Target firm employee perceptions of procedural and interpersonal justice

1 Introduction

Extensive literature covers perceptions of justice as one of the most salient issues for employees [7]. There is ample evidence that more fairly treated employees show positive psychological effects such as a higher job satisfaction or a higher organizational commitment to their firm [24]. Also a causal relationship between organizational identification and organizational justice is recognized with a wide range of additional positive outcomes for organizations [1]. In this, Elstak et al. [11] find that uncertainty reduction rather than self-enhancement in form of prestige leads to a stronger identification.

The present study aims at contributing to the understanding of a causal relation between a fair treatment of employees to their organizational identification by addressing different constructs of organizational justice perceptions, namely procedural and interpersonal justice [13]. In this, we go above distributive justice what is heavily applied in the psychological research arena [3, 25]. The main reason for this is that in our research, the top management at the subsidiary did not have power to determine the salary of target employees.

We apply procedural and interpersonal justice constructs to a cross-border merger and acquisition (M&A), where a Japanese target was taken over by a German firm, providing more insight into business in Japan. For this, we base our study on research conducted by Blahova, Palka and Zeleny to identify current trends and practices influencing Japanese business environment with consequences to the corporate world [4].

Based on the tenets of the group engagement model it is stated that fairly treated members of a group identify more strongly to it [3]. Our research is in line with Ellis et al. [10] who found that informational justice and procedural justice affect different components of value creation. Procedural justice is more critical in realizing market position improvements following the integration process, while informational justice is essential in achieving market position gains. They found interrelationships between the two different justice dimensions and concluded that the combination of justice and identification may be a more complex issue. This study can also be seen as an extension of research by Bebenroth and Thiele [1] who found evidence that commitment of target employees is influenced by informational and procedural justice.

We extend this research to organizational identification and to explicitly investigate target employees [26]. For this, we test a causal relation between procedural / interpersonal justice dimensions and the target employees’ identification to the new firm. Furthermore, we aim to detect how the casual relations change over time. This is because as the post-merger integration ages, employees may change their behavior [15]. For example, while at the beginning of a post-merger integration employees might elicit feelings of threat and denial, they may change at a later stage. Employees might feel better, however there could also be frustration and anger present at a later stage [19].

We follow a call by Schumacher et al. [23] that time aspect has an underemphasized role in organizational change research stating that: “Our findings indeed suggest that organizational change is a dynamic process, and support calls for explicitly considering time (i.e. change stages) in organizational change research” (p. 13). There is indeed an extensive amount on organizational behavior research literature, mentioning that time is an important element to consider [12, 22].

To investigate about changes in time, we collected data at several stages of the post-merger integration period. Precisely, we sent out questionnaires to target employees at three different times. The first time was immediately after the deal (1st round of the questionnaire). The second time was around six month later (2nd round of the questionnaire) and the third was at around one year after the acquisition (3rd round of the questionnaire).

Our findings are as follows: rather less the general term of justice (measured as interpersonal justice), but more procedural justice mattered most to employees whether their treatment by the top management influenced their organizational identification. We find a causal relation between procedural justice and organizational identification while the aspect of interpersonal justice becomes important for employees not earlier than one year after the deal. That means, interpersonal justice mattered at the end of the observation period, but no longer procedural justice.

The paper is structured as follows. We proceed by first providing a theoretical background applying the group engagement model on justice and on organizational identification of target employees at a post-acquisition period. Next, we describe our methods, followed by results and discussion. The final section provides limitations and a conclusion.

2 Theory and hypothesis

Justice refers to the idea that an action or decision is morally right [6, 7]. Organizational justice then refers to how morally right employees feel to be treated, what can be divided into distributive justice, procedural, and interactional justice. In organizational change research, there is overwhelming research carried out with attention to distributive justice [3, 25]. Our research; however, concerns employees’ perceptions of their treatment by subsidiary top managers which do not have power over distributive elements. For example, an increase in salary will be decided by the German headquarter not by the top management at the target. While distributive justice can be seen as outcome oriented, procedural justice in contrast, is defined as a construct to measure fairness in a decision making process [8]. Interactional justice can be split into interpersonal justice and in informational justice. Recently, procedural justice has received increasing attention from strategy scholars [10] showing that procedural justice in the case of M&A leads to the success of individual psychological criteria [16]. The two most relevant constructs for our research; therefore, are procedural justice and interpersonal justice what will be focused on in this study.

This research draws upon the theory of the group engagement model devised by Tyler and Blader [25]. According to the group engagement model there is discretionary behavior in addition to mandatory behavior. Tyler and Blader define mandatory behavior as required by the group and thus to be motivated by incentives and sanctions. Conversely, discretionary behavior is defined as an action used to motivate through internal values and it is seen as more cooperative, and therefore as an ideal behavior within a group. The group engagement model incorporates psychological theories, like social identity theory and relational models, to explain underlying psychological processes. In short, better treated members identify higher to their group. In return, according to the theory, a higher engagement within the group will lead to a positive behavior of the individual. The group engagement model deals primarily with procedural justice to explain how processes influence members’ identifications within an integrated group. Besides, in this study we also incorporate interpersonal justice into this model, as it can also explain employees’ identification.

We extend the group engagement model to organizational change context. Group engagement model in organizational change context postulates that justice affects the organizational identification of its members, in that a higher perceived justice leads to supportive organizational attitudes, values, and behaviors [3, 25]. Also Colquitt and Zipay find differences where procedural justice reflects rather the appropriateness in decision making procedures, whereas interpersonal justice is seen to reflect the appropriateness as procedures are enacted [7]. Thus, it is natural to theorize that employees of the acquired firm will firstly look at the procedures of decision making in post-acquisition integration. That meansit becomes imperative for managers to inform their target employees about where they stand and what the future provides for them at the new firm. The enactment of procedural justice, therefore, is of utmost urgency to take care of for the new management. Employees have to be given certainty about their future, so that motivation of all target employees can be upheld. It further reflects research by Lilly and Durr [18] that manager behavior does influence employee attitudes toward work. Also, it is to make sure that the most promising talents do not leave the firm because of uncertainty due to the lack of a clear concept of procedures set by the new management. In contrast, interpersonal justice should then matter more in its later stage of the post-acquisition integration. Therefore, the new management may tackle these issues at a later stage of the post-acquisition integration.

It is important for managers to reduce target employees’ uncertainty about their future at the firm. Research by Gunkel et al. [14] shows that employee’s feelings for dissatisfaction leads to an active resistance behavior, what can even become an open protest. To sum up, a higher justice perception of employees will help them to more strongly identify to their firm. Moreover, reducing uncertainty will directly help to have a higher organizational identification rather than having a change in their prestige [11]. It is because employees at the target firm may experience an “identity threat” resulting from an uncertain situation. Thus, our hypotheses are as follows:

Hypothesis 1a: Positive employees’ perceptions of procedural justice will lead to a higher organizational identification.

Hypothesis 1b: The effect of procedural justice is stronger at the earlier stage of the acquisition.

Hypothesis 2a: Positive employees’ perceptions of interpersonal justice will lead to a higher organizational identification.

Hypothesis 2b: The effect of interpersonal justice is stronger at the later stage of the acquisition.

3 Methods

4 Results

Means, standard deviations, and correlations among variables used in our study are shown in Table 1. The table shows that procedural justice perception and interpersonal justice perception lead to a higher organizational identification, indicating that both types of organizational justice have predictive potential to organizational identification in our research context.

In Table 2, we show that procedural justice leads to a higher organizational identification at the first two rounds. At the third round, however, interpersonal justice leads to a higher organizational identification. That means, we have evidence that at the beginning of an integration period to its end (of our observation) justice criteria differ for employees in order to have a higher organizational identification to their firm. Hypotheses 1a is therefore supported by our results (Tables 2 and 3).

To test our hypotheses of changes in time, we performed a multiple moderated regression analysis using pooled data, regressing organizational identification onto the control, independent, and moderator variables. The pooled data contains all of the survey data through the first round to the third round. The round of the survey was dummy-coded such that the first round survey represents 1, the second 2, and the third 3. In the first step of the regression analysis we entered control variables as well as the survey round. In the second step we added the main effects of procedural justice and interpersonal justice perceptions. In the third step we further added the interaction terms between each type of justice perceptions and the survey round. The results of the multiple moderated regression analyses are presented in Table 3.

As shown in Model 2 of Table 3, the overall main effect of the procedural justice perception on organizational identification was significant (β= 0.29, p < 0.05) whereas the main effect of the interpersonal justice perception was non-significant (β= 0.23, ns.). This result indicates that overall the procedural justice perception had a stronger effect on organizational identification through the post-integration process. In contrast, Hypothesis 2a is only marginally supported for round 3 (Table 2), but not in the overall model (Table 3, Model 2).

Next, as shown in Model 3 of Table 3, the interactions between the procedural justice perception and the survey round, and between the interpersonal justice perception and the survey round, were both significant (β= –0.33, p < 0.05; β= 0.31, p < 0.05, respectively), but the direction of interactions were opposite between the two interaction terms. To probe the significant interactions, we created graphs drawing how procedural justice / interpersonal justice lead to organizational identification for each survey round. The graphs are shown in Figs. 1 and 2.

Graph 1 shows that positive procedural justice perceptions lead to a higher organizational identification in the first survey round, and that the magnitude of strength declines at later rounds. This graphical pattern is consistent with Hypothesis 1b that predicted the effect of the procedural justice perception of target employees on their organizational identification is stronger at the earlier stages of an acquisition. Thus, our result lends support to Hypothesis 1b.

Graph 2 shows that in the first survey round interpersonal justice of target employees’ perceptions only weakly lead to a higher organizational identification, but that the magnitude of strength increases at later rounds. This graphical pattern is consistent with Hypothesis 2b, which predicted that the effect of the interpersonal justice perception of target employees on their organizational identification is stronger at the later stages of an acquisition. Thus, our result lends support to Hypothesis 2b (Table 3, Model 3).

5 Discussion

The success of a post-merger integration hinges strongly on the ability of the acquirer to create a perception that employees feel to be treated with organizational justice. For this, target employees’ perceptions of fairness to the new management are investigated. Based on previous findings from the literature that a higher justice leads to a better organizational identification of employees [3, 25], we try to understand how two other constructs can be applied to target employees at a cross-border M&A. For this, we examined two theoretically derived constructs of justice that we expected to explain organizational identification of target employees to their new firm. This research goes beyond studies which found evidence that fairly treated employees tend to better identify to their organizations [1, 25], and also includes changes in time.

As suggested in our hypotheses, we have empirical evidence that procedural justice leads employees to have a higher organizational identification to their firm, and this right up from the start at the post-merger integration period. That means, we have evidence that both constructs differ according to the time of the post-merger integration period. Procedural justice matters more at the beginning and interpersonal justice becomes more salient at a later stage.

Our findings extend the body of literature on justice and organizational identification in several ways. First, while other studies in organizational change arena focus on distributive justice [3, 25], we investigate about employee’s perceptions of how they feel to be treated by the new management. Therefore, we employ procedural and interpersonal justice concepts as they fit best to investigate organizational identification patterns of target employees. Second, numerous researchers emphasize the importance to conduct long term studies in organizational change research [12, 22] or at least, to take changes in time into consideration as one of the most important aspects [23]. We did this in the present study. Third, our findings are in line with the tenets of the group engagement model that a positive perceived justice for employees leads to a higher organizational identification. We extend the group engagement model to show its applicability to the M&A context for target employees following a cross border acquisition. Forth, all of our constructs are above the average(of 3), that means target employees generally feel that they are treated with a rather high procedural justice. (We received the following values: 3.17 for procedural justice, 3.47 for interpersonal justice and 3.27 for organizational identification). That means we have evidence that target employees feel rather positively about their treatment by the new management after the acquisition took place.

Fifth, at the beginning of the post-acquisition, employees highly value procedural justice, which mirrors the importance of the group engagement model that only people who are perceived to be treated fairly identify and engage in activities.

Finally the R2 in Table 3 jumps from 8% in model 1 to 34% in model 2, and even increases to 38% in model 3. That means we have evidence that our explanation power increases tremendously by taking our two justice constructs into the model. What can be learned from the current study is that justice has to be split into (at least) two different constructs such as procedural and interpersonal to measure target employees’ identification to their new firm.

There are also practical findings worthwhile to report. Immediately following a deal, the new management is advised to inform target employees about procedures that they know about relevant on-goings, especially concerning the target employees’ futures at the new firm. This is important especially at the beginning of the post-merger integration period. Put different, target employees should be given more weight to know about their own future than, for instance, to receive a friendly treatment by the new top management (expressed by interpersonal justice). As the post-merger integration process ages, importance also must be given to interpersonal elements of justice, to treat target employees with dignity, respect, and fairness. To sum up, interviews conducted with target employees supported our findings that a fair treatment, more precisely organizational justice played an important role for employees’ identification to the new firm.

6 Limitations and conclusion

Despite the above contributions, our study has its own limitations. Our focus of analysis was laid on procedural and interpersonal justice constructs, and therefore, extended previous studies [1, 10]. However, we excluded other justice criteria, such as distributive justice or informational justice. Distributive justice was specifically excluded because the management at the subsidiary did not have authority to directly influence it, such as to dictate salaries of target employees. In similar transactions bidder firm subsidiaries may have more power in decision making. Also, it may be reasonable that headquarter decide the matters directly. We also investigated a cross border M&A with Japanese employees, where the participants are obviously very positive about being acquired what might be not the normal case. Also the leader at the German bidder office with fluent Japanese may be rather an exception. These skills may have led to a positive effect as the management may have a better sense about the target employees than other newly appointed and not Japan familiar managers would have been otherwise.

Furthermore, we could not link each round’s answers to the respective target employees. The reason is that the new management was afraid that target employees could feel afraid of having their opinions connected to their names exposed to the public(or to the new top management). So the new management did not give us permission to ask participants for their names, or to track them in any other way. Therefore, we have three cross sectional studies that enabled us to conduct a pooled regression analysis. Also all of our study variables rest on employee perceptions. Therefore there is the possibility to have common method variance. To reduce it, we followed the recommendations by Podsakoff et al. [21] in how to design a questionnaire. The cover letter explicitly stated that there is no issue of right or wrong answers, participants’ anonymity was protected, as well as the fact that we used only validated measures. In spite of its limitations, this investigation is based on real firm data in a cross-border M&A setting and we hope to enrich the M&A literature about target firm employees’ behavior with it.

Based on the limitations, several suggestions for future research are given here: First, the focus of future studies could disentangle top managers of the bidder firm. In this study we took the new top management as a whole; however, some top managers at the new firm may have good relationships with target employees, while other managers may not even be visible for target employees. Second, distributive justice as a construct could be worthwhile to study in case the new management has authority to dictate salaries and other working conditions.