MN2177 Core management concepts

Block 4: The Rise of Human Resource Management

Learning Outcomes
By the end of this chapter, and having completed the Essential reading and activities, you
should be able to:
 describe the emergence of human resource management approaches
 discuss the possible contribution of HRM to firm performance
 evaluate key leadership theories, including LMX and Transformational
Leadership
 discuss the psychological contract and the impact it has on our understanding of
work relationships.

Reading list

Essential reading
Willman, P. Understanding management: social science foundations. (Oxford: Oxford
University Press, 2014), chapter 4. Chapter 4: The Search for Consummate Cooperation
Northouse, P.G. (2013) Leadership: Theory and Practice London: Sage. Chapter 1:
Introduction.

Recommended reading
Boselie, P.,‘Human Resource Management and performance’, in S. Bach and M. Edwards
(eds.), Managing Human Resources (London: J. Wiley & Sons, 2013) pp. 268-288. Chapter
from an edited book, exploring the evidence for and against a link between HRM and
business performance.
Buchanan and Huczynski, Organizational Behaviour (Harlow: Pearson, 2013). Chapter 19:
Leadership. Textbook chapter providing a decent summary of the history and contemporary
issues in leadership and leadership theory from an Organisational Behaviour perspective.
Coyle-Shapiro, J.A–M. and L. Shore ‘The employee-organization relationship: where do we
go from here?’, Human Resource Management Review (17) 2007, pp.166–79. A well-known
paper by LSE academics, exploring the psychological contract, and a wider range of
relationship issues, now and considering future implications.
Cullinane, N. and T. Dundon The psychological contract: a critical review, International
Journal of Management Reviews 8(2) 2006, pp.113–29. A journal article summarising the
history of psychological contract research. Takes a critical stance, thus highlighting issues
with existent research.
Guest, D. Is the psychological contract worth taking seriously?, Journal of Organizational
Behaviour 19 Special issue, 1998, pp.649–64. Clear journal article providing a very useful
great summary of the theory of the psychological contract, followed by clear criticisms of
some of the problems with it.

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Huselid, M. The impact of human resource management practices on turnover, productivity,

and corporate financial performance, Academy of Management Journal 38(3) 1995, pp.645–
70. Journal article giving a more detailed account of key themes of the chapter, in particular
seeing if there are good reasons for decent HRM practices.
Pfeffer, J. (1995). Producing sustainable competitive advantage through the effective
management of people, Academy of Management Executive, 9, pp.55-72. Well-argued
journal article, making a clear case for working with people, rather than just treating them as
a resource.
Torrington, D., L. Hall, S. Taylor and C. Atkinson Human Resource Management (Harlow:
Pearson, 2017)
 Chapter 1: The nature of human resource management. Opening chapter from
respected HRM textbook, defining HRM, putting it into the wider business context,
and highlighting key practices, issues and activities within the HRM function.
 Chapter 4: Strategic human resource management. Additional chapter from respected
HRM textbook, considering whether and if so, how, HRM can be seen as strategic.
Very clear on outlining these arguments and thus a good additional resource for
anyone struggling with this block.

Works cited
Argyris, C. Understanding organizational behavior. (Homewood, Ill.: Dorsey Press, 1960).
Bass, B.M. Leadership and performance beyond expectations. (New York: Free Press, 1985)
[ISBN 9780029018101].
Beer, M., B. Spector and P.R. Lawrence Managing human assets. (New York: Free Press,
1984) [ISBN 9780029023907].
Colquitt, J.A., J.A. LePine and M.T. Wesson Organisational behaviour: improving
performance and commitment in the workplace. (New York: McGraw Hill, 2009) [ISBN
9780071318112].
De Menezes, L.M., S.J. Wood and G. Gelade ‘The integration of human resource and
operation management practices and its link with performance: A longitudinal latent class
study’, Journal of Operations Management 28(6), 2010, pp.455–71.
Dobbin, F., J.R. Sutton, J.W. Meyer and W.R. Scott ‘Equal opportunity law and the
construction of internal labor markets’, American Journal of Sociology 99(2) 1993, pp.396–
427.
Ghoshal, S. and P. Moran ‘Bad for practice: a critique of the transaction cost
theory’, Academy of Management Review 21(1) 1996, pp.13–47.
Graen, G. B.; Uhl-Bien, M. (1995). The relationship-based approach to leadership:
Development of LMX theory of leadership over 25 years: Applying a multi-level, multi-
domain perspective, Leadership Quarterly 6 (2), pp. 219–247
Guillen, M.F. Models of management: work, authority and organisation in a comparative
perspective. (Chicago: Chicago University Press, 1994) [ISBN 9780226310367].

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Hamel, G. and C.K. Prahalad Competing for the future. (Harvard: Harvard Business School
Press, 1996) [ISBN 9780875847160].
Huselid, M.A. ‘The impact of human resource management practices on turnover,
productivity, and corporate financial performance’, Academy of Management Journal 38
1995, pp.635–72.
Jurgens, U., T. Malsch and K. Dohse Breaking from Taylorism. (Cambridge: Cambridge
University Press, 1993) [ISBN 9780521405447].
Kotter, J. ‘What leaders really do’, Harvard Business Review, 68, 1990, pp.103–11.
MacDuffie, J.P. ‘Human resource bundles and manufacturing performance: Organizational
logic and flexible production systems in the world auto industry’, Industrial & Labor
Relations Review48 1995, pp.197–221.
Pfeffer, J. Competitive advantage through people (Boston: HBS Press, 1994) [ISBN
9780875847177].
Rose, M. Industrial behaviour. (London: Penguin, 1988) [ISBN 9780140091335].
Rousseau, D.M. Psychological contract in organisations: understanding written and
unwritten agreements. (Newbury Park: Sage, 1995) [ISBN to come].
Schein, E.H. Organizational psychology. (Upper Saddle River, NJ: Prentice-Hall, 1970)
[ISBN 9780136411345]. Ulrich, D. The human resource proposition. (Harvard: HBR Press,
2005) [ISBN 9781591397076].
Wall, T. and S. Wood ‘The romance of human resource management and business
performance and the case for big science’, Human Relations 58(4) 2005, pp.1–34
Willman, P. and G. Winch Innovation and management control: labour relations at BL
Cars.(Cambridge: Cambridge University Press, 1985) [ISBN 9780521268028].
Witzel, M. Builders and dreamers: the making and meaning of management. (Harlow:
Pearson, 2002) [ISBN 9780273654377].
Wren, D.A. The history of management thought. (New York: Wiley, 2005). [ISBN
9780471669227].
Wright, P. M. and G.C. McMahan ‘Theoretical perspectives for strategic human resource
management’, Journal of Management, 18(2), 1992, pp.295–320.
Yukl, G.A. Leadership in organizations. (Upper Saddle River, NJ: Pearson/ Prentice Hall,
2006) [ISBN 9780138142681].

4.1 The Historic Development of HRM

Human relations thinking and the adoption of its techniques were often associated with the
creation of personnel departments. Guillen (1994, pp.73–74) notes the rapid spread of
personnel departments in manufacturing in the USA in the second quarter of the 20th century.
These evolved into the modern human resources departments whose toolkit is the human
relations legacy. Second, there is an academic legacy. As Rose notes:
...technology supplanted the human relations climate as the favourite variable for
explaining human behaviour... increasingly, investigators took the title of

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‘organisation theorists’. Combined with applied psychology, the sociology of

organisations formed the core of a newly popular and heavily promoted academic
area, organisational behaviour. (Rose, 1988, p.81)
We shall look at both the practice of human resource management and theories in
organisational behaviour below.
In this section, we trace the lineage of the human relations approach down to the 21st century.
In fact, there are several legacies to consider. In practical terms, we need to look at the
evolution of the human resource function within the firm. There are, of course, enormous
variations in human resource practice, but one may generalise to say that the concerns of the
human relations movement with the management of people have been generalised into a set
of practices employed by firms concerning recruitment, retention, rewards, motivation and
the commitment of employees. In many firms there is a key departure from the spirit of the
human relations approach, in that human resource management (HRM) is a staff function
separate from line management; arguably this is a central issue in how HRM works and we
will discuss it both specifically, in terms of the effectiveness of HRM, and generally, in terms
of line-staff arrangements within the firm. There is also an academic discipline called HRM,
which tends to focus on the design and effectiveness of individual HRM practices and the
performance implications for firms of combinations or bundles of practices which involve
intractable measurement problems.
The second legacy is the very sizeable academic field of organisational behaviour (OB). Its
theoretical agenda is similar to that of human relations, but it is methodologically far more
sophisticated, in part because it has developed as a branch of applied psychology. It is not
primarily concerned with rationality – compared with economics rationality it is treated as a
variable not an assumption – and is not always concerned to measure business outcomes such
as efficiency or productivity. This chapter seeks to illustrate rather than summarise this field
and its contribution, and it will do so by looking at how OB deals with two concepts which
have been central so far: hierarchy and contract. These emerge prominently in the OB
literature as studies of leadership and the psychological contract respectively. We turn first to
HRM.

4.2 The HRM Function

What types of activity does the HRM function do?

One of the most influential modern models of the practice of the HRM function has been
developed by Ulrich (2005). It is a prescriptive model, meaning that it recommends a course
of action. It suggests that the HR function should organise itself around just three types of
activity, each of which supports the business and its line managers in different ways.
1. Shared services. Ulrich says that HR departments can perform the set of basic
administrative tasks required in the management of a workforce. These are the sorts of
activities through which economies of scale may be achieved by the concentration of
activity on an enterprise-wide basis. These activities include management of payroll,
absence control and employee databases more generally. It is possible to save money
if these activities are grouped into one HR function, rather than distributed across the
business. The measures of performance of such units are essentially the quality and
timeliness of data provision and cost. There are clear outsourcing possibilities, since
inter-firm scale economies can be exploited subject to confidentiality concerns about

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employee data. For instance, outsourcing companies are regularly used to help
organise payroll. One example of such a company is Moorepay, who at the time of
writing claimed to provide 500,000 payslips for a wide range of clients each year.
2. Centres of expertise. Ulrich says that HR departments have a role to play in
supporting and advising line managers where relevant issues arise. When acting as
centres of expertise, HR departments focus on areas of knowledge where there may
also be economies of scale but where the complexity of information requires specific
HR knowledge. Examples would be the selection of employees, designing and
applying reward systems (including pensions), employee relations (including dealing
with unions), training and termination of employees. Compliance with relevant law is
often an issue in all such areas. Performance measures here are more complicated, but
would include, in addition to those for shared services, some line management
evaluation of quality of advice.
3. Business partnership. Finally Ulrich says that HR departments can work with high-
level line management to improve firm performance through more strategic
initiatives. This type of work often involves small HRM teams working with senior
managers to change the organisation with the intention of improvement. Examples
would be issues such as strategy implementation, organisational design and change
management. At this level, initiatives can be driven by the business or even by the HR
professionals, assisting the firm to maximise its use of human assets. Performance
measures here are challenging, if not impossible because it is very difficult to isolate
and measure the value of HR separate to the rest of the firm.
This is a simplifying, prescriptive and aspirational model, which summarises both the
activities a firm may require from its HRM function. It also highlights the variance in
relationships between line management and staff. The shared service and expertise activities
essentially deal with, on the one hand, the rise in bureaucratic employment issues within large
firms and, second, the regulatory burden on employment. The assumptions underlying
business partnership are qualitatively very different and are tied to a resource-based view of
the firm; they include the idea that the management of human assets may be a source of
competitive advantage. As Pfeffer puts it:
There is a substantial and rapidly expanding body of evidence….that speaks to the
strong connection between how firms manage their people and the economic results
achieved. (Pfeffer, 1994)
The relevance of this model here is twofold. First, using this threefold division is a useful
heuristic for describing the development of HRM practice historically. Second, as we shall
see, it outlines the core tensions within HRM practice. In the next sections, we will look at
each in turn.

Historical HRM Practice

In this section, we will look at the development of HRM historically. Ulrich’s model (covered
in the previous section), gives a useful, simple heuristic to think about the three functions:
shared services, centres of expertise, and business partnership. Here, we will begin to see
where each of these three functions emerged.
Two early and uncorrelated developments are noteworthy. First, in some large 19th-century
firms, ‘welfare’ departments were established that were concerned with the provision of
canteens, medical services, housing and, in some cases, social work. This was particularly

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strong in Germany. In the UK it was associated with philanthropy by owners whose concerns
were religious or social, rather than economic, for example Cadbury, the confectioner, and
Wedgewood, in ceramics. The earliest recorded such department in the USA was the
National Cash Register Company in 1897 (Wren, 2005, p.186). Retrospective cynicism might
see in these ventures the pursuit of business objectives – for example, seeing the company
doctor might be seen as a form of absence control – but there is probably also a genuinely
altruistic interpretation, and no systematic evidence of cost-benefit analysis in the well-
documented examples such as Cadbury.
Click here to read more about the history of Bourneville, the town that Cadbury built; it is a
useful summary if you are unfamiliar with the idea of a philanthropic organisation or town.

Figure 4.1: Cadbury built a ‘model town’ where his workers lived and treated them
very well. It still exists today as Bourneville. by-SA The shops in Bourneville,
Birmingham Gavin Warrins @ Wikimedia Commons
Slightly later, more focused activities were driven by the workforce quality needs of scientific
management: selective hiring, incentive pay and absence control were all central to the
pursuit of efficiency. If this pursuit generated recourse to trade unions by employees, a set of
bargaining and consultation arrangements needed to be designed and monitored. In addition,
as Gospel notes:

Over time, in most countries, there has been a gradual build up in (government)
intervention in terms of rights off the job (state welfare and pension systems),
rights on the job (workmen’s compensation, health and safety, racial and sexual
equality legislation) and regulation of collective employment matters (the law
on trade unions, collective bargaining and information and consultation at
work).
(Gospel, 2007, p.423)

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Three central issues emerged to beset this literature. First, what were these HRM practices
that one deployed in order to generate competitive advantage and how did one deploy them?
Second, were these practices the same everywhere? If firm strategies were different, were
different bundles of HRM practices required to deliver them? Third, how could one measure
the impact of HRM practices on competitive advantage? We look at each in turn.

Activity 1
This activity is a multiple choice quiz on the VLE, you can attempt it at the link below:
https://emfss.elearning.london.ac.uk/mod/quiz/view.php?id=21255

4.3 Using HRM to Provide Competitive Advantage

Strategic HRM
Ulrich’s model is also useful for a second reason. It highlights the key tensions that still exist
in HRM. Is it a strategic function for an organisation or not? For it to be strategic in this
sense, it needs to create or help to maintain some competitive advantage. The question is
then, can shared services, centres of expertise and business partnership functions provide any
competitive advantage to firms? In order to answer this we need to look back a number of
decades to the beginnings of what we now label HRM.. The major change to what we now
characterise as HRM came in the 1970s and 1980s, first in the USA. It required several
intellectual developments elsewhere and, as is frequently the case, a sharp shock and an
opportunity. First, if HRM were to influence strategy, somebody had to be ‘doing’ strategy
explicitly. As we show below, the academic study of business strategy was a relatively late
arrival, and even early versions such as strategic planning post-date the emergence of
personnel departments. But, second, the role of the management of people as an element in
strategy needed to be articulated in a particular form – the resource-based theory of the firm.
Once this intellectual toolkit was in place, and employees could be seen as a source of
competitive advantage, the stage was clear for HRM to make a bid to be strategic.
The sharp shock was provided by the emergence of Japanese competition in the 1980s and in
particular the use of what became described as high performance work practices within
systems. Consummate cooperation required HRM technique. The opportunity was provided
by the removal of a constraint − the decline of trade unionism. The language of personnel
management changed. An influential text was Beer et al.’s Managing human assets,
embedding the idea that ‘people are an asset not a cost’ and thus the HRM function needs to
be ‘fully aware of and involved in all strategic and business decisions’ (Beer et al., 1984,
p.292). HRM became strategic – defined as the ‘pattern of planned human resource
deployments and activities intended to enable an organisation to achieve its goals’ (Wright
and McMahan, 1992, p.298). And the idea resonated among popular strategy authors:
The way we organise our business and leverage our intangible assets, primarily vested
in people, is one of the most fundamental and sustainable sources of competitive
advantage. (Hamel and Prahalad, 1996)

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Three central issues emerged to beset this literature. First, what were these HRM practices
that one deployed in order to generate competitive advantage and how did one deploy them?
Second, were these practices the same everywhere? If firm strategies were different, were
different bundles of HRM practices required to deliver them? Third, how could one measure
the impact of HRM practices on competitive advantage? We look at each in turn.

Issue 1: Which HRM practices actually generate competitive advantage?

Pfeffer (1994) offers seven generic (universally applicable) practices for building profits by
‘putting people first’. They are:
1. employment security (people feeling protected in their jobs)
2. selective hiring (choosing the right person for the job)
3. self-managed teams or team working (allowing people to work in autonomous or
semi-autonomous groups with whom they identify)
4. high pay contingent on company performance (people being rewarded for the
company doing well)
5. reduction of status differences (using initiatives which flatten the hierarchy or at least
make it feel flatter)
6. sharing information (making sure that there are processes to pass information around
and a culture of doing so).
This is an influential list but it is not the only list in play. Meta-analysis of the field (Wall and
Wood, 2005) shows a variety of different items listed as HRM practices across a variety of
studies. There is no widespread agreement on what should be included or excluded. So there
is not a ‘theory’ of HRM and performance here. It is not clear whether the effects of these
practices on performance would simply be additive or whether, in particular combinations,
the whole would be greater than the sum of the parts. Some empirical studies around the
relationship between these kinds of practices and performance variables generate very
specific numbers; Huselid (1995), for example, argued that a dollar value of firm benefit
could be identified for unit value increases in HRM use. However, the path by which these
practices generate outputs remains obscure. The proposition that any firm adopting any HRM
practice or set thereof will generate a performance improvement is weak. As Macduffie has
remarked:
Innovative human resource practices are likely to contribute to improved economic
performance only when three conditions are met: when employees possess knowledge and
skills that managers lack, when employees are motivated to apply this skill and knowledge
through discretionary effort; and when the firm’s business or production strategy can only be
achieved when employees contribute such discretionary effort. (Macduffie, 1995, p.199)
However unattractive the Taylorist model of the excellent worker might be, it contains a
model of the relationship between labour input, production process, output and reward that
studies of the HRM performance link have so far failed to generate. This is, of course, partly
because the unit of analysis for Taylor is the individual, while that for HRM studies is
variable.

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Issue 2: Do the same HRM practices work everywhere?

The second issue concerns inter-firm variation; if firm strategies are different, maybe HRM
practices need to be. For example, it makes no sense to be a luxury clothing store and yet not
spend time and effort on recruiting the right people. There needs to be a fit between
organisational objectives and HRM practices. Wall and Wood (2005, p.431) identify three
types of ‘fit’ between HRM practices and the firm.
1. Internal fit ‘posits synergy among the practices, meaning that their collective effect
will be greater than the sum of their individual parts’. This means that HRM practices
themselves need to be related and to make sense together. If you spend time recruiting
and selecting really good graduates, it would be sensible to make sure that you offer
them the learning and training you know that they need and want.
2. Organisational fit ‘concerns the role of HRM in enhancing the effectiveness of other
organisational practices or technologies, and vice versa’. If your company has spent
lots of money developing a new piece of technology, you will want to make sure that
you recruit people who you think have the ability to learn how to use it.
3. Strategic fit ‘assumes that HRM practices need to be aligned with the organization’s
strategy to have their full effect on performance’. Starbucks’ mission is to ‘inspire and
nurture the human spirit – one person, one cup and one neighbourhood at a time’. You
may want to make sure that your appraisal system measures how good your baristas
are at making coffee, or making your customers feel happy, so that they have the
highest chance of feeling nurtured and being inspired.
The first concept of fit suggests that some combinations of HRM practice may be better than
others. The second implies that some combinations may optimise the performance of certain
technologies. But the third reaches to the heart of Ulrich’s idea about the organisation of the
HRM department and its relationship to line management. For Ulrich, the essence of
competitive advantage from HRM is the HRM–line management relationship, rather than a
bundle of practices. The bundle of practices is a dependent variable. Let us look at the line
management−staff relationship.
Witzel (2002, pp.51–54) offers an interesting set of observations. First, he notes that the line
management−staff division, which became common practice and parlance in the business
world, originated in military organisation. He uses the Prussian army in the 19th century as
an example.
Second, he noted that the line management units had to be Taylorist and the staff units had to
coordinate, integrate and be goal-focused. Third, he offers a specific example: the Franco-
Prussian war of 1870 when less well armed and less experienced Prussian troops defeated an
apparently superior French army by virtue of the line management−staff relationship that
generated flexibility and rapid response. Fourth, he observes that a prominent early
management theorist, the American Harrington Emerson, observed this conflict directly and
incorporated his views of it in his writings. The core issue that links 19th-century military
operations and 21st-century management of people in organisations is the observation that an
organisational attribute, rather than a capital or resource asset, can be the source of
competitive advantage and, moreover, that organisations that are asset-poor can outcompete
those that are asset-rich.

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Issue 3: How can you measure the impact of HRM practices on

competitive advantage?
The third problem is of a rather different nature. Whatever the claimed impact of HRM
practices on a dependent variable such as performance, it is still unclear whether any
competitive advantage is being generated. If, as many authors have implied, effective
management of human assets leads to competitive success, it is necessary to show that these
‘bundles’ of practices can be better implemented by some firms than others. There has been
little analysis of this. In the car industry example used above, the key performance variable
‘man hours per car’ has fallen across the industry, in part as a consequence of the adoption of
high-performance work practices, but this can simply generate a price war rather than a
competitive advantage (Jurgens et al., 2003; Willman and Winch, 1985).
De Menezes et al. have used data on both operations management practice and the use of
HRM in a longitudinal study that indicates the way forward in this field. They show that
firms that innovate early and integrate HRM with production practices generate sustained
performance improvement, arguing:
An integrated managerial philosophy is potentially a source of competitive advantage,
highlighting the importance of continuous improvement and learning that is often
allied to the lean production concept. (De Menezes et al., 2010, p.1065)
So, in the HRM field, it does not seem that simply adopting a practice or set of practices
employed by a successful competitor offers a high chance of replicating their success. Many
firms in many sectors do so for both practices and for targets, in a process known as
‘benchmarking’. As we have seen, we may improve an aspect of our own firm’s performance
by adopting ‘best practice’ but it may not improve relative performance. Methodologically, it
involves sampling on the dependent variable which can give rise to unexpected, often
disappointing, results. In the HRM field, many studies even use cross-sectional data to study
allegedly causal HRM performance relationships; these methods cannot discriminate
effectively between firms that might be improving performance using HRM and firms that
have improved performance so can afford the investment of HRM.

Further reading
For further research on the challenges of seeing HR as strategic and placing an organisational
value on it we recommend the following readings.
 Problems with trying to manage HRM from a business perspective
 How can HR be seen as strategic?
 Perhaps the problem is with treating HRM as one ‘thing’ when really, it’s lots of
different people tasks?

4.4 Organisational behaviour

This has recently been influentially defined as:
A field of study devoted to understanding, explaining, and ultimately improving
the attitudes and behaviours of individuals and groups in organizations. (Colquitt,
LePine and Wesson, 2009, p.7)

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Let us deal with the omissions from this definition first. Organisational behaviour (OB)
academics are not primarily concerned with firms, or firm performance, and they seldom
study markets. The disciplines on which OB draws – psychology and social psychology – are
deployed in markets by others (looking at consumer behaviour, see below) but these
literatures have emerged separately. The field looks at affective states as worthy of study in
themselves, and generates sophisticated models to relate affective states and behaviours. It is
highly fragmented, with no core body of theory delineating a model of human behaviour
comparable to economic man, and it is arguably held together by rather looser assumptions
and a commonality of method.
Two sub-fields illustrate how this field differs from one that makes assumptions about
rationality and self-interest. Economic approaches use principal–agent theory to describe
hierarchy, while OB talks about leadership. Economists describe employment contracts as
incomplete, whereas OB academics study how these silences are filled. We look at each in
turn, as illustrations of the difference between rational choice and psychological approaches
to organisation.

4.5 Theories of Leadership

Trait approaches to leadership

Consideration of leadership and, in particular, what makes a good leader precedes the
business literature on the subject by centuries. Much of this earlier literature was concerned
with military leadership. The academic literature on business leadership emerges in the
1920s. At this early stage (and for some time after), the unit of analysis was the individual.
The research tries to figure out what traits make someone into a good leader. These traits are
most commonly presented as innate (something that people are born with) as opposed to
being acquired (through experience).
Numerous lists have been produced over the years, often with common features but no
universal agreement on a particular list. In more recent years, researchers have tried to
produce meta-analyses (studies bringing together lots of previous studies and trying to
extrapolate common patterns) of studies of leadership traits, to try to find patterns.
Judge et al. (2002) performed a meta-analysis on previous studies using the trait perspective
of leadership. They organised others’ findings around the Big Five personality traits
(extraversion; openness; agreeableness; conscientiousness; and neuroticism). They found that
leaders tend to be high in extraversion, openness and conscientiousness, and low in
neuroticism (their agreeableness was found to be largely irrelevant).
The trait theory is, however, fundamentally depressing for the business literature (as well as
the consultants and trainers who work in the area) because it implies that, no matter what you
do, your propensity for leadership is fixed. Firms’ efforts to develop leaders are limited to
their appropriate selection of staff. Also problematic is how difficult it has been for
researchers to agree on the list of traits that are desirable. These reasons make it unsurprising
that the literature turned away from the trait approach.
The subsequent development of leadership research reflects interests in an ever-increasing
array of organisational variables. They are chosen and tested in a (seemingly never-ending)
quest to identify what good leadership is, and how it may be developed or enhanced within
particular contexts.

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Leadership theory thus turned towards behaviours that individuals could practise, and
therefore potentially improve upon. However, it was acknowledged that different individuals
might practise and thus perform them to different degrees.

Type of leadership theory Trait

Main proposition Leaders are born, not made

Key activities Trying to develop a list of traits that good leaders have

Assumes that leadership can’t be developed Ignores

Main criticisms
context

Behavioural approaches
The behavioural approach to leadership was developed in the Midwest of the USA. Studies
by Ohio State University (1945) identified two critical categories of leadership:
1. People-oriented leadership (consideration)
2. Task-oriented leadership (initiating structure)
The research was based on questionnaires to leaders and their subordinates. It found that both
categories were independent of one another, but that those leaders who are most effective
possess a strong ability to work with others, as well as a strong ability in creating structure in
which tasks can successfully be completed.
In the 1950s, the Michigan Leadership Studies and indicated something very similar: that
leadership behaviours could be classified as either ‘employee centred’ or ‘job centred’.
Thus, in both studies, twin categories of ‘task’ and ‘relationship’ behaviours emerge to be
important to leadership, with effective leaders tending to be ‘high’ in both.
These two categories continue to have very wide currency in the management literature. They
are used in the analysis of teams and teamwork at the micro level, and organisational culture
at the macro level. They replicate in this literature the broad engineering concern for
efficiency and the human relations concern for work relations.
However, there are criticisms of this approach. One is that direct measures of efficiency were
not taken in either of these large-scale studies. aA second is that, although these studies use
questionnaires from subordinates, they are still generic in arguing for leadership behaviours
independent of either context or audience. In other words, they do not consider whether the
leadership setting or the type of person being led has an impact on the best form of
leadership.

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Type of
leadership Trait Behavioural
theory

Main proposition Leaders are born, not made Leadership is a set of behaviours

Presenting good leaders as those

Trying to develop a list of traits that
Legacy who have a focus on both people and
good leaders have
tasks

Assumes that leadership can’t be

Ignores context
developed
Ignores audience
Main criticisms Ignores context
Research methods not rigorous
No conclusive evidence for one
enough
particular set of traits

Contingency approaches
The next development in leadership research addresses context. Contingency theories in their
various forms suggest sources of variation in leadership effectiveness based in the power of
the leader, the nature of the task to be completed and level of uncertainty in the work
situation. Contingency theories are incredibly diverse in the aspects of context they choose to
focus on. One of the more influential studies is actually called Contingency Theory and was
originated by Fiedler (1964). It is a leader-match theory, meaning that it tries to match leaders
to situations which might suit them. It takes the name Contingency because it proffers that a
leader’s effectiveness depends on their style fitting the context.
Leaders are divided into those who are relationship-focused versus those who are task-
focused. In order to measure this, Fiedler created the LPC (Least Preferred Co-worker) scale
on which to measure leadership style. Those who score high are relationship-motivated; those
who score low are task-motivated.
There are then three situational variables which Fiedler believes will impact the type of
leadership style required in a particular situation:
 Leader-member relations: the degree to which followers trust, are attracted to and
feel for their leader.
 Task structure: the degree to which tasks are specified, from vague and unclear to
highly structured.
 Position power: the amount of authority a leader has to punish or reward his/her
followers.
Once a situation is measured, the favoured leadership style could be identified and the right
type of leader found. Whilst it sounds relatively simplistic, it has been supported by much
empirical research. It also removes the expectation that leaders will be successful in all
situations.

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Fiedler Contingency Model

Situations (i.e., contingencies)

Leader-Member
Low High
relations

Task Structure Low High Low High

Position Power Low High Low High Low High Low High

Favoured Style Task Relational Relational Relational Relational Task Task Task

However, Fiedler is criticised because they do not explain what a leader should do if they
find themselves in one of their unfavourable situations. It might be assumed that panicking or
refusing to participate would not be acceptable alternatives. Additionally, contingency
theories of leadership are criticised en masse because they still place the emphasis on the
leader as an individual, rather than taking into account the audience.

Type of leadership
Trait Behavioural Contingency
theory

Leaders are born, not Leadership is a set of Good leadership

Main proposition
made behaviours depends on context

Recognising that
Presenting good leaders
Trying to develop a list leadership success
as those who have a
Legacy of traits that good depends on finding the
focus on both people
leaders have right type of leader to
and tasks
fit the context

Assumes that Ignores audience

leadership can’t be Nearly impossible to
Ignores context
developed fully account for
Ignores audience
Main criticisms Ignores context context
Research methods not
No conclusive evidence Theories are
rigorous enough
for one particular set of disconnected rather
traits than additive

Leader-follower approaches
As a response to this, subsequent theories placed more emphasis on the relationship between
leaders and their followers. Leader-follower relationships were shown to be variable, but
patterned, and follower reactions to leadership became increasingly the most significant
dependent variable. In a modern definition:
Leadership is the process of influencing others to understand and agree about what needs to
be done and how to do it, and the process of facilitating individual and collective efforts to
accomplish shared objectives. (Yukl, 2006, p.10)

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One of the prominent theories that first recognised the importance of the follower-leader
relationship is Leader-Member Exchange (LMX) theory. In its earliest form, LMX theory
believes that an in-group and an out-group routinely form around a leader (Graen and Uhl-
Bien, 1995). Followers become part of the in-group based on how well they get along with
the leader and whether they are willing to take on more responsibilities in line with the
leader’s domain. Subordinates who go no further than formal responsibilities remain in the
out-group. As the theory developed, the emphasis switched to recognition that good quality
exchanges between leaders and their followers would lead to higher individual and thus
organisational performance, and then an interest in how to encourage such exchanges
(Northouse, 2013).
LMX is a well-researched theory, which not only describes what happens in successful (and
unsuccessful) relationships between leaders and their followers, but which also offers up
some suggestions on how to improve these relationships (for example, leaders should try to
be trusting and cooperative, and to offer employees decent opportunities to participate in
career-related exchanges). However, its suggestion that there will be an out-group as well as
an in-group runs counter to ideas that work should be fair and just. It also neglects context
once again, ignoring how situations could alter or influence LMX relationships.

Type of
leadership Trait Behavioural Contingency Leader-follower
theory

Good leadership ‘Leadership is a

Leaders are born, Leadership is a set
Main proposition depends on conversation, not
not made of behaviours
context a monologue’

Recognising that
Presenting good Leadership is best
leadership success
Trying to develop leaders as those understood as a
depends on
Legacy a list of traits that who have a focus relationship
finding the right
good leaders have on both people between leader
type of leader to
and tasks and follower
fit the context

Assumes that Ignores audience

Ignores other
leadership can’t Nearly impossible
Ignores context elements of
be developed to fully account
Ignores audience context
Ignores context for context
Main criticisms Research methods Creates an in-
No conclusive Theories are
not rigorous group and an out-
evidence for one disconnected
enough group which
particular set of rather than
seems unfair
traits additive

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Transformational leadership and beyond

In more recent years, leadership research has continued apace. The diverse range of
contemporaneous theories are loosely connected by their exploration of what it is that makes
people want to follow a leader, whether it is their ability to be transformative, charismatic,
authentic, or a ‘servant’ to their followers. A notable difference from earlier works is a clear
separation between formal position and leadership. Leadership is now portrayed as something
that can be performed independent of someone’s place in the hierarchy. Anyone can be a
leader, even if they do not have a formal management position.
Acknowledging the split between hierarchically-prescribed ‘management’ activities focusing
on monitoring/exchange versus those more people-based activities focused on affect is Bass’
theory of Transformational Leadership (1985), which is by now relatively well-established.
Bass distinguishes:
Transactional leaders – motivate employees through an exchange process involving
rewarding and correcting. This is much more in line with what rational economic theory
suggests managers will need to do in order to negate some of the Principal-Agent problems.
Transformational leaders – motivate employees by activating their higher order needs,
offering inspiration, intellectual stimulation and individualised consideration. This is focused
on affect, with the idea being that if a leader can do all of these things, workers’ consummate
cooperation can be attained and organisational performance will be better overall.
However, Transformational Leadership theory is open to criticism. It once again focuses on a
one-way, leader-to-follower relationship. Thus, it encourages a ‘heroic leadership bias’. What
this means in practical terms is that it advocates leaders who are strong, controlling and who
are there to shake up the status quo. The question is whether these are always desirable
qualities in leaders, or whether there are circumstances that require a very different approach.
There are plenty of other contemporary leadership theories, too, which are in their early
stages of development. Charismatic Leadership, Authentic Leadership and Servant
Leadership are all examples which you can easily find more about online if you are interested
(or in Northouse’s excellent book on Leadership, the introduction of which is on the Essential
Readings list for this Block).

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Type of
Leader-
leadership Trait Behavioural Contingency Transformational
follower
theory

Good ‘Leadership is ‘A good leader

Leadership is a
Main Leaders are leadership a conversation, will change and
set of
proposition born, not made depends on not a transform her
behaviours
context monologue’ followers’

Recognising
Presenting that leadership Leadership is Places strong
Trying to
good leaders as success best emphasis on
develop a list
those who depends on understood as morals and
Legacy of traits that
have a focus finding the a relationship values, as well as
good leaders
on both people right type of between leader the growth of
have
and tasks leader to fit the and follower followers
context

Assumes that Ignores

leadership audience Ignores other Lack of
Ignores context
can’t be Nearly elements of conceptual
Ignores
developed impossible to context clarity
audience
Main Ignores fully account Creates an in- A return to trait-
Research
criticisms context for context group and an like qualities
methods not
No conclusive Theories are out-group Suffers from a
rigorous
evidence for disconnected which seems ‘heroic’
enough
one particular rather than unfair leadership bias
set of traits additive

A wider criticism of the leadership field

We have dealt with the (perceived and real) problems of fields of leadership theory in the
previous sections. These have included a lack of focus on context, ignoring followers, or
suggesting that leadership cannot be developed. However, if we take a step back and survey
the field of leadership theory as a whole, there is an additional, wider problem for the
business in trying to use it.
Leadership theory usually finds that it’s important to concentrate on the relationship elements
of the role, either wholly or in part. There is strong agreement across the board that focusing
on relationships with followers will increase leader effectiveness. And yet, if we contrast this
with the rational, economic perspective on how to run a business, there is a conflict.
Principal-agent theory tells us that being nice to workers isn’t enough to guarantee their
consummate consumption. Workers will routinely be ‘acting with guile’, and as such, under
the conventional economic perspective, leaders may want to consider monitoring and
incentivising good performance. These actions run contrary to the more considerate approach
that leadership theory suggests will work best. Thus, a simple interpretation of what an
effective economic ‘principal’ should do, would be ‘bad leadership’ in the OB literature
(Ghoshal and Moran, 1996).

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4.6 The Psychological Contract

Introduction
The second strand of OB research that we will consider here analyses employment
relationships. Some sociologists have long been interested in exchange, but these social
exchange theorists tended to take a broader view than simple economic exchange.
Resources, both tangible (such as money or goods) and intangible (such as information or
status), are included. There needs to be some notion of balance between what is exchanged
for both parties to be satisfied. Social exchange is voluntary and continuing, but it
entails unspecified obligations about the exact nature of reciprocity. Where social exchange
continues, norms of reciprocity are established, such that people both help and avoid injuring
those who have helped them. Continuing reciprocity generates trust between exchangers,
which may provide the basis for enduring and profitable network linkages. Trust relations
have dynamics, such that trustworthiness is rewarded and its loss can lead to a cycle of
mistrust.
Psychological contract research is an area of OB research that examines employment
relationships. Again, the human relations movement is in the lineage. Argyris (1960) used the
term ‘psychological work contract’ to describe a Hawthorne-type relationship between
informal work groups and managers involving a trade between stable wages and employment
security for the former, and higher productivity and fewer grievances for the latter. The
cognitive elements in this approach were refined by Schein (1970) in a focus on the matching
of expectations and exchange performance where each party might have a different set of
both preferences and perspectives.

What is the psychological contract?

The defining approach that has generated the bulk of research on the matter is from
Rousseau. She defines a psychological contract as:
Individual beliefs (sic), shaped by the organisation, regarding terms of an exchange
agreement between individuals and their organisation. (Rousseau, 1995, p.9)
The content of the contract involves both tangible and intangible elements; a considerable
segment may be ‘promise-based obligations’ made by one party concerning long-term
commitments to the other, and these promises themselves may be both implicit and explicit.
While there is much debate and critique about the definition of constructs, it is clear what the
objective is here: to capture the sum of the relationship between employee and employer
where that relationship involves, for the employee at least, a massively significant social
exchange where both economic interests and psychological concerns are embraced. The
former is captured by the notion of a transactional contract, typically short-term economic
exchanges with limited emotional investment. The latter is captured by a second dimension −
the relational contract − where both parties make considerable idiosyncratic investments.

Violations to the Psychological Contract

Psychological contract breach – termed rather emotively ‘violation’ – is both significant and
common; employees, at least, quite frequently perceive violation in terms of broken promises
and studies have indicated an impact on employees’ feelings, attitudes and behaviour.
Precisely what will happen will depend on circumstances and the seriousness of the breach

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(or its perception), but likely outcomes are lowered satisfaction or commitment, or even
absence and exit.
Breach appears to have a bigger downside impact than contract fulfilment has as an upside,
and Rousseau herself (2005) appears to see them as independent constructs rather than as a
dichotomy or continuum; employees report both fulfilment and breach coexisting within the
same contract. Repeated breach generates a shift from a relational to a more transactional
contract.

Evaluation
The approach has been criticised. Rousseau appears to focus primarily on the employee, a
tendency reinforced by over-reliance on her graduating MBA students as research subjects.
As such, we have an understanding weighted towards the employee. We have little sense of
the impact of the psychological contract on the employer. Even in the case of the employee,
we are still not clear whether and how the employee can influence the psychological contract,
nor how they perceive their own obligations to their employer (Seeck and Parzefall, 2008).
However, even if it is only a theory of employee behaviour, it has substantial scope. It is not
particularly helpful to management practice, since the circumstances under which an
individual generates a psychological contract involve complex individual difference
variables. But it does quite clearly allow one to fill in the silences in the employment contract
noted by Williamson. Moreover, it stresses the social and psychological factors that allow for
the effective operation of highly incomplete contracts in ways that help to understand the
impact of affect on contract performance.
There are clear links to institutional economics, not least the distinction between relational
and transactional contract dimensions. Rousseau herself explicitly uses Hirschman’s exit-
voice model (mentioned in chapter 4 of this handbook) in explaining responses to violation
(1995, p.134). And many violations develop out of what are fundamentally agency problems:
promises are made by recruiters or line managers who then leave the organisation, which in
turn neither recognises nor honours the perceived promise. However, at the most fundamental
level, similarity is assured by the fact that the psychological contract approach is a bounded
rationality model.
We can elaborate on this by looking at how individuals construct contracts. Rousseau
suggests that individuals have contract schema: prototypical mental models about how
contracts work. These are rooted in ‘predispositions’, then based on work history and develop
by accumulating information about contract obligations in work settings. Typically new
entrants have incomplete information about the organisation, and Williamsonian problems
about the construction of complicated contingent claims contracts that cover future
contribution and reward. Information cues originate with co-workers or managers, and
information search and processing is discontinuous – higher where there may be contract
violation. Once formed, they have heuristic characteristics; they frame information search
and are resistant to change (Rousseau, 1995, pp.27–36; 2001).
In its different take on the employment contract, the psychological contract research assists us
in understanding the human dimensions of what was perceived previously as an economic
topic of inquiry.

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The psychological contract: video

This section contains a video on the VLE, you can watch it at the link below:
https://emfss.elearning.london.ac.uk/mod/book/view.php?id=20358&chapterid=1417

Activity 2
We know a great deal about how a breach of psychological contract impacts an employee.
But in what ways is it likely to impact the employer?

4.7 Overview of chapter

This chapter has tried to trace the human relations legacy from its earliest moments towards
both more modern HRM practices and Organisational Behaviour theories (OB). At the most
fundamental level, both are concerned to explore or manage the non-rational side of
organisations, or at least the interactions between rational and non-rational. In comparison to
the more rational concerns of traditional economics, OB and HRM research helps us to
recognise the people within the firm, who regularly act in ways that are not in keeping with
rational economic theory. As such it factors in a more human, psychological dimension to our
understanding of the firm. HRM and OB are large, interconnected fields, and this chapter
only provides the briefest of introductions. However, what is covered here gives some sense
of the breadth and the types of interests that are central to these two disciplines.

Test Your Knowledge and Understanding

Use the discussion forum and your own notes to help you answer the questions:
1. Do you think HRM can be seen as strategic? Why/why not?
2. Is leadership theory useful? Why/why not?
3. Could you use psychological contract theory to improve things for yourself at work?

Learning Outcomes Checklist

Use this to assess your own understanding of the chapter. You can always go back and amend
the checklist when it comes to revision!
 describe the emergence of human resource management approaches
 discuss the possible contribution of HRM to firm performance
 evaluate key leadership theories, including LMX and Transformational Leadership
 discuss the psychological contract and the impact it has on our understanding of work
relationships.

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