The impact of psychological ownership on employee retention in mergers and acquisitions

Abstract

Research has demonstrated that turnover rates among employees and executives in the acquired firm are much higher during an M&A event. Recent empirical and review articles on M&A have also shown that employee retention/turnover can best be understood by looking at psychological attributes and perceptions of M&As, thus drawing significant attention to the psychological and ‘human’ side voids to theoretically exploit and enhance understanding of people-related problems in M&A endeavors. In this article, we develop a moderated mediation model and propose that acquired firm employees' psychological ownership is positively related to acquired firm employees' retention through the direct and mediating effects of employees' commitment and involvement in M&A. We also propose that the effect of acquired firm employees' psychological ownership on employees' commitment and involvement and, ultimately, acquired firm employees' retention is moderated by loss of acquired firm autonomy. We also discuss implications for theory and practice, as well as future research directions of such an employees' psychological ownership perspective on retention effects.

Introduction

“When managers talk about ownership, what they typically want to instill is not financial ownership but psychological ownership—a feeling on the part of the employees that they have a responsibility to make decisions that are in the long term interest of the company” (O'Reilly, 2002, p. 19).

Despite the above statement, scholars have long considered employee¹ ownership, particularly stock ownership, as a critical attitudinal and behavioral barometer for improved employee retention, thus creating a mutual interest with the employer for the benefit of both parties (e.g. Long, 1978). Similarly, firms undergoing mergers and acquisitions (M&As), have predominantly focused on legal/formal ownerships—while crudely excluding the psychological aspect—for exercising control and making key M&A decisions such as the retention of acquired firm employees, as well as the overall enhancement of value creation and performance improvement of M&As (e.g. Degbey, 2015; Degbey and Ellis, 2017, Degbey and Ellis, 2019; Degbey & Hassett, 2016; Gomes, Weber, Brown, & Tarba, 2011; Krug & Shill, 2008). However, the success of M&As remains a challenge to executives and employees (Gomes, Angwin, Weber, & Tarba, 2013; Weber, Tarba, & Öberg, 2014) due to continuous high failure rates found in various academic disciplines and surveys by consulting firms such as BCG, KPMG and Mckinsey (e.g. Christofferson, McNish, & Sias, 2004; Kelly, Cook, & Spitzer, 2003; Schoenberg, 2006; Thanos & Papadiakis, 2012). One of the reasons is the high rate of acquired executives and key talents turnover following M&A. Scholars and practitioners have found that M&A events often foreshadow higher turnover of employees, particularly from the acquired firm (Ahammad, Glaister, Weber, & Tarba, 2012; Hambrick & Cannella, 1993; Krug & Aguilera, 2005; Zhang et al., 2015). Relatedly, despite the predominant focus on financial and strategic explanations of extant M&A studies, growing evidence suggests that one-third and one-half of all M&A failures are attributable to people problems (e.g. Cartwright & Cooper, 1993; Krug, Wright, & Kroll, 2014; Weber & Tarba, 2012). While there is evidence that cultural differences, a given factor, create this turnover, executives and especially human resource managers, cannot simply change this cause and effect relationship. As noted, these practitioners and researchers have limited knowledge about other factors that directly, and through mediation, influence turnover and other related phenomena (Weber, 2012).

This paper argues that the lack of understanding on what causes the high turnover that leads to poor M&A performance is at least partly due to an incomplete conceptualization of the psychological mechanisms through which turnover occurs in M&A. This indicates that there are several gaps in the current state of the art. Literature reviews about the mixed results on the effects of cultural differences on M&A performance point out that this is due to omission of important variables (Sarala, Junni, Cooper, & Tarba, 2016; Tarba, Ahammad, Junni, Stokes, & Morag, 2019; Weber, 2012; Weber & Drori, 2011; Weber, Tarba, & Reichel, 2011; Weber, Yedidia Tarba, & Reichel, 2009). Furthermore, the role of HRM in M&As requires further theoretically grounded examination (Weber, 2012; Weber & Fried, 2011). In other words, the factors and HR managerial actions for intervention during the post-merger integration process to prevent, or at least minimize, post-merger turnover remain unclear (Gomes et al., 2013; King, Bauer, Weng, Schriber, & Tarba, 2019; Weber, 2012; Weber & Tarba, 2010). Finally, this paper asserts that employees' psychological ownership is an important asset of the acquired company that, given some moderators, influences turnover through employees' commitment and involvement. As such, it can act as an important tool for HR managers to prevent or at least to minimize post-merger turnover. This paper moves from the focus on the effects of cultural differences on turnover to explore the mechanisms and interrelationships among important variables that influence retention. More specifically, the paper seeks to address the inadequate understanding of employee retention in M&A by identifying the key underlying psychological phenomenon and mechanisms (in the form of crucial mediators and moderators) that arrest—or bolster—this retention effect.

In this article, such psychological phenomenon is founded on the psychology of possession (the feeling that an object, entity, or idea is ‘MINE’ or ‘OURS’), which constitutes the foundation of psychological ownership (Furby, 1978). The psychology literature has long recognized M&A activity as a major and complex process of organizational change (Humpal, 1971), with the potential to profoundly impact the lives of employees (Cartwright and Cooper, 1990, Cartwright and Cooper, 1993). For example, frequent attitudinal or behavioral expression of acquiring firm executives and/or managers—e.g. “it is ‘our’ newly acquired firm, we bought them”—toward members of the acquired firm evokes a sense of possession. Indeed, scholars posit that psychological ownership is ubiquitous, as it can occur in relation to legal/formal ownership or in its absence and can pertain to tangible or intangible objects (Van Dyne & Pierce, 2004; Wilpert, 1991). Therefore, such ownership is found to demonstrate positive relationships with measures of organizational performance (Conte & Tannenbaum, 1978; Hammer, Landau, & Stern, 1981; Long, 1978). A critical assumption, which underpins its tendency to produce positive attitudinal and behavioral outcomes, is that formal/legal employee ownership is not necessary for ownership feelings and behavioral alterations to emerge (e.g. Pierce, Kostova, & Dirks, 2001). Thus, we argue that psychological ownership is a vital asset of the acquired firm but can be destroyed in the M&A process. The role of HR is thus critical in protecting this asset to better understand employees' responses following M&A events. The adoption of this psychological perspective in this article may also serve to complement the prevailing macro-level interest especially in M&A research (cf. Lee, Kim, Kim, Kwon, & Cho, 2013).

Bearing in mind the research voids mentioned above and in light of the paucity of research on the key underlying psychological mechanisms that influence retention, the aim of this article is to develop a conceptual model that shows that employees' psychological ownership in M&A provides a clear-cut theoretical basis for understanding the inherent challenge of acquired firm employees' retention post-M&A. That is, the possessive attribute of psychological ownership distinguishes it from other related concepts such as commitment, identification or satisfaction in M&A whilst simultaneously allowing it to deepen our understanding of employee attitudes and behavior beyond existing constructs (cf. Van Dyne & Pierce, 2004). In other words, this article's conceptual arguments differ from prior studies that establish a relationship between related concepts of psychological ownership (e.g. organizational commitment – Hassett, 2012, Mathieu & Zajac, 1990; organizational identification – Kroon, Noorderhaven, & Leufkens, 2009; occupational identification – Kroon & Noorderhaven, 2018) and M&A outcomes. We emphasize feelings of possession as the unique conceptual core of human experience particularly in the context of a critical organizational change (M&A in this case).

Specifically, an important contribution of the present article is the development of a conceptual model and testable propositions that draw on the concept of psychological ownership to inform the literature on retention/turnover of acquired firm employees, and thus advancing scholarship in the HR–stream of M&A performance research. In addition, we highlight the effects of employee commitment and involvement, as well as the moderating effect of acquired firm autonomy removal on employee retention in M&A. More broadly, we contend that our moderated mediation model (see also, Preacher, Rucker, & Hayes, 2007) contributes to the broad organizational behavior school of thought in M&A (e.g. Birkinshaw, Bresman, & Håkanson, 2000; Haspeslagh & Jemison, 1991). Our theorized relationships are summarized in Fig. 1.

To improve the conceptualization of the psychological mechanisms through which turnover occurs in M&A, we suggest that psychological ownership is an important asset that may help enhance our understanding of employee retention-strengthening (or employee turnover-weakening) following M&A, and certain effects unaccounted for in extant related models that attempt to explicate how M&A can undermine or strengthen employee retention. Our model thus provides practitioners and scholars with a “psychological ownership” approach for deciphering and managing how to strengthen acquired firm employee retention or minimize their turnover in M&A. For academics, this could mean testing our proposed conceptual model. For M&A practitioners, this could mean creating awareness for identifying employees' psychological ownership and its mechanisms, particularly in the acquired firm from multiple sources and hierarchical levels to foster the retention of employees during times of critical organizational events, such as M&A.

The rest of the paper is structured as follows. Firstly, we review prior academic work on turnover in M&A to highlight the inconsistent findings, contradictions and mixed results, as well as a review on the removal of acquired firm's autonomy following an M&A. Secondly, we present and discuss the concept of ‘psychological ownership’ briefly with explicit elaborations of behavioral issues. Thirdly, we develop testable propositions based on Fig. 1's key variables—namely, psychological ownership, commitment and involvement, loss of autonomy, and employee retention. Finally, we provide discussion and conclusions, and also note some limitations/boundary conditions and specify directions for further research.