Organizational Change and Performance 1 Running Head: ORGANIZATIONAL CHANGE AND PERFORMANCE

Organizational Change and Performance: The Moderating Role of Human Resource Management Centrality *

Manuela Faia Correia Lusiada University Lisbon, Portugal

Rita Campos e Cunha Nova School of Business and Economics Lisbon, Portugal

Marc Scholten ISPA University Institute Lisbon, Portugal

The authors thank Chris Brewster and Ricardo Rodrigues for their comments on earlier versions of this paper.

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Electronic copy available at: http://ssrn.com/abstract=1804871

Organizational Change and Performance 2 Abstract In this study, we examine how the effects of mergers and acquisitions on organizational performance depend on human resource management (HRM) centrality. HRM centrality is the status of HRM in the organization. In an analysis of the data from the 2005 Cranet survey, overall results showed that i) organizational change stemming from mergers and acquisitions increased HRM centrality, ii) organizational change and HRM centrality increased organizational performance and, most importantly, iii) the positive effect of organizational change on organizational performance increased with HRM centrality. More detailed analyses revealed that the moderating role of HRM centrality itself depended on the type of organizational change, the type of responsibility for HRM practices and HRM strategic involvement, and the type of organizational performance indicators. The study offers new insights about the critical role of HRM centrality, and suggests that mergers and acquisitions should be studied as differentiated change processes.

Key words: Mergers, Acquisitions, Takeovers, Human Resource Management Centrality, Organizational Performance.

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Electronic copy available at: http://ssrn.com/abstract=1804871

Organizational Change and Performance 3 Organizational Change and Performance: The Moderating Role of Human Resource Management Centrality Introduction Mergers and acquisitions are popular forms of organizational change. Despite their popularity, however, they appear to yield mixed results (Agrawal & Jaffe, 2003; Cartwright & Schoenberg, 2006; King et al., 2004). This has been attributed to a variety of factors, including culture gaps and clashes, and incompatibility between, and loss of, key people (Bianco, 2000; Fairlamb, 2000). Executives who have been through a process of change now recognize that, in todays economy, the management of the human side of change is the real key to maximizing the value of a deal (Gunther, 2001; Kay & Shelton, 2000) and expect a proactive management of the human integration process to lead to a situation where both organizations win (Cartwright & Cooper, 1996; Kanter, 1994). Although it is believed that HRM can contribute to the success of mergers and acquisitions, there is a surprising lack of evidence to corroborate this view. Some evidence comes from Cunha (1997), who studied privatizations, a particular case of acquisitions. Her results show that, in privatized companies, major changes in HRM are made, not only to promote strategic and cultural alignment, but also to increase employees job satisfaction and commitment, thus emphasizing the role of HRM. In this study, we examine how HRM centrality affects the relation between organizational change and performance. HRM centrality is the status of HR in the organization, i.e., the perceived power of the HR department as an agent of change, through the existence of formalized, or written, strategies, strategic involvement in the change process, and the responsibility for HR practices. The components of our analysis are organizational change, i.e., ownership change, HRM centrality, and organizational performance. With this work, we contribute to the field of HRM

Organizational Change and Performance 4 by examining the role of HRM centrality in moderating the relation between organizational change and organizational performance, and by exploring how the moderating effect itself depends on the type of organizational change involved. The paper is structured as follows: First, the literature on the relationships between HRM, organizational change and organizational performance is discussed. The research model and hypotheses are presented. Next, the research method is described, followed by the presentation of the statistical analyses and results. Finally, the findings and implications are discussed. Theoretical Background and Hypotheses Organizational change and performance In this article we distinguish three types of change: Acquisitions, i.e., buying another organization, being taken over, i.e., being bought by another organization (henceforth, takeover), and mergers, i.e., fusing two organizations (Schuler & Jackson, 2001). While in a merger two companies come together and create a new entity, in an acquisition, one company buys another and manages the acquired company in a way consistent with their strategic aims. Although acquisitions and takeovers are two sides of the same coin, i.e., an organization gaining control or ownership of another organization, we distinguish in our study between the organizations that acquired another organization (acquisition) and the organizations that had been acquired by another organization (takeover). One common pattern in processes of mergers and acquisitions is the organizational change arising from the ownership change, and the goal of achieving substantial improvements in business performance, either to achieve economies of scale, to expand their market and internationalize, to spread their risk, and to improve efficiency and flexibility (Kumar, 2009; Schuler & Jackson, 2001).

Organizational Change and Performance 5 Hence, our first hypothesis: H1-Organizational change stemming from mergers, acquisitions, or takeovers increases organizational performance. This change is large in scale and involves all stakeholders, especially managers and employees, by affecting corporate strategy, operations, and human resource policies. A few of the negative consequences of organizational change include the fear of job cuts with the corresponding survivor syndrome, cultural clash, and poor alignment of structures, systems, and incentives, resulting in stress reactions and crisis management, which has been named merger syndrome (Marks & Mirvis, 1998). Given the impact on the human factor, it is only natural that HRM has a central role in improving the integration process in each of the three types of change. Organizational change and performance: The moderating role of human resource management centrality Strategic human resources management (SHRM) literature focuses on how HRM practices affect organization-wide outcomes (Ferris et al., 1999). The increasing emphasis on the contribution of SHRM has been accompanied by a growing interest in relating HRM activities to competitive performance (see Lengnick-Hall et al., 2009, for an extensive review). Overall, the link between HRM and organizational performance is well-documented, in terms of market value (Huselid & Becker, 2000) and return on assets (Combs et al., 2006), or even directly (Khatri, 2000) or indirectly (Harris & Ogbonna, 2001). However, as Guest (2011) argues, studies to date do not reveal how this association works, nor the direction of the relationship. In the specific case of mergers and acquisitions (M&As), there is a considerable body of evidence that organizational performance fails to live up to expectations, suggesting that HRM and employment issues are poorly handled (Buono & Bowditch, 1989; Cartwright &

Organizational Change and Performance 6 Cooper, 1996; Reeves & Edwards, 2009) and a potential factor in failures of mergers and acquisitions (e.g., DeNisi & Shin, 2004; Stahl, Mendenhall, & Weber, 2005; Weber & Drori, 2008). Not many studies focus on how the consequences of mergers and acquisitions are related to HR roles and practices, but Cunha (1997) studied privatizations, and analyzed the internal change process in terms of corporate culture and HRM practices. The results of her study showed that following privatizations, companies implemented different HRM practices, namely in terms of downsizing and selective recruitment, appraisal and incentives, communication with employees and unions, as well as training and development practices. These changes were aimed not only at promoting the strategic and cultural organizational alignment, but also at reducing individual employee stress levels and increasing their job satisfaction and organizational commitment (Cunha & Cooper, 2002). Takeovers, mergers, and acquisitions are major organizational events that require HRM departments to play a more strategic role in their organizations (Bjrkman & Sderberg, 2003), when different management styles and reward and evaluation systems need to be reconciled (Datta, 1991). In addition, HRM needs to assure a vertical fit between corporate strategy and HRM policies and practices as well as a horizontal fit among HRM practices (Wright & Snell, 1998). Vertical and horizontal fit are needed to provide the link between strategy and skills and the link between strategy and behaviors. Furthermore, what roles are played by HRM specialists and Line Managers (LMs) and what their influence is must be defined (Kirkpatrick et al., 1992; Mesner & Sterbe, 2005), since line managers implement some of the HRM policies and practices on a daily basis. A senior HRM officer as member of the board of directors raises awareness of the human factor at the strategic top management team level. Companies with explicit mission statements, business strategies, and HRM strategies can be expected to develop adequate HRM strategies that address the issues essential to strategic implementation (Schuler &

Organizational Change and Performance 7 Jackson, 2001) and enhance organizational performance (Lyles et al., 1993; Nikandrou & Papalexandris, 2007; Pearce et al., 1987). This literature leads us to propose that HRM centrality will increase as a result of mergers and acquisitions. Hence our second hypothesis: H2-Organizational change stemming from mergers, acquisitions, or takeovers increases HRM centrality. According to Danya, Guedrib, and Hatta (2008), integration of strategic decision making with HRM strengthens the link between HRM and organizational performance. They go further by suggesting that performance is better when influence over HRM issues is shared by HRM specialists and LMs, except when there are major organizational changes, in which case the HRM specialists role should predominate (Danya et al., 2008) in order to overcome the potential lack of interest, time and competences of LMs in HRM issues, themselves overloaded by the extra responsibilities demanded by the change process. Once again research revealed mixed results. Using the Cranet data, Nikandrou and Papalexandris (2007) found that companies with successful mergers and acquisitions had increased HRM involvement in strategic decisions, formalized HRM practices, built organizational capability through training and development activities, devolved HR activities to LMs, and emphasized internal labor market opportunities. However, Bjrkman and Sderbergs (2003) study of Nordea banks merger revealed typical problems in organizing and managing HRM issues and illustrated how HRM specialists are easily given non-strategic roles in these processes. The impact of HRM on the relationship between organizational change and organizational performance can thus be expected to depend on the specific areas in which the HRM department is active: training and development, recruitment and selection, and performance appraisal and compensation (Delery & Doty, 1996).

Organizational Change and Performance 8 Based on the SHRM literature, however, HRM must be strategically coordinated in order to play its positive role (Combs et al., 2006; Delery, 1998; MacDuffie, 1995) and emphasis needs to be placed on the implementation process, so that firms create strong HRM Systems (Bowen & Ostroff, 2004). This, in turn, requires that strategy should be formalized, and that the primary responsibility for various HRM areas remains with HRM specialists, who should be visibly involved in the design and implementation of HRM policies and practices from the outset, i.e., HRM centrality should be high. In sum, we propose that HRM centrality is an important determinant not only of organizational performance but also of whether organizational change improves organizational performance. These relationships are reflected in our final two hypotheses: H3-A greater HRM centrality increases organizational performance. H4-A greater HRM centrality increases the positive effect of organizational change on organizational performance. Research Model Most studies that have examined the role of HRM in organizational change have used case studies or domestic surveys (e.g., Antila, 2006; Bjrkman & Sderberg, 2003; Clement & Greenspan, 2000), treated mergers and acquisitions indiscriminately, used few indicators of organizational performance, or did not explore the areas in which HRM should play a strategic role in order to increase the success of mergers and acquisitions (for exceptions, see Danya et al., 2008; Nikandrou & Papalexandris, 2007). We overcome those limitations with our research model, presented in Figure 1. <Insert Figure 1 about here>

Organizational Change and Performance 9 Methodology Survey and sample This study draws on the 2005 Cranet survey containing data on HR policies and practices in private and public sector organizations in 32 countries, mostly European. The survey asks the most senior HRM professional a range of questions on company policies and practices in human resource management, covering the personnel function, staffing, employee development, compensation and benefits, employees relations and communication, and organizational details (Brewster et al., 2004). The sample comprises a total of 7914 usable questionnaires, gathered over a period of 18 months, from late 2003 to mid-2005. Tables 1 and 2 present a description of the sample. Table 1 presents the distribution of the sample by their reported histories of change and Table 2 provides the distribution of the companies that experienced change by number of employees and by industrial sector. <Insert Tables 1 and 2 about here> Measures HRM centrality The concept of HRM centrality has three interrelated, but distinct, variables: (1) Formalization, (2) HRM strategic involvement in business strategy, and (3) Responsibility for several HRM practices. We distinguished written formalization (2), unwritten formalization (1), and no formalization (0) in four areas (mission statement, business strategy, personnel/HRM strategy, and corporate values statement), yielding a variable ranging from 0 (no formalization whatsoever) to 8 (written formalization in all four areas). Concerning HRM strategic involvement, we distinguished four levels: HRM strategic involvement from the outset (3), HRM strategic involvement through consultation (2), HRM

Organizational Change and Performance 10 strategic involvement on implementation (1), and HRM not consulted (0). HRM strategic involvement was treated as an ordinal variable. When it served as independent variable, HRM strategic involvement was decomposed into three orthogonal, and hierarchical, contrasts. One contrast, HRM strategic involvement from the outset, compared from the outset (3) with through consultation, on implementation, and not consulted (-1). The second contrast, HRM strategic involvement through consultation, ignored from the outset (0), and compared through consultation (2) with on implementation and not consulted (-1). The third contrast, HRM strategic involvement on implementation, ignored from the outset and through consultation (0), and compared on implementation (1) with not consulted (-1). Responsibility for HRM practices distinguishes five areas: Pay and benefits, recruitment and selection, training and development, industrial relations, and workforce expansion/reduction. We considered whether the HRM Department - HRMD (1) or Line Manager - LM (0) is ultimately responsible for a given area. Organizational performance. Both objective and subjective indicators of organizational performance have been used in past empirical research (Paauwe, 2004, 2009), and there is a correlation between the two types of indicators (Pearce et al., 1987). Our study used multiple indicators of organizational performance: Service quality performance, level of productivity, profitability, and rate of innovation. We used subjective indicators for the same reasons as Nikandrou and Papalexandris (2007), i.e., difficulty in finding common indicators of performance across sectors, the validity of subjective perceptions of performance as a basis of managerial action (Guest et al., 2003) and the potential biases of objective indicators in cross-national studies, because of differences in long-term and short-term orientations, and differences in fiscal policies and tax systems.

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Organizational Change and Performance 11 These four indicators were measured on a three-point benchmarking scale: In the top 10% (3), in the upper half (2), or in the lower half (1). All indicators were treated as ordinal variables. Control variable We controlled for the extraneous variance introduced by industry sector, by dividing the companies into three sector groups: Primary, secondary, and tertiary (Table 2). Primary sector includes agriculture, forestry, hunting and fishing, secondary sector includes energy and water, chemical products, metal manufacturing, other manufacturing and building. The tertiary sector includes retail and distribution, transport and communication, financial services, personal, social and health services, education, public administration and other services. Results Overall analysis: Organizational change, HRM centrality, and organizational performance To permit a single test of our hypotheses, we aggregated all dependent variables in Figure 1 into the two main ones. HRM centrality was coded in two stages. The four areas of formalization were combined into one variable of formalization, and the five areas of HRM responsibility were combined into one variable of HRM responsibility. A factor analysis was then performed on the three variables constituting HRM centrality: Formalization, HRM strategic involvement, and HRM responsibility. The first factor, on which all three variables loaded positively, accounted for 45.6% of the variance, and this factor was used as our overall measure of HRM centrality. Finally, a factor analysis was performed on the four variables constituting organizational performance. The first factor, on which all four variables loaded positively, accounted for 58.7% of the variance, and this factor was used as our overall measure of organizational performance. Organizational change, the independent variable, was coded 1 when the organization had gone through at least one change and 0 otherwise. Industrial sector, the control variable, was

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Organizational Change and Performance 12 decomposed into two orthogonal contrasts, one contrasting the primary sector with the secondary and tertiary ones, and the other contrasting the secondary sector with the tertiary one. All of the above variables, except for organizational change, had a mean equal to 0. Variables that are centered around their means are convenient for investigating moderating effects in multiple regression, because they reduce multicollinearity between the independent variables. We therefore centered organizational change as well. We conducted four regression analyses. In the first analysis, we regressed HRM centrality on both organizational change and industrial sector. Thus, the effect of one variable is evaluated while controlling for the other variable. In support of hypothesis 2, organizational change increased HRM centrality, t(5368) = 2.88, p = .00. HRM centrality was greater in the secondary and tertiary sector than in the primary sector, t(5368) = 3.03, p = .00, and greater in the tertiary sector than in the secondary sector, t(5368) = 5.28, p = .00. In the second regression analysis, we entered the interaction terms between organizational change and industrial sector into the equation. The positive impact of organizational change on HRM centrality was less pronounced in the tertiary sector than in the secondary sector, t(5366) = 3.85, p = .00. This may indicate a ceiling effect: In the tertiary sector, where HRM centrality was already greater, there was less room for an even greater HRM centrality. In the third analysis, we regressed organizational performance on organizational change, HRM centrality, and industrial sector. In support of hypothesis 1, organizational change increased organizational performance, t(3706) = 2.09, p = .04, and, in support of hypothesis 3, so did HRM centrality t(3706) = 2.77, p = .01. Organizational performance was better in the secondary sector than in the tertiary sector, t(3706) = 2.68, p = .01. In the fourth and final analysis, we entered the interaction terms between organizational change, HRM centrality, and industrial sector into the equation. In support of hypothesis 4,

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Organizational Change and Performance 13 the positive impact of organizational change on organizational performance was more pronounced with greater HRM centrality, t(3699) = 2.59, p = .01. In addition, the positive impact of organizational change on organizational performance was more pronounced in the primary sector than in the secondary and tertiary sector, t(3699) = 2.01, p = .04, where economies of scale and scope are more likely to be created. In sum, the analysis on the three main variables supported the hypotheses of our study. We next report a more detailed analysis of the individual variables involved. Detailed analysis: Organizational change and HRM centrality We conducted a series of regression analyses to examine the impact of organizational change on HRM centrality. In each analysis, the occurrence of mergers, acquisitions, and takeovers served as independent variables. Formalization. This was the dependent variable in a linear regression. Formalization increased with acquisitions, t(6756) = 4.80, p = .00, and mergers, t(6756) = 4.32, p = .00. It also increased with takeovers, but this effect was not reliable, t(6756) = 1.30, p = .19. Overall, formalization increased with organizational change HR strategic involvement. This was the dependent variable in an ordinal multinomial LOGIT regression. HRM strategic involvement increased with acquisitions and decreased with takeovers, but these effects were not significant, 2(1) = 2.51, p = .11, and 2(1) = 2.65, p = .10, respectively. HRM strategic involvement was not affected by mergers, 2(1) = 0.15, p = .69. Responsibility for HRM practices. This was the dependent variable in five binomial LOGIT regressions, corresponding to the five areas of responsibility. Responsibility for pay and benefits shifted from LM to HRMD in the presence of acquisitions, 2(1) = 4.79, p = .03. Responsibility for recruitment and selection shifted from LM to HRMD in the presence of acquisitions, 2(1) = 3.81, p = .05, and takeovers, 2(1) = 3.86, p = .05. Responsibility for

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Organizational Change and Performance 14 training and development shifted from LM to HRMD in the presence of acquisitions, 2(1) = 13.36, p = .00. Responsibility for industrial relations shifted from LM to HRMD in the presence of acquisitions, 2(1) = 37.42, p = .00. The same shift of responsibility occurred in the presence of mergers and takeovers, but these effects were not as reliable, 2(1) = 3.27, p = .07, and 2(1) = 3.25, p = .07, respectively. HRMD responsibility for workforce expansion/reduction was not affected by organizational change, 2(3) = 0.25, p = .97. Overall, responsibilities shifted from LM to HRMD in the presence of acquisitions. Detailed analysis: Organizational change, HRM centrality, and organizational performance For each indicator of organizational performance, several ordinal multinomial LOGIT regressions were conducted: One excluding the interactions between HRM centrality and organizational change, which yielded the main effects on the independent variables, and others including the interactions between HRM centrality and organizational change, which yielded the simple main effects of the independent variables (in addition to the interactions between them). Service quality. Acquisitions had a positive effect on service quality performance, 2(1) = 33.10, p = .00, and so did formalization, 2(1) = 30.48, p = .00. However, HRM strategic involvement through consultation had a negative effect on service quality performance, 2(1) = 22.45, p = .00. Also, service quality performance was better when HRMD was responsible for recruitment and selection, 2(1) = 10.98, p = .00, and workforce expansion/ reduction,

2(1) = 4.41, p = .04, and when LM was responsible for pay and benefits, 2(1) = 8.17, p =
.00, and industrial relations, 2(1) = 4.30, p = .04. The positive effect of acquisitions on service quality performance was greater when LM was responsible for pay and benefits than when HRMD was responsible for it, 2(1) = 4.12, p = .04 (see the top left panel of Figure 3). Also, the positive effect of acquisitions on service quality performance was greater when HRMD was responsible for workforce expansion/ 14

Organizational Change and Performance 15 reduction than when LM was responsible for it, 2(1) = 4.55, p = .03 (see the top right panel of Figure 2). <Insert Figure 2 about here> Mergers and takeovers had no overall effect on service quality. In fact, sometimes the effect was beneficial and sometimes detrimental, depending on HRM centrality. Mergers had a positive effect on service quality when HRMD was responsible for training and development, but a (less pronounced) negative effect when LM was responsible for it, 2(1) = 4.68, p = .03 (see the bottom left panel of Figure 3). Also, takeovers had a positive effect on service quality when HRM was strategically involved through consultation, but a (slightly more pronounced) negative effect when it was involved on implementation or not at all, 2(1) = 4.10, p = .04 (see the bottom right panel of Figure 3). Level of productivity. Acquisitions had a positive effect on productivity, 2(1) = 10.36, p = .00, and so did formalization, 2(1) = 37.90, p = .00. HRM strategic involvement from the outset also had a positive effect on productivity, 2(1) = 5.21, p = .02. Productivity was higher when HRM was strategically involved from the outset than when it was involved only through consultation, on implementation, or not at all. However, HRM strategic involvement through consultation had a negative effect on productivity, 2(1) = 25.56, p = .00. Productivity was lower when HRM was strategically involved through consultation than when it was involved only on implementation or not at all. Also, productivity was higher when HRMD was responsible for workforce expansion/reduction, 2(1) = 3.72, p = .05, and when LM was responsible for pay and benefits, 2(1) = 7.08, p = .01, and industrial relations, 2(1) = 6.30, p = .01. The positive effect of acquisitions on productivity was greater when HRMD was responsible for workforce expansion/reduction than when LM was responsible for it, 2(1) = 4.20, p = .04 (see the left panel of Figure 4). Mergers had opposite effects on productivity, depending on

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Organizational Change and Performance 16 HRM strategic involvement through consultation, 2(1) = 5.89, p = .02. They had a positive effect when HRM was strategically involved on implementation or not at all, but a (less pronounced) negative effect when HRM was involved through consultation (see the right panel of Figure 3). <Insert Figure 3 about here> Profitability. Acquisitions had a positive effect on profitability, 2(1) = 32.81, p = .00, and so did formalization, 2(1) = 34.21, p = .00. However, HR strategic involvement through consultation had a negative effect on profitability, 2(1) = 6.03, p = .01. Profitability was lower when HR was strategically involved through consultation than when it was involved only on implementation or not at all. HR strategic involvement through consultation also impaired any positive effect that mergers had on profitability, 2(1) = 4.36, p = .04. Rate of innovation. Acquisitions had a positive effect on rate of innovation, 2(1) = 6.33, p = .01, and so did formalization, 2(1) = 18.96, p = .00. However, takeovers had a negative effect on rate of innovation, 2(1) = 10.31, p = .00, and so did HRM strategic involvement through consultation, 2(1) = 6.16, p = .01. Rate of innovation was lower when HRM was strategically involved through consultation than when it was involved only on implementation or not at all. Also, rate of innovation was higher when HRMD was responsible for recruitment and selection, 2(1) = 3.46, p = .06, and workforce expansion/reduction, 2(1) = 3.97, p = .05, and when LM was responsible for pay and benefits, 2(1) = 10.39, p = .00. HRMD responsibility for industrial relations boosted the positive effect of acquisitions on rate of innovation, 2(1) = 5.89, p = .02. Summary The results obtained in our study are summarized in Tables 3 and 4. <Insert Table 3 about here> <Insert Table 4 about here> 16

Organizational Change and Performance 17 How organizational change affected HRM centrality Organizational change led to more formalization, and to a shift of responsibilities from LM to HRMD in all areas, particularly in the case of acquisitions. How organizational change and HRM centrality affected organizational performance There were three systematic results. First, acquisitions and formalization led to a better organizational performance. Second, organizational performance was better when HRMD was responsible for (1) recruitment and selection and (2) workforce expansion/reduction, and when LM was responsible for (1) pay and benefits and (2) industrial relations. Third, productivity was higher when HRM was strategically involved from the outset than when it was involved only through consultation, on implementation, or not at all. How the effects of change on performance depended on HRM centrality The most salient result was that HRM centrality moderated the effects of organizational change on service quality. HRMD responsibility for workforce expansion/reduction and LM responsibility for pay and benefits, which by themselves were beneficial to service quality performance, boosted the positive effect of acquisitions on service quality. Additionally, HRMD responsibility for training and development changed an otherwise negative effect of mergers on service quality into a positive one. HRMD responsibility for workforce expansion/reduction positively moderated the effect of acquisitions on productivity as did HRMD responsibility for industrial relations on rate of innovation. Third, HRM strategic involvement through consultation, which by itself was detrimental to service quality, changed an otherwise negative effect of takeovers on service quality into a positive one. HRM strategic involvement through consultation continued to have other detrimental effects, though. It impaired any positive effect that mergers had on profitability and it changed an otherwise positive effect of mergers on productivity into a negative one.

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Organizational Change and Performance 18 Overall, HRM strategic involvement appears to be a bad idea unless HRM is strategically involved from the outset. Discussion The aim of this paper was to examine how HRM centrality affected organizational performance and moderated the relationship between organizational change and organizational performance. In doing so, we distinguished three different types of organizational change, and included a far greater range of indicators of organizational performance than have earlier studies. Also, we decomposed HRM centrality into formalization, strategic involvement, and the responsibility that either the HRM department or the Line Manager has for specific HRM areas, unlike most studies reported in the literature. This study therefore considers process variables in addition to content aspects of HRM, which follows Bowen and Ostroffs (2004) proposal for studies of the HRM-organizational performance relationships. Generally, our findings suggest that HRM centrality moderates the relationship between organizational change and organizational performance, particularly when organizational performance was assessed in terms of service quality. However, whether a greater HRM centrality was good or bad for organizational performance depended on the type of organizational change and on the indicator of organizational performance. Acquisitions generally improved organizational performance, whereas mixed results were obtained for mergers and takeovers, suggesting that takeovers have a stronger negative impact on rate of innovation, possibly because organizational actors must adjust to the policies and practices of the acquiring company, frequently suffering downsizing and diminished career opportunities. However, the robustness of these isolated results must be established by future research.

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Organizational Change and Performance 19 In our more detailed analyses, organizational change resulted in more formalization, with a positive effect on all performance indicators, corroborating the findings from earlier studies (Apospori et al.., 2008; Combs et al.., 2006; Cunha et al.., 2003;; Lyles et al.., 1993), but did not moderate the relationship between organizational change and organizational performance. Albeit the need for further empirical analysis, in the case of mergers where both partners share power and decision making, very formalized/rigid procedures and policies may jeopardize HRM integration. These very sensitive people decisions should be shared in a diplomatic fashion (namely downsizing) and not through rigid procedures. Centralization of responsibility for HRM practices occurs in all areas with organizational change, and this was beneficial when it was responsibility for recruitment and selection and workforce expansion/reduction, but detrimental in the case of responsibility for pay and benefits and industrial relations. The fact that LMs are closer to the competitive compensation packages (external equity) whereas HRM managers seek to achieve internal equity may explain this finding. The negative impact of HRMD responsibility for labor relations on rate of innovation is more difficult to explain, since the moderating effects clearly show that, in acquisitions, rate of innovation is boosted when the responsibility for labor relations lies with the HR Department. This result is intuitively plausible when we consider the major challenges that are demanded from management in order to restore and/or regain trust from the unions and their representatives in this major organizational turbulence. Unlike Nikandrou and Papalexandris (2007), our study reveals that the positive effect of acquisitions was sometimes enhanced but other times hindered by LMs responsibility for certain areas. In processes of ownership change, management of workforce

expansion/reduction and industrial relations must be very cautious, because, in order to achieve synergies, the HRM manager may need to negotiate the terms and conditions of layoffs and compensation (Antilla, 2006; Delaney & Huselid, 1996), as well as nourish a

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Organizational Change and Performance 20 perception of labor opportunities and security, raise expectations, support change and increase individual effort.. Additionally, giving too much HRM responsibilities to LMs can challenge their capacity to take on new roles parallel to their current workload, as Danya et al. (2008), Kirkpatrick et al., (1992) and McGovern et al. (1997) argue. However, contrary to our arguments, none of these authors questioned that responsibilities for various HRM practices should be differentially allocated. Our results support the concerns of Brewster and Sderstrm (1994) with the devolvement of the area of pay and benefits to the Line Managers. Our study also suggests that when the HRM department was responsible for training and development, an otherwise negative effect of mergers on service quality was averted, and even changed it into a positive one, possibly because it takes into consideration the different employee segments, thus efficiently creating positive employee attitudes and increasing trust in the future (Pfeffer, 1998). HRM strategic involvement appears to only be a good idea when it starts from the outset, which improves the likelihood that vertical and horizontal fit exist and increases the status of the HR function in the organization. When HRM is involved from the outset, a strategic vision on people issues is shared in a very clear way, whereas through consultation, this vision remains ambiguous, therefore losing credibility, power and focus. All used HRM centrality measures contributed to service quality, the indicator that is most intimately linked to HRM-related outcomes (Dyer & Reeves, 1995) or operational performance. Limitations Interpretation of the results must take the limitations of our study into account. First, we used survey data with single respondents, providing no estimate of the magnitude of error due to rater sampling (Gerhart et al., 2000). Questionnaires were completed by the senior HRM

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Organizational Change and Performance 21 manager in each company and we do not have employees perspectives on HRM practices at different levels of the organization. Some of the conclusions may be biased, particularly in what concerns our concept of HRM Centrality. Future research should incorporate a multilevel analysis, to reduce the impact of any bias from a specific category. We acknowledge, however, some of the practical difficulties in doing so, considering that, during processes of mergers and acquisitions, all human factor issues are politically sensitive and companies may be reluctant to participate (Cunha, 1997). Second, because the data are cross-sectional, there may be issues in the determination of causality. Longitudinal studies could help to determine the robustness of our results, and clarify some results that remained inconclusive. A third limitation is that we did not use any accounting/financial performance indicator, but rather intermediate perceived indicators of performance. This is a reasonable practice, considering the Cranet data include a large number of companies in 32 countries, which make it impossible to compare financial indicators from companies in different sectors and across national boundaries, i.e., with different baseline values and varying applicable fiscal and tax policies. However, future studies, with a smaller number of companies, may capture more precise measures of firm performance. Finally, there may be a statistical reason why acquisitions showed such pervasive effects on organizational performance while mergers and takeovers did not. In the Cranet data we observed a moderate rate of acquisitions, but low rates of mergers and takeovers (see Table 1). It may well be that the effects of mergers and takeovers could not be estimated as reliably as the effects of acquisitions. Thus, conclusions about the differential impact of acquisitions and other organizational changes should be drawn with caution.

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Organizational Change and Performance 22 Managing M&As - Implications for practice The findings in our study suggest different ways to manage the integration process in the three types of major organizational change associated with ownership. In the case of acquisitions, our results imply a greater centrality of HRM, i.e. strategic involvement from the outset and a shift of responsibility from LMs to HRM Managers in most HRM practices, except for pay and benefits. When one company acquires another one, and therefore is expected to integrate the acquired one into its policies, strategy, and culture, the human resources function has an important role as change agent, to promote and reinforce organizational transformation. Yet, looking at the company that is being taken over, it is natural that the turbulence and instability associated with the ambiguity of what is about to come, will negatively affect employee motivation, hence performance and rate of innovation in particular. HRM should therefore try to minimize this ambiguity, through communication and development of realistic expectations, acting as much as possible as internal consultants to top management teams. Mergers, on the other hand, have a more delicate negotiation process in all issues affecting employees. Flexibility is needed to adjust to different situations as the integration process evolves. Our results suggest that low strategic involvement of HRM and low formalization are positive. On the other hand, centralizing training and development activities in the HRM manager is important, to promote cultural integration and to develop new skills, aligned with the strategic intent of the new emerging organization. Conclusion In sum, two main conclusions are highlighted in this study. First, that HRM centrality moderates the relationship between organization change and organizational performance, with different effects depending on type of organizational change, on type of responsibility for

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Organizational Change and Performance 23 HRM practices and HRM strategic involvement, and on type of performance indicators. Future research should systematically analyze these effects. Second, results suggest that mergers and acquisitions should be considered as two different cases. Whereas acquisitions seem to require more formalized and centralized HRM practices with a strategic involvement of the HRM function from the outset, in the case of mergers, flexibility and low formalization of HRM practices seem to produce better organizational results. This line of inquiry may help to better understand the puzzle of why organizational changes sometimes succeed and other times fail.

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Organizational Change and Performance 30 Table 1. Distribution of sample by reported histories of change (percentages). No mergers No takeovers No acquisitions Acquisitions 4966 (62.75) 1494 (18.88) Takeovers 417 (5.27) 142 (1.79) Mergers No takeovers 515 (6.51) 245 (3.10) Takeovers 54 (0.68) 81 (1.02)

N = 7914.

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Organizational Change and Performance 31 Table 2. Distribution of companies experiencing mergers, acquisitions, or takeovers, by industrial sector. Acquisition Industrial sector Primary Secondary Tertiary 2.3% 47.6% 50.1% 1.1% 57.3% 41.7% 2.8% 37.9% 59.3% Takeover Merger

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Organizational Change and Performance 32 Table 3. Summary of main effects.

Centrality of HRM Formalization HRM responsibility Pay and benefits Recruitment and selection Training and development Industrial relations Organizational Performance Service Quality with acquisitions with formalization HRM strategic involvement through consultation HRM Managers responsibility for recruitment and selection HRM Managers responsibility for workforce expansion or reduction Line Managers responsibility for pay and benefits Line Managers responsibility for industrial relations Productivity with acquisitions with formalization HRM strategic involvement from the outset HRM strategic involvement through consultation HRM Managers responsibility for workforce expansion or reduction Line Managers responsibility for pay and benefits Line Managers responsibility for industrial relations Profitability with acquisitions with formalization HRM strategic involvement through consultation Rate of Innovation with acquisitions with formalization with takeovers HRM strategic involvement through consultation HR Managers responsibility for recruitment and selection HR Managers responsibility for workforce expansion or reduction Line Managers responsibility for pay and benefits with acquisitions with acquisitions and takeovers with acquisitions with acquisitions with acquisitions and mergers

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Organizational Change and Performance 33 Table 4. Summary of moderating effects.

On Service Quality Acquisitions Line Managers responsibility for pay and benefits HRMDs responsibility for workforce expansion or reduction Mergers HRMDs responsibility for training & development Takeovers HR strategic involvement through consultation On Productivity Acquisitions HRMDs responsibility for workforce expansion or reduction Mergers HR strategic involvement on

implementation or none On Profitability Mergers HR strategic involvement through consultation On Rate of Innovation Acquisitions HRMDs responsibility for industrial relations

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Organizational Change and Performance 34

Figure 1. The relationship between organizational change, the centrality of HR, and organizational performance.

Organizational change Acquisition Merger Takeover

Centrality of HR Formalization
Mission statement Business strategy Personnel/HRM strategy Corporate values statement

Organizational performance
Service quality performance Level of productivity Profitability Rate of innovation

HR strategic involvement
From the outset Through consultation On implementation Not consulted

HRM responsibility
Pay and benefits Recruitment and selection Training and development Industrial relations Workforce expansion/reduction

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Organizational Change and Performance 35 Figure 2. The effect of acquisitions on service quality performance, moderated by HRM responsibility for pay and benefits (top left panel) and HRM responsibility for workforce expansion/reduction (top right panel), the effect of mergers on service quality performance, moderated by HRM responsibility for training and development (bottom left panel), and the effect of takeovers on service quality performance, moderated by HR strategic involvement through consultation (bottom right panel).

Service quality performance

Service quality performance

Responsibility for pay and benefits LM HRM

Responsibility for workforce expansion/ reduction LM HRM

1 No Y es

1 No Y es

Acquisitions
4 4

Acquisitions

Service quality performance

Service quality performance

Responsibility for training & development LM HRM

HR strategic involvement No Through consultation

1 No Y es

1 No Y es

Mergers

Takeovers

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Organizational Change and Performance 36 Figure 3. The effect of acquisitions on level of productivity, moderated by HRM responsibility for workforce expansion/reduction (left panel), and the effect of mergers on level of productivity, moderated by HR strategic involvement through consultation (right panel).

Responsibility for workforce expansion/ reduction LM HRM

Level of productivity

Level of productivity

HR strategic involvement No Through consultation

-1 No Y es

-1 No Y es

Acquisitions

Mergers

36