encourage them to look for the next wage rise and nothing else; however, salary may also

be a de-motivator where the employee perceives it to be too low or low compared to that
o f t heir p eer s. The lo ng t er m mo t iva t o r s a re t he A b ra ha m p a rt o f t he co nc e p t t ha t le a d
to satisfaction and are intrinsic to the job itself and the job design. Consider the
c ha mb er ma id w ho pr efer s to r eceiv e a no t e of a p pr e c ia t io n for he r hig h sta nd a r d s fr o m
a guest than a carelessly delivered gratuity.

It is important to understand that the two types of factors are not mutually
e xc lusiv e a nd t hat ma na g ement must tr y t o fulfil bo t h ty p e s of ne e d fo r a n e mp loy e e to
b e tr uly sa tisfied with t heir jo b. O nc e the hy giene fac tor s hav e bee n satisfie d prov id ing
mor e o f them will not create fur ther mo tivat io n b ut no t sat isfy ing t he m may cause de-
m o t iv a t i o n ; u nl ik e t h e m o t iv a t i o n fa c t o r s w he r e m a n a g e m e n t ma y n o t f ul fi ll a l l o f t h e m
but the workers may still feel motivated. Major companies have recognized this situation
w he n d es ig ni ng t he ir me t h o d s o f r ew a r d a nd r e c o g n it io n.

Probably one of the most important ideas that Herzberg postulated based on his
finding s o f sat isfa ction is t hat o f 'jo b enrichme nt '. This is t he ad dition o f d iffe rent ta sks t o
a job to provide greater involvement and interaction with that job. It is obviously a
continuous management process:

 T h e j o b m u s t u s e t h e f u l l a b i l i t y o f t h e e m p l o y e e a n d p r o v i d e t h e m w i t h suffic ie nt
c ha lleng e
 A n y e m p l o y e e w h o d e m o n s t r a t e s a n i n c r e a s i n g l e v e l o f a b i l i t y s h o u l d b e g iv e n
c o r r e sp o nd in g l y in c r e a s in g l ev el s o f r e sp o ns ib il it y

If a job cannot be designed to use an employee's full ability management should

consider employing someone of lesser skills or perhaps automation of the task. If a
p e r so n's sk ills c a nno t b e used to t he full t he y will e xp e r ie nc e pr o b le ms w it h mo t iv a t io n.
Most job frustrations arise from hygiene factors such as frustration due to bureaucracy ,
poor organization, internal politics or feeling exploited.

Tesco, one of the leading retailers in the UK, recently gained recognition v ia
ac hiev ing t he Nat io na l Business Awa rds 'Employ er of the Ye ar ' when t he j ud ge s dec lar ed
that: "Tesco was voted Employer of the Year because its solutions were seen to be more
ho list ic ". Tesc o rec o g nize ho w mo t iv a t e d st a ff w ho a r e c o mmit t e d t o t he ir wo r k ha v e 3
positive effect on company performance. They invest several million pounds each year In
training schemes which are based on Herzberg motivators. For example:

1.New and more open lines of communication between managers and staff
2 .D ir ec t o r s a nd senio r ma na g er s sp e nd a we e k o n t he sho p floo r list e ning t 0 i d e a s
from customers and staff
3 .A scheme exists to spot individual talent and to fast-track shop floor workers u p t h e
promotional ladder
4.A better understanding of individual employees personal circumstances

3-2
8 I Good Governance and Social Responsibility
 These initiatives have helped Tesco deliver record growth and sales profits and
illustrate how theory may be used in practice.

Over the years, there are criticisms that have arisen, like his sample of employees
was not representative of all workers, but further studies have tended to support his
findings. In addition, some critics have declared that it is natural for people to take credit
for satisfaction, but to blame dissatisfaction on external factors. Every individual is just
that — an individual and theories of motivation cannot realistically apply to each single
employee; however, they are useful for identifying the main ways in which people are
motivated. Herzberg and his findings have been extremely influential in developments
a sso c iat ed wit h t he field o f jo b d e sig n a nd me t ho d s of ma na g e me nt to pr o v id e j o b
satisfaction and motivation.

When Frederick Herzberg researched the sources of employee motivation during

t he 1 95 0s a n d 1 96 0s , he d is c o v er e d a d ic h o t o my t ha t st il ls in t r ig ue s (a nd b a ff le s)
managers: "the things that make people satisfied and motivated on the job are different
in kind from the things that make them dissatisfied."

Ask workers what makes them unhappy at work, and you'll hear about an
annoying boss, a low salary, an uncomfortable work space, or stupid rules. Managed
badly, environmental factors make people miserable, and they can certainly be
demotivating. But even if managed brilliantly, they don't motivate anybody to work much
harder or smarter. People are motivated, instead, by interesting work, challenge, and
increasing responsibility. These intrinsic factors answer people's deep-seated need for
growth and achievement.

H e r z b er g ' s w o r k i n f l u e n c e d a g e n e r a t i o n o f sc h o l a r s a n d m a n a g e r s b u t h i s
conclusions don't seem to have fully penetrated the American workplace if the
extraordinary attention still paid to compensation and incentive packages is any
indication.

W ha t is t he s im p l es t , s ur es t a nd m o s t d i r e c t w a y o f g e t t i ng s o m e o ne t o d o
something? Ask? But if the person responds that he does not want to do it, then that calls
f o r p sy c ho lo g ic a l co nsult a t io n to d e t er mine t he r e a so n fo r suc h o b st ina c y . Te ll t he
person? The response shows that he does not understand you, and now an expert in
communication methods has to be brought in to show you how to get through. Give the
erson a monetary incentive? I do not need to remind the reader of the complexity and
ifficuity involved in setting up and administering an incentive system. Show the p e r s o n ?
his means a costly training program. We need a simple way.

As a group, these theorists discovered that people worked for inner satisfaction a n d n o t
materialistic rewards, shifting the focus to the role of i n d i v i d u a l s i n a n
Organization's performance.

Internal and External Institutions and Influences of Corporate Governance I 3_29

 REFRAMING ORGANIZATION

As organizations have become pervasive and dominant, they have also becom e
harder to understand and manage. The result is that managers are often nearly as clueless
as the Dilberts of the world think they are. The consequences of myopic management and
leadership show up every day, sometimes in small and subtle ways, sometimes in
o r g a n iz a t io na l c a t a st r o p he s. O u r b a s ic p r e mi se is t ha t a p r im a r y c a u se o f m a n a g e r ia l
failure is fa ulty thinking roo ted in ina de quat e id ea s.

M a na g er s a nd t ho se w ho tr y to he lp t he m to o o ft e n re ly o n c o nst r ict e d mo d e ls
t ha t c a p t ur e o nly p a rt o f o rg a niza t io na l life . Le a r ning mult ip le p er sp e c t iv e s, or fr a me s, is
a defense against thrashing around without a clue about what you are doing or why .

Frames serve multiple functions. They are filters for sorting essence from trivia, maps that
a id na v ig a t io n, a nd t o o ls fo r so lv ing pr o b le ms a nd g e tt ing t hing s d o ne .

There are four frames which are all rooted in both managerial wisdom and social
sc ie nc e k no w led g e. The structural ap p r oa c h foc use s o n t he a rc hit e c t ur e of or g a niz a t io n
— the design of units and subunits, rules and roles, goals and policies. The human
resource lens emphasizes understanding people, their strengths and foibles, reason and
emotion, desires and fears. The political view sees organizations as competitive arenas of
scarce resources, competing interests, and struggles for power and advantage. Finally,
the symbolic frame focuses on issues of meaning and faith. It puts ritual, ceremony, story,
p la y , a nd c ult ur e a t t he hear t of or g a niz a t io na l life .

Each of the frames is both powerful and coherent. Collectively, they make it
possible to reframe, looking at the same thing from multiple lenses or points of view.
When the world seems hopelessly confusing and nothing is working, reframing is a
powerful tool for gaining clarity, regaining balance, generating new options, and finding
strategies that make a difference.

Enron's reign as history's greatest corporate catastrophe was brief. An even

bigger behemoth, WorldCom, with assets of more than $100 billion, thundered seven
m o n t h s l a t er , i n J u l y 2 0 0 2 . S t o c k w o r t h m o r e t h a n $ 4 5 a s h a r e t w o y e a r s e a r l i e r f e l l t o
nine cents.

Among the possible ways of talking about frames are schemata or schema theory
(Fiedler, 1982; Fiske and Dyer, 1985; Lord and Foti, 1986), representations (Frensch and
Sternberg, 1991; Lesgold and Lajoie, 1991; Voss, Wolfe, Lawrence, and Engle, 1991 )
cognitive maps (Weick and Bougon, 1986), paradigms (Gregory, 1983; Kuhn, 1970), social
categorizations (Cronshaw, 1987), implicit theories (Brief and Downey, 1983), menu'
models (Senge, 1990), definitions of the situation and root metaphors. A number or
scholars (including Allison, 1971; Bergquist, 1992; Birnbaum,1988; Elmore, 1978; Morg3 0
1986; Perr ow, 1986; Quinn, 1988; Quinn, Fa er ma n, Tho mp so n, and Mc Gra th, 1996; 3 1 " 1
Scott, 1981) have made similar arguments for multi-frame approaches to groups Jr"
social collectives.

3 3 0 I Good Gove rn an ce an d Socia l Respo nsib il i ty

-
 EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

A company which wants to set up an ESOP creates a trust to which it makes

annual contributions. These contributions are allocated to individual employee accounts
within the trust. A number of different formulas may be used for allocation. The most
common is allocation in proportion to compensation, but formulas allocating stock
according to years of service, some combination of compensation and years of service,
an d equally, have all been used. Typically employees might join the plan and begin
receiving allocations after completing one year of service with the company, where any
year in which an employee works at least 1,000 hours is counted as a year of service.

The shares of company stock and other plan assets allocated to employees'
accounts must vest before employees are entitled to receive them. Vesting is a process
whereby employees become entitled to an increasing percentage of their accounts over
time. Employees receive the vested portion of their accounts at either termination,
disability, death, or retirement. These distributions may be made in a lump sum or in
installments over a period of years. If employees become disabled or die, they or their
beneficiaries receive the vested portion of their ESOP accounts right away.

In a publicly-traded company, employees may sell their distributed shares on the

market. The form of distribution of a privately held firm can vary, depending on the plan
document or all or substantially owned by the ESOP with by-laws that only authorize
company stock be owned by employees. But if privately held, the company makes the
distribution in stock, it must give the employees a put option on the stock for 60 days
after the distribution. If the employee chooses not to sell at that time, the company must
offer another put option for a second sixty day period starting one year after the
distribution date. After this period the company has no further obligation to repurchase
the shares.

An ESOP company may make an installment distribution provided that it makes

the payments i n substantially equal amounts, and over a period to start within one year
for a retirement distribution, within five years for a pre-retirement distribution, and not
to exceed five years in duration in either case. The company must provide adequate
security and pay interest to the ESOP participant on the unpaid balance of an installment
distribution.

Internal and External Institutions and Influences of Corporate Governance I 3-31

 Calculate risk associated to debts. If you are taking on debts or issuing bonds
to make the company unappealing, make sure that you can handle those
d e b t s e v e n i f t h e e c o n o m y sl i d e s d o w n .
 C on s u l t w i th p a r t n e r s , d i r e c t o r s , l a w y e r s a n d a c c o u n t a n t s b e f o r e i n i t i a t in g a n t i -
takeover strategies.
 Don't use anti-takeover strategies except when you are sure that it will not backfire
leaving the company at risk and defenseless.

LIABILITY ISSUES AND INDEMNIFICATION OF OFFICERS

Liability can accrue for officers and directors when they cause financial and
no n fi n a n ci a l h a r m t o t h e c o r p o r a t i o n , o r w h e n t h e y a c t s o l e l y o n t h e i r o w n b e h a l f wh i ch
is detrimental to the corporation, this can be in a form of commission of a crime and other
wrongful acts. Certain acts may place an officer or director to personal liability
(uninsured), and other acts, although they would otherwise openly expose them to
liability, may be either compensated by or insured against by the corporation.

Personal Liability of Officers and Directors

The following are issues that may subject officers and directors to personal
liability:
I s s u e s i n v o l v i n g m i s a p p r o p r i a t i o n
Issues involving nondisclosure of conflict of interest
I s s u e s o n l o y a l t y
Issues on non-separation of personal and business concerns
I s s u e s o n p r u d e n c e

Indemnification of Officers and Directors

Indemnification of officers and directors refers to the act of the reimbursing

o ffi ce r s an d d i r e c t o r s f o r e x p e n s e s i n c u r r e d , l i a b i l i t i e s a c c r u e d , an d a m o u n ts p a i d i n
defending claims brought to them for actions taken on behalf of the corporation.
Shareholders should recognize that in the absence of this method of trying to limit the
personal liability of officers and directors for claims brought against them, it will be
difficult for corporations to find anyone willing to take such a risky job of serving as
officers or directors.

As a result of this, some corporate bylaws are now containing provisions

regarding indemnification and insurance for officers and directors. Prov isi on s may vary as
to where and when indemnification will apply. Provision for indemnification and
insurance of officers, directors, and person holding sensitive positions can also be
inclu de d i n th e b yl aw s of t h e c or po ra ti on to h av e a st ron g bas is a s t o whe re , whe n, and
ho w t h e re l a t e d p r o c e s s w i l l be d o n e .

Internal and External Institutions and Influences of Corporate Governance I 3 1 9 -

Directors' and Officers' Insurance

There are matters that cannot be indemnified under the law or the company does
not have the enough resources to indemnify officers and director. In this case, the
appropriate remedy would be insurance coverage. Corporations are allowed to purchase
insurance to cover matters resulting from acts taken by officers and directors.
This
insurance coverage is different and separate from the general liability insurance
the
corporation purchase for the corporation itself in general. Insurance of this type hurts
corporate pocket considering that it is not cheap. The reasons for the increase of the cost
are two (2) things: first, the cost for directors' and officers' insurance has gone up
dramatically due to the inherent risk associated to it (it involves big fishes in the
corporation who can decide big things). Second, the exclusions for coverage have also
increased; insurance companies understandably want to trim down their assumed risk,
the lesser specific coverage, the better.

SHAREHOLDERS' IMPOSABLE LIMITATIONS

THROUGH CLASSES OF STOCK

A company may have many different types of shares that come with different
conditions and rights. There are four main types of shares:

Ordinary Shares
These are standard shares with no special rights or restrictions. They have tre
potential to give the highest financial gains, but also have the highest risk. Ordinar,
shareholders are the last to be paid if the company is wound up.

Preference Shares

These shares typically carry a right that gives the holder preferential treatment
when annual dividends a r e d i s t r i b u t e d t o s h a r e h o l d e r s . S h a r e s i n t h i s category have 3
fixed value, which m e a n s t h a t a s h a r e h o l d e r w o u l d n o t b e n e f i t f r o m a n i n c r e a s e i n t h e
b u s i n e s s ' p r o f i t s . H o w e v e r , u s u a l l y t h e y h a v e r i g h t s t o t h e i r d i v i d e n d ahead of ordinary
shareholders if the business is i n t r o u b l e . A l s o , w h e r e a b u s i n e s s w i l l b e l i q u i d a t e d a n d
w i n d up, they are likely to be repaid t h e p a r / n o m i n a l v a l u e Of l i q u i d a t i n g value of t h e
shares ahead of ordinary shareholders

Cumulative Preference Shares

These shares give holders the right that, it a dividend cannot be paid one year It
will be carried forward to the succeeding years Dividends on cumulative pretereoLe
shares must be paid, despite the earning levels of the business

3 70 I Good Governance and Social Responsibility

Redeemable Shares

These shares come with an agreement that the company can buy them back at a
future date - this can be at a fixed date or at the choice of the business. A company cannot
issue only redeemable shares.

SUPERMAJORITY

R efer s t o pe rc en ta ge of own er shi p t ha t is wa y ab ov e t he s im pl e ma jor it y wh ich

is, one half (Y2) plus one (1) share of the total shares outstanding. Usually super majority
could mean 67% to 90%. Unlike other percentage holding which can only have significant
influence on corporate affairs, supermajority can have full control on major goings on in
the corporation. A supermajority is often requisite for a company to take certain actions,
su ch a s a me nd ing th e c har te r. In s om e ca se s, t o pr ot ec t th e c om pa ny f ro m p re da to r,
s o m e co m p a n i e s r e qu i r e su p e r m a j o r i t i e s a s an t i - t a k e o v e r m e a s u r e s . F or e x a m p l e , a
com pa ny m ay r equ ir e t wo -t hir ds of sha reh ol de rs to ap pr ov e a me rg er or ac qu is it ion .
Supermajority provisions may be needed principally to make certain the company's
independent survival. This may limit however the board of directors' elbow of authority,
and may even hamper a friendly and rational takeover that may do more good for the
company.

O n e i s su e a b ou t s u p e r m aj o r i t y is t h a t o f t h e s m a l l bu s i n e s s ow n e r s wh o o ft e n
look for "angel" investor to increase capitalization of the business. As an investor, that
carries along with it the recognition on equity in the business by virtue of their
investments. It is fairly normal for these angel investors to have equity for their
investment. They also seek to have some say in how the company is run to protect their
in te re st s. Fa ce d w it h c ap it al ne ed s, sm al l bus ine ss ow ne rs of te n no t o nl y gi ve the se
m i n o r i t y ( e q u i t y - w i s e ) o wn e r s p r e f e r e n t i a l b u t a l s o pr o v i d e t h e m w i th su p e r m a j o r i t y
voting rights for certain actions that require the owners' consent.

SHAREHOLDER VOTING AGREEMENTS

A sh a r e h o l d e r v o t i n g a gr e e m e n t i s a l e g a l c o n t r a c t a m o n g sh a r e h o l d e r s o f a
corporation involving voting of shares. The shareholder voting agreement frequently
covers how members of the Board of Directors are to be selected and occasionally covers
major corporate events such as mergers and acquisitions. Venture capitalist often expects
a shareholder voting agreement to be executed in connection with their investment in a
start-up company.

In a shareholder voting agreement, shareholders may choose to pool their votes

for a particular goal. Voting agreements may stipulate that the involved shareholders will
cast the vote their shares collectively or cooperatively. Corporation Code of the
Philippines does not prohibit a shareholder voting agreements as long as they relate to
issues upon which shareholders can vote and it does not have any malicious intention or
any violation on any agency regulation which governs corporate operation.

- Internal and External Institutions and Influences of Corporate Governance I 3-21

 In some advanced countries, the state may require that voting pools follow
detailed procedures and guidelines to be valid. The laws may limit the length of a
sha r e ho ld er ag r eement , or ma y r eq uir e a c o py of t he a g r ee me nt a nd ha ve it d e p o sit ed
wit h the cor pora tion. Vio la tors of the va lid agr ee me nt may be sue d a nd the co urt ma y
req uire vot ing ac cord ing to t he agreement otherw ise v iolat ing vo te s w ill d isqualified.

SHAREHOLDERS MANAGEMENT AGREEMENTS

-

"Together with the company's articles of incorporation which regulates the

conducts of the company, what gives investors their most important contractual
p r o t e c t i o n s i s t h e s h a r e h o l d e r s ' a g r ee m e n t . T h i s a g r e e m e n t w i l l o n l y b e r e l e v a n t , o f
co ur se , if t he co r po r a t e st r uc t ur e is b e ing use d . A g r e e me nt s o f t his k ind a re b y far t he
mo st rec o mmend a b le sy st em o r met ho d fo r t he p ro t e c t io n o f sha r e ho ld e r s." ( So u r ce -
Chris Southorn, www.cmck.com ). The main features of a shareholders' agreement are:

Board Appointment Rights

It is common for the shareholders' agreement to establish the relative rights of

representation that the shareholders will have on the company's board of directors of the
company. A minority shareholder may seek to have one director on the board in order to
be kept informed of matters discussed at board level. A larger shareholder may seek to
appoint a large number of directors to reflect its proportionate holding of shares at board
le v e l. U su a l ly , t h e a g r e em en t w i ll p r o v id e t ha t a n y d ir e c t o r a p p o in t e d b y a s ha r e ho ld e r
can only be removed by that party.

Veto Rights

Veto right refers to the right to overturn decisions reached by the board. This
process involves listing of material things that cannot be done without the investors' prior
consent and ratification. These normally range from fundamental matters, such as issuing
furt he r shar es, commitment o f assets, ca pita l e xp enditure and so on.

Adoption and Amendment of Business Plans and Budgets

The agreement may provide a process for adopting and amending business plans
a n d b ud g et s, t o en su r e t h a t i nd iv id ua l sh a r e h o l d e r s o r t h e ir a p p o i nt e d d ir e c t o r s a r e
properly represented in that process.

Scope of Business

Although this thing can be found in the charter of the corporation, it is common
particularly in a joint venture or a start-up company, for the shareholders' agreement to
specify the scope of the business that the company will conduct, and provide that consent
is required from the shareholders before the company can change the nature of its
business or do some diversification attempts.

3-
22 I Good Governance and Social Responsibility
 Intellectual Property Rights
Where shareholder parties are contributing unique and distinct advantage or
p r o ce s s s u ch p a t e n t , t r a d e m a r k , c o p y r i g h t s , o r a n y f o r m o f in f o r m a t i o n or c o m p e t e n ci e s
to a venture, the shareholders' agreement may provide for the ownership and licenses of
intellectual property rights, preserving certain such rights for the parties themselves and
oth er s to th e co mp an y. Thi s is ano th er c om mo n ag re em en t in a joi nt ve nt ur e co mp an y.

Right to Information

It is extremely important for the investors to monitor performance closely,

particularly to give them an early warning if things are starting to go wrong. Accordingly,
they will expect a contractual right to receive regular reports, management accounts,
ca s h fl o w fo r e ca s t s an d s o o n, t o g e t h e r w i t h s t a t u t o r y a c c o u n t s . T h e in v e s t o r w i l l a l s o
often seek the right to have its own director appointed to the board. He will expect board
meetings to be held regularly and all material decisions to be made by the board.

Warranties from the Management Team

In ge ne ra l te rm s, th es e ar e a se ri es o f st at em en ts a bo ut th e co mp an y th at th e
investors would expect to be true and accurate. At a first-stage capital raising, it is unlikely
that these statements will be little more than confirmations: that the team stands behind
its business plan; that the company is clean; and that the team knows of nothing that has
been withheld from investors. However, at subsequent funding rounds, once the
company has a track record, the warranties will extend to the company's general trading
affairs. This actually the statement of management responsibility intended to be given to
sha reh ol de rs an d oth er in te re st ed pa rt ie s (s ta ke ho ld er s) o f th e co rp or at io n.

Strategic Investor Rights

Where a shareholder is looking for more than a return on its investment, the
shareholders' agreement may provide an opportunity to negotiate terms covering
secondary commercial arrangements, such as giving a shareholder or its group first rights
of refusal on certain type of business or contract with the company, or the right to be
informed of and to co-invest in investments to be made by the company.

Restrictions on Transfers of Shares

The investors will be keen to make sure that the management team they are
back in g, holds on to their shares. In certain circumstances, managers will be pe rmitte d,
through an agreement, to transfer shares to family or to trusts.

Restrictive Covenants
These will make it clear that, while m e m b e r s o f t h e m a n a g e m e n t a r e employed
an d f or a pe ri od of time afterwards, they can n ot (.u mpe te with t h e c o m p a n y o r s o l i c i t
customers or employees. One would e x p e c t t h e s e c o v e n a n t s t o t i t t o g e t h e r w i t h
r
estrictive covenants contained in e m p l o y m e n t a g r e e m e n t s b u t t h e c o v e n a n t s in the

Internal and External Institutions and Influences of Corporate Governance 2

shareholders' agreement will be directly in favor of the investors. It is obviously critical
from the management's perspective that they are comfortable with the covenants they
are entering into.

Exit Provisions

A shareholding in a private company is by its nature illiquid because there is no

market live and open of the shares. Accordingly, a shareholders' agreement will very often
include provisions that are intended to encourage or facilitate a realization by the
s h a r eh o l d e r s o f their in v e s t m e n t s . O n c e a g a in , th i s i s p ar t i c u l a r l y i m p o r t a n t f o r m i n or i t y
shareholders who are unable to control an exit process.

There are of course many other detailed provisions in an average shareholders'

agreement. It is normally a sophisticated legal document. No business angel, private
equity firm or institutional investor, should invest a substantial amount in any company
without protecting himself with contractual rights in a shareholders' agreement.

BEHAVIORAL MANAGEMENT THEORY

As management research continued in the 20th century, questions began to

come up regarding the interactions and motivations of the individual within
organizations. Management principles developed during the classical period were simply
not useful in dealing with many management situations and could not explain the
b e h a v i o r o f i n d i v i d u a l e m p l o y e e s . I n s h o r t , c l a s s i c a l t h e o r y i g n o r e d e m p l o y e e motivation
and behavior. As a result, the behavioral school was a natural outgrowth of this
revolutionary management experiment.

The behavioral management theory is often called the human relations

movement because it addresses the human dimension of work. Behavioral theorists
believed that a better understanding of human behavior at work such as motivation,
conflict, expectations, and group dynamics, improved productivity.

The theorists who contributed to this school viewed employees as individuals,

r e s o u r ce s , a n d a s s e t s t o b e d e v e l o p e d a n d w o r k e d w i t h — n o t a s m a c h i n e s , a s i n t h e past.
Several individuals and experiments contributed to this theory.

ELTON MAYO

E l t o n M a y o ' s c o n t r i b u t i o n s c a m e a s p a r t o f t h e H a w t h o r n e s t u d i e s , a series Of
experiments that rigorously applied classical management theory only to reveal its
s h o r t c o m i n g s . T h e H a w t h o r n e e x p e r i m e n t s c o n s i s t e d o f t w o s t u d i e s co nducte d at the
H a w t h o r n e W o r k s o f t h e W e s t e r n E l e c t r i c C o m p a n y i n C h i c a g o f r o m 1 9 2 4 t o 1932 . The
f i r s t s t u d y w a s c o n d u c t e d b y a g r o u p o f e n g i n e e r s s e e k i n g t o d e t e r m i n e t h e r e l a t i o n s h ip
of lighting levels to worker productivity. Surprisingly enough, they discovered that
w o r k e r s ' p r o d u c t i v i t y i n c r e a s e d a s t h e l i g h t i n g l e v e l s d e c r e a s e d — t h a t is, until the

3-24 I Good Governance and Social Responsibility

employees were unable to see what they were doing, after which performance naturally
declined.

A few years later, a second group of experiments began. Harvard researchers

M a y o a n d F . J. R o e t h l i s b e r g e r s up e r v i s e d a g r ou p o f f i v e w o m e n in a b a n k w i r in g r o o m .
They gave the women special privileges such as the right to leave their workstations
without permission, take rest periods, enjoy free lunches, and have variations in pay levels
and workdays. This experiment also resulted in significantly increased rates of
productivity.

In this case, Mayo and Roethlisberger concluded that the increase in productivity
re sul te d fr om the su pe rv is or y a rra ng em en t ra the r tha n t he c han ge s in li ght ing o r o th er
associated worker benefits. Because the experimenters became the primary supervisors
of the employees, the intense interest they displayed for the workers was the basis for
t h e i n c r e a s e d motivation and resulting productivity. Essentially, the experimenters
became a part of the study and influenced its outcome. This is the origin of the term
Ha wtho rne effe ct , whi ch d es cr ib es t he sp ec ia l at te nt ion r es ea rc he rs gi ve to a s tud y' s
s u b j e c t s a n d the impact that attention has on the study's findings.

The general conclusion from the Hawthorne studies was that human relations
and the social needs of workers are crucial aspects of business management. This
principle of human motivation helped revolutionize theories and practices of
management.

ABRAHAM MASLOW

Abraham Maslow, a practicing psychologist, developed one of the most widely

r e co g n i z e d ne e d th e o r i e s , a t h e o r y o f m o t i v a t i o n b a s e d u p on a c o n s i d e r a t i o n o f hu m a n
n e e d s . H i s theory of human needs had three assumptions:

1.Human needs are never completely satisfied.

2 .H u m a n b e h a v i o r i s p ur p o s e f u l a n d i s m o t i v a t e d b y th e n e e d f o r s a t i s f a c t i o n .

Needs can be classified according to a hierarchical structure of i m p o r t a n c e , f r o m

the low es t to hi gh es t. Ma sl ow br ok e d own th e ne ed s h ie ra rc hy in to f iv e spe ci fi c a re as :

1 . P h y s i o l o g i c a l n e e d s . M a s l o w g r o u p e d all physical needs necessary f o r

m a i n t a i n i n g b a s i c h u m a n w e l l - b e i n g , s u c h a s f o o d a n d d r i n k , i n t o t h i s category.
After the need is satisfied, however, it is no longer is a motivator.
2 . S a f e t y n e e d s . T h e s e n e e d s i n c l u d e t h e n e e d for basic security, stability,
protection, and freedom from fear. A normal state exists for an individual to have all
these n e e d s g e n e r a l l y s a t i s f i e d . O t h e r w i s e , t h e y b e c o m e primary motivators.
3 .Belonging and love n e e d s. A f t e r th e p h y s i c a l an d sa f e t y n e e d s a r e s a t is f i e d and are
no longer motivators, the need for belonging and love emerges as a

Internal and External Institutions and Influences of Corporate Governance I 3-25

 primary motivator. The individual strives to establish meaningful
relationships with significant others.
4. Esteem needs. An individual must develop self-con fidence and wants to achieve
status, reputation, fame, and glory.
5 . S e l f - a c t u a l i z a t i o n n e e d s . A s s u m i n g t h a t a l l t h e p r e v i o u s n e e d s i n t h e hierarchy
a r e s a t i s fi e d , a n i n d i v i d u a l f e e l s a n e e d t o f i n d h i m s e l f .

Maslow's hierarchy of needs theory helped managers visualize employee

motivation.

DOUGLAS MCGREGOR

Douglas McGregor was heavily influenced by both the Hawthorne studies and
Maslow. He believed that two basic kinds of managers exist. One type, the Theory X
manager, has a negative view of employees and assumes that they are lazy,
untrustworthy, and incapable of assuming responsibility. On the other hand, the Theory
Y manager assumes that employees are not only trustworthy and capable of assuming
responsibility, but also have high levels of motivation.

An important aspect of McGregor's idea was his belief that managers who hold
either set of assumptions can create self-fulfilling prophecies — that through their
behavior, these managers create situations where subordinates act in ways that confirm
the manager's original expectations.

FREDERICK HERZBERG

Frederick Herzberg was a well-respected American who has contributed greatly

to the way in which managers think about motivation at work. He first published his
t h e o r y i n 1 9 5 9 in a b o o k e n t i t l e d ' T h e Mo t i v a t i o n t o W o r k ' a n d pu t f o r w a r d a t w o fa ct o r
content theory which is often referred to as a two-need system. It is a content theory
which explains the factors of an individual's motivation by identifying their needs and
desires, what satisfies their needs and desires and by establishing the aims that they
pursue to satisfy these desires.

Herzberg's original research was undertaken in the offices of engineers and

a ccou nt an ts ra the r th an on t he f ac to ry f lo or an d inv ol ve d int er vi ew in g ov er tw o hun dre d
employees. His aim was to determine work situations where the subjects were highly
motivated and satisfied rather than where the opposite was true and his research was
later paired with many studies involving a broader sampling of professional people.

In his findings, Herzberg split his factors of motivation into two categories called
hygiene factors and motivation factors. The hygiene factors can de-motivate or cause
d iss at is fa ct io n i f th ey ar e not p re sen t, bu t do no t v er y of te n cr ea te sa ti sf ac ti on whe n t he y
are present; however, motivation factors do motivate or create satisfaction and are rarely

3-26 I Good Governance and Social Responsibility

 the cause of dissatisfaction. The two types of factors may be listed as follows in order of
importance:

Hygiene Factors (leading to dissatisfaction):

 Company Policy
 Supervision
 Relationship with Boss
 Work Conditions
 Salary
 Relationship with Peers

Motivators (leading to satisfaction):

 A ch i e v e m e n t
 Recognition
 The work itself
 Responsibility
Advancement
 Growth

The dissatisfiers are hygiene factors in the sense that they are maintenance
factors required to avoid dissatisfaction and stop workers from being unhappy, but do
not create satisfaction in themselves. They can be avoided by using 'hygienic' methods to
prevent them.

It is clear from the lists that the factors in each are not actually opposing which
means that the satisfiers are not the opposite of the dissatisfiers. The opposite of
s a t i s fa ct i o n i sn ' t d i s s a t i s f a c t i o n bu t is ' n o s a t i s f a c t i o n ' . B o t h l i s t s c o n t a i n f a c t o r s t h a t l e a d
to motivation, but to a differing extent because they fulfill different needs. The hygiene
facto rs hav e a n e nd wh ic h on ce fu lf il le d t hen c ea se to b e mo ti va ti ng fa ct or s wh il e the
m ot i v at i o n facto rs ar e mu ch mo re o pe n- en de d an d t his i s wh y th ey co nt inue t o mo ti va te .

He rzb er g al so d ev el op ed th e co nc ep t t ha t the re a re t wo d is tin ct huma n n ee ds :

 Physiological needs: avoiding unpleasantness or discomfort and may be

fulfilled via money to buy food and shelter etc.
 P s y ch o l o g i c a l n e e d s : t h e n e e d f o r p e r s o n a l d e v e l o p m e n t f u l f i l l e d b y a c t i v i t i e s
which cause one to grow.

He identified this as the Adam and Abraham Concept where Adam is animal and wants to
avoid pain or discomfort, but Abraham is human and needs to go beyond the p h y s i c al
requirements and expand psychologically too. Herzberg believed that the hygiene
factors causing no satisfaction are not applicable to the task an employee undertakes
b u t a r e e x t e r n a l t o t h a t t a s k . T h e y a r e t h e A d a m p a r t o f t h e c o n c e p t w h e r e an incentiv e may
be attribu te d to a fe ar of punis hme nt or incre as e in discomfort or as he p h r a s e d i t ' A K i c k u p t h e
Ass' (KITA). He thought that these did work but only as short term motivators e.g. constantly
increasing someone's salary to motivate them will merely

Internal and External Institutions and Influences of Corporate Governance I 3-27