salary schemes after the collapse of the stock market. This maneuvre of the companies was completely legal because it was often the directors of the company who were the trustees of the pension scheme. They were bound only by the rules of the scheme and not by any legal restrictions. These trustees gave themselves a rich payout and then closed the scheme, putting their employees’ remaining money in a new and less remunerative scheme4. The Caparo Group employed 2,000 workers in 20 plants and offices in the UK. According to the Career Journal (2002), Caparo’s chairman, Lord Paul of Marylebone, was a socialist and a strong labour party supporter. He created Caparo by pulling together a number of small and mid-sized companies. He now had a reputation in the House of Lords as a critic of the government’s policies towards U.K. manufacturing. The company had steel factories at Tregedar and Wrexham at Wales, and at Scunthorpe in north Lincolnshire. All the 450 employees of the steel plants were informed about the company’s decision to shut down the pension plan for good. They were told that if they switched to the company-sponsored stake-holder plan, Caparo would match their contribution up to 6% of salary, depending on a worker’s age and years with the company. Those who wanted to invest in a different pension-plan would not get the company match. If all the workers joined the plan, it would cost the company the same amount as the old plan. But in the stake-holder plan the company would not face the risk of dramatically higher costs ahead. In an article for Parliament’s weekly newspaper, Lord Paul wrote that , “With turbulent financial and stock markets, low interest rates and increasing life expectancy, few companies can afford to contemplate maintaining an open-ended and unquantifiable liability over many years, which is subject to influences entirely outside the company’s control.” The company’s employees would have more control over their pensions through a stake-holder plan: than undertake the risk of the company disappearing because of unaffordable pension plan. But the workers did not want to take on the risk of fluctuating stock-market prices either. They felt that with a stake-holder, their financial future was risky. Another problem was that a shuttered plan would be “wound up” in a few years. Under U.K. law, existing pensioners had first rights over the pension fund. Current workers would get only what was left, when they reached retirement age. So their pensions would be considerably reduced. Those employees who were junior to them, would have to save more than their predecessors. Another concern of the current workers was that come retirement, they would not have saved up enough to buy an annuity policy, which they were required to do under U.K. law, and which would pay them a certain amount each year. To avoid a major shortfall in their retirement provision workers either had to increase their pension payments or had to be ready to work for several years beyond the official retirement age. At the Caparo steel mills, workers appealed to their national union. Their action began with a refusal to work any overtime, and instead would “work to rule”, or follow the rules to the letter. The workers then started a series of one-day strikes after talks broke down between their employers and their union, the ISTC (The Iron and Steel Trades Confederation). Union members voted to give the company 14 days notice for increasing their strike action to two days if their proposal was not accepted. (epn 2002). The fight at Caparo was surprising because labour relations previously had been good. During the early 1980s , the Caparo employees continued working when those at British Steel went on strike. When the company had asked employees to increase their pension contribution to 6% of their pay from 5% : in order to save the pension plan, according to workers, they had readily agreed. A survey found that 29% of workers, or three million Britons, were willing to strike over pensions. They felt that there had to be a legislation against companies suddenly closing their final salary pension schemes which they had promised their workers, and for which the workers had been contributing from their salaries. Martin Wolf (2005) offered the following devastating verdict: The companies which closed their final salary pension schemes, were in effect – if not in intention – playing a confidence trick known as ‘bait and switch’. First they offered a pension plan that was attractive, and then switched it for something else when they had to pay the pensions. Pension provision provided attractive opportunities for such a game. The aim was to hold on to valuable staff, encourage them to acquire company-specific skills, and pay them less than their market wage. A clever way to do this was to promise them pay that was far in the future. Pensions were, after all: deferred pay. Companies had played the bait and switch game, for their own benefit and to the detriment of their workers. The only potential obstacle for Caparo’s pensions compromise, was the U.K. taxman, the Inland Revenue. Legally, the pension system needed to be reopened for the compromise to work. Caparo officials needed to get approval from Inland Revenue, to reopen the pension system without any tax consequences. In the meantime, neither Caparo nor its workers were paying into the final-salary pension plan. The company was contributing into stakeholder pensions that were set up. (Ascarelli, Silvia 2002). According to the BBC News of 14th March, 20065, the manufacturing firm Caparo, employing 450 people in its steel units, had called in receivers, after failing to reach a settlement over its pension fund deficit. Receivership is a form of bankruptcy in which a company can avoid liquidation by reorganizing with the help of a court-appointed trustee. Caparo is the parent company of the Armstrong Group. The Armstrong Group said that it inherited a debt of thirty-six million pounds, and for the past two years had been in negotiations with the trustee of its pension fund. The firm said that it was unable to pay the amount, but had tried to avoid insolvency and protect jobs. The group had factories at Wolverhampton, Darlaston and Hull. The firm was told by the trustees that insolvency was being considered to secure benefits under the Pension Protection Fund. Angad Paul, chief executive of Armstrong’s parent company Caparo felt that it was wrong that a pension fund could access government subsidy only by closing down a successful firm and damaging its suppliers. The group which supplied bolts, screws and studs to many car makers, said that it would make every effort to minimize the effect on workers, customers and suppliers. The joint administrative receiver of Armstrong Fastenings Limited, Willenhall Manufacturing Limited, Caparo Automotive Limited and Armstrong Equipment Limited was PricewaterhouseCoopers. The receiver Matthew Hammond said that the subsidiary companies of Caparo had suffered from the difficulties of a significant pension deficit. The ongoing funding of this was the predominant factor in the appointment of administrative receivers. The receivers had the objective of achieving a sale by interested third parties: of all or part of the businesses while safeguarding the jobs of the workers. Caparo being forced to place one of its subsidiaries, Armstrong Group into receivership was due to the pressures placed on it by the pension scheme trustees to plug its pension deficit. It was an unusual situation because Armstrong was a relatively small subsidiary of Caparo, with a relatively massive hole in its pension fund. But this was symptomatic of the strains afflicting companies, as a result of the increasingly aggressive stance taken by newly empowered trustees. The Armstrong scheme’s trustees faced with an offer from Caparo to pay just 3.2 million pounds into the scheme in full and final settlement, had not looked elsewhere to protect their pensioners. (Stevenson, Tom 15th March, 2006, Telegraph). ACADEMIC LITERATURE ON THE PROBLEM: Firms' reluctance to report fraud, especially when it had been carried out by insiders, generally made it difficult to gauge the full extent of the problem. Recent research by corporate investigations agency: Risk Advisory Group suggested that British companies' first instinct was to cover up internal scams so as to avoid bad publicity. The research, based on a study of 50 recent cases, also found that senior executives were involved in nearly three-quarters of fraud actions worth in excess of £1m. (BBC News 2nd July, 2002). Major factors that contributed to organizational effectiveness were: organizational culture, leadership, motivation, and structure. In the case of Caparo, the concept of the company’s Culture has been identified as the main criterion for the problem of deficits in the pension funds. This would be discussed after the following related concepts were described briefly, as they also contributed to the company’s difficult situation. 6Organizational analysis included identifying underlying issues related to management process, the structure of the organization and work processes, and also people processes and rewards. In order to succeed, an organization must continuously evaluate its purpose and responsibility. Managing change was also an important criterion, determining the successful working of the company. The notion of organizational change, had become different in the last two decades. Earlier the concept of many potential strategies for managing was used. Now, the idea of a key influence on organizational effectiveness and survival was considered as important. The focus had shifted on external forces that managers needed to anticipate, react to and manage. (Mills, Jean Helm; Mills, Kern 2003 p.73). Modern managers were confronted with an increasing variety of political, economic, social, technological and environmental factors, along with increasing competitive pressures that they had to adapt to in order to survive and thrive. (Coles, Eve; Smith, Denis 2001 p.75). Major external forces such as market trends, huge cash deficits, or regulating supply to meet higher demand were some of the main reasons for implementing change. ORGANIZATIONAL STRUCTURE: The groups of people forming the various levels of hierarchy in an organization formed the structure. 7Organizations could be regarded as people management systems. They ranged from simple hierachies along traditional lines to complex networks dependent on computer systems and telecommunications. 8 From a managerial point of view, the main concerns were maintaining effective communication and coordination. Two common structural types were: 1) A functional structure: The organization was structured according to functional areas instead of product lines. The functional structure groups specialized in similar skills in separate units. 2) A divisional structure was formed when an organization was split up into a number of self-contained business units, each of which operated as a profit center. Such a division may occur on the basis of product or market or a combination of the two. LEADERSHIP IN ORGANIZATIONS: Leadership was the ability of an individual to guide, motivate and enable others to contribute effectively towards the success of the organization which they were a part of. Gary A. Yukl, in his book, gave the guidelines and recommendations for improving managerial effectiveness to facilitate understanding of the practical implications of leadership theory and research. (2005). The many approaches to leadership and how they could be applied in practical situations was given by Peter G. Northouse (2003). The investment of time and resources in leadership development assisted in building a well integrated and high performing team, which was capable of delivering improvement in both operational and financial results. MOTIVATION IN ORGANIZATIONS: Margit Osterloh and Bruno S. Frey (eds.) stated that employees may work hard for one of two reasons: because they were interested in the work itself (intrinsic motivation) or because they were being paid (extrinsic motivation). Sometimes these two forms of motivation were interlinked.(2001 p.7). The manager should help people to function at optimal efficiency by motivation and guidance. ORGANIZATIONAL CULTURE: Organizational culture was the specific collection of values and norms that were shared by people and groups in an organization, and that control the way they interacted with each other and with stakeholders outside the organization. Organizational values were beliefs and ideas about what kinds of goals, members of an organization should pursue and ideas about the appropriate kinds or standards of behavior organizational members should use to achieve these goals9. 1) Role cultures were highly formalized, bound with regulations and paperwork. Authority and hierarchy dominated relations. 2) Task cultures were the opposite, they preserved the basic mission of the organization, and teamwork was the basis on which jobs are designed. 3) Power cultures had a single power source which may be an individual or a corporate group. Control of rewards was a major source of power. Role cultures had pyramid structures, task cultures had flexible matrix structures and power cultures had web-like communications structure. A necessary asset of the modern company was the acute sense of the core values and mission of the organization10. Mutual partnering with the workforce, treating employees as independent, highly capable, unique adults; building social systems that maximized both social differentiation and social integration; building a culture that rewarded creativity and creative (right-brained) people; building alignment on a mutually-shared “deep purpose”; and uniting with the workforce as a community were the best ways to achieve the goals of improving corporate culture. Sustainable profound innovation was possible only if formal innovation processes were accompanied by a fundamentally new paradigm for leadership and management. (Robb, Dean 2006, pp.249-252). CONCLUSION: If I were managing this organization, what are the most important things I would want to change? Why do they need changing, and how would I go about doing it. Two main areas where change should be brought about were the Culture and the Structure of the company. Why they need change: 1) For long-term health and survival of the company. 2) To avoid frequent loss of production due to industrial action. 3) To avoid possible government action if the situation gets out of hand. 4) To keep up supplies to the customers, and 5) To avoid loss of credibility in the market, along with the loss of trust that it has incurred with the employees. CULTURE WITHIN CAPARO: The organizational culture would have to be changed, keeping the following points in mind: (1) The company should put people first, rather than look at the situation from a purely financial point of view. (2) Creation of trust in the company through transparency, making promises that can be kept, participation of workmen in the solution, and balancing the risk : reward equation in pension management. (3) Communication and listening. The employees’ standpoint has to be given consideration. (4) Sustained engagement and negotiation with the workmen, working towards mutual agreement. Establishing a culture of justice and fairness, incorporating crucial changes for fostering an attitude of mutual trust with the employees would be the priority. This would mean that the company should start putting people first. A culture of caring could be developed within the organization, thus enhancing employee loyalty and continued service. This would also prove to be economical in the long run, saving on training new employees, and on wasted man-hours due to strikes and campaigns demanding for their rights. By keeping promises and maintaining transparency in major policy decisions, the employees’ trust can be regained. The workmen should be allowed to voice their opinions, and given an impartial hearing. They should participate in working out solutions for the problem at hand. In the company’s pension fund management, the equation of risk to reward had to be balanced. It was the management’s responsibility that the pension fund should be entrusted to the best financial brains to work out a solution to the satisfaction of the employees. To overcome the risk involved in the Stakeholder Pension Plan, one possible solution was the creation of a Guaranteed Minimum Pension Scheme, which will benefit the employees, regardless of the company’s share market value. In order to honour the promise made to the employees, the company should ensure that any high profits derived from the share market, should be used for replenishing the pension fund. This will overcome the crises at times of share market collapse. Another possible solution would be a Long-term Investment Scheme: investing the employees’ and the company’s matching contributions in a profit-making scheme where long-term returns will be assured. These returns will be used for funding the Pension Scheme. Implementation of one of the above proposals will re-establish the confidence of the employees in the management. Their loyal service to the company will be assured, as their pension-related worries would be sorted out. The company should follow the rules of the pension scheme scrupulously. The management should be accountable to a legally appointed third party, to ascertain strict adherence to plan. Total transparency and participation of workers in the progress of the scheme will ensure that the company’s credibility will be maintained. CHANGING THE STRUCTURE: Caparo had the ‘pyramid structure’ of role culture where authority and hierarchy dominated relations. Changing the organization to the ‘flexible matrix’ structure of task culture was crucial. The basic mission of the organization with an emphasis on teamwork will be created and developed. This change will bring about enhanced communication among the members of the organization, resulting in mutual trust and better work atmosphere. An atmosphere of team spirit and working for the common good will be developed. The Structure of Pension Fund Administration: 1) Reduce role of the Board of Directors. 2) Redefine the responsibility of trustees. 3) Define responsibility of internal control, and continuous sharing of information. Company policies with regard to trustees of the pension scheme will have to be changed. Directors of the company should not be allowed to be the trustees of the scheme. A legally appointed independent person should be given the responsibility. This change in structure would ensure that the directors did not have complete power over the finances. The manager should apply effective communication and coordination among the various levels of the company’s structure. An internal group appointed for control of the pension fund, and with accountability to a legally appointed person will prove to be effective in operating the pension fund scheme. To increase profits, to replenish pension scheme the company would have to make changes in its structure and operations, stopping cash leaks, building on present infrastructure, minimizing losses and organizing cash flow profitably. With the leadership qualities of the manager and his ability for motivation: he/she should be proactive by creating a competitive level of quality and efficiency, that will bring out the organization as a leader in its field.( De Feo, Joseph A. 2006). Recommendations for future actions: 1) Form an internal task team to put together a road map for implementing specific measures to achieve the above. 2) Communicate a time-bound action plan, to implement the solutions, to the leaders of the workforce and then to the workers.3)Monitor the implementation rigorously over the next few months, preferably using an external agency for maximum credibility. 4) Ensure prompt course correction and coordination to sustain the results. In conclusion, change, diversity and flexibility are the main components of the future employment landscape, and therefore need to be features of the pensions strategies. Pensions are set to play an important part in organizations’ reward and people management practices. REFERENCES Ascarelli, Silvia (2002), “Retirement Planning, Pension Plans”, Career Journal, Web site: http://www.careerjournaleurope.com/myc/retirement/20021223-ascarelli.html Chaudron, David, PhD (2003), “Assessing and Improving your Organization”, Organized Change Consultancy, Web site: http://www.organizedchange.com/assess.htm Coles, Eve; Smith, Denis (2001), Risk Management and Society, Springer. De Feo, Joseph A. (2006), “Breakthrough Performance: A way out of Predicaments”, Handbook of Business Strategy, Vol 7, Issue 1, 2006. Magazine “epn”: European Pensions and Investment News, dated 16th Sept. 2002. Web site: http://www.epnmagazine.com/news/fullstory.php/aid/387/caparo_fight_deepens.html Mills, Jean Helms; Mills, Kern (2003), Making Sense of Organizational Change, Routledge,(U.K.) Montagu-Smith, Nina (2003), “Serps Fiasco Adds Insult to Injury”, Telegraph.co.uk Web site: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2003/11/08/cmserps08 Northouse, Peter G. (2003), Leadership: Theory and Practice, Sage Publications Ltd. Osterloh, Margit; Frey Bruno S. (2001). Successful Management by Motivation: Balancing Intrinsic and Extrinsic Incentives, Springer. Robb, Dean. (2006), Why today’s corporate cultures must change, Handbook of Business Strategy, Vol.7, Issue 1 pp.249-252. Roger, Williams et al (2006), “Quality and Risk Management: What are the Key Issues?” The TQM Magazine, Vol 18, Issue 1, 2006, The Emerald Group Publishing Ltd. Starbuck, William H., The Oxford Handbook of Organization Theory Web site: http://www.oup.co.uk/pdf/0-19-925832-5.pdf Stevenson, Tom (2006), Business Comment: “Government’s Pension Lifeboat Blamed for Company’s Collapse”, Telegraph Online Magazine. Web site: http://www.telegraph.co.uk/money/main.jhtml?xml=money/2006/03/15/ccom15.xml Turner, David (2002), “Bleak Outlook for Pensioners at Mercy of Volatile Markets”, Financial Financial Times 23rd July, 2002 Wolf, Martin (2005), “ A Shameful Pensions Confidence Trick”, Financial Times 1st July, 2005 Yukl, Gary A. (2005), Leadership in Organizations, Prentice Hall. Read More