Thursday, February 5, 2009

Australian Industry: Commonwealth Bank

Introduction - All over the western world it is becoming more common for governments to privatize publicly owned companies. However, is the privatization of publicly owned businesses beneficial to the Australian economy? This essay will examine this question with specific reference to the recent privatization of the Commonwealth Bank of Australia (CBA).

History - The Commonwealth Bank of Australia was first founded in 1911 and was the first bank to combine both savings and general trading in the same company. This ingenuity gained them the security of a federal government guarantee and created ties between the bank and the federal government. From this foundation, the CBA became a government owned company. However, poor returns and inefficiency recently left the government no option but to privatize the company.

Privatization Theory - A basic argument given for privatization is that persons who work in government owned companies have few incentives to ensure that the enterprises they own are well run. On the other hand, it is believed that private owners do have incentives, for if their businesses perform poorly the companies will lose money. The theory holds that, not only will the business' customers see benefits, but as the privatized company becomes more efficient, the whole Australian economy will benefit. In the privatization of the CBA customers saw improvements in customer service, with the specialization of labour within the company. This included the creation of branches designed solely for processing, which utilized the specialization of labour. (Commonwealth Bank:About Us -

Similarly there are some negative consequences to the privatization of companies. Improvement in company efficiency is almost always accompanied by large layoffs of staff. The Commonwealth Bank was no exception, as the specialization of the workers dramatically improved their efficiency, which enabled the company to layoff staff without sacrificing any working capacity. An example of this can be found in rural Australia, where many workers were made redundant to improve branch productivity and company profits. (Financial Review: Events –

Commonwealth Bank Events - The Australian Government decided to sell off the Commonwealth Bank in small sections, before fully privatizing the company. This proved successful. However, one minor problem the process encountered was in the selling of their shares to foreigners off shore. The state allowed this, for the money invested by foreigners helped to provide the capital needed to upgrade and modernize the firm, making it internationally competitive. Improvements in the CBA's operating and stock market performance, and rival banks reaction to the partial and full privatization announcements, were strongest after the Bank had been fully privatized. Long-term stock market performance improved markedly as the proportion of government ownership decreased, with the Bank's cumulative abnormal returns being 50% more than those of its rivals three years after the Bank had been fully privatized.

By reducing costs and improving its profitability in the post-privatization period, it has outperformed its rivals on almost all the operating performance measures, and has become the most profitable bank in Australia. This is partly due to the effectiveness of the ‘performance based incentives’ system. The profits don’t end there, for the Government also benefits directly from the privatization. This is because Privatizations are usually organized as auctions, where bidders compete to offer the state the highest price, creating real income that can be used by the state as investment capital.

Commonwealth Bank – Profit Details
2001 2002
Revenue $8.824b $9.068b
Expenses $7.396b $6.016b
Pre-Tax Profit $3.405b $3.572b
Income Tax $993m $916m
Net Profit $2.398b $2.655b
Earnings Per Share $1.896 $2.093
Dividend Per Share $1.36 $1.50
Table 1: Commonwealth Bank Profit Details (Financial Review)

Relation to Government - The benefits governments gain from privatizing companies extends further than just receiving money from the sale of the assets. The improvements in company efficiency not only removes the financial burden from the government but also help to strengthen the Australian economy. This is done through the creation of new capital and the specialization of the labour force. These two factors are significant in providing and maintaining a strong economy.

Conclusion - The implications of these results are that governments contemplating privatization of state-owned enterprises are required to fully privatize, in order to achieve strong gains in efficiency, profitability and stock market performance. The keystone in the success of privatization is the ‘profit motive’ which is responsible for improvements in efficiency and functionality of the business. The Privatization of the Commonwealth Bank of Australia is a perfect illustration of the benefits available in not only the end product, but also in the process involved. So the privatization of public owned companies can be beneficial to, and successful in, creating a stronger economy.

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Arrow Electronics

Arrow Electronics must tackle several issues in regards to its performance appraisal system for its non-sales employees. The performance appraisal problems that Arrow faces are similar to many companies in today’s business environment. Steve Kaufman, CEO, understands and stresses the importance of human resource management at Arrow; usually the first hurdle an organization must clear before delving into the specific problems associated with performance management. Kaufman has concluded that the performance appraisal system needs further adjustment in order to meet his needs. To do so, Kaufman must first identify the problems associated with the current performance appraisal system to develop solutions.
The objective of any performance appraisal (PA) system is to identify core competencies, set goals and standards to measure, maintain and improve job performance for short-term and long-term results for both the employee and the organization. Arrow will utilize the information obtained from the PA process for administrative reasons such as identifying those who deserve promotions and/or salary increases, those who should be trained as future stars of the organization, and those who should be let go. The information will be used for developmental reasons to identify career goals, problem areas, and the actions to improve skills. The PA information is also used for strategic reasons to communicate organizational goals, to align employee behaviors to those goals. Finally, this information will be used for research/evaluation purposes to analyze other human capital management practices in the organization such as recruitment practices and training.

Most of the time, the individual/employee goals differ greatly from those of the organization/manager when participating in an evaluation process. The conflicts that arise between managers and their employees contribute to the ambivalence that managers and employees have when involved in the performance appraisal system. Kaufman believes that those efforts have been unsuccessful due to his managers’ inabilities to accurately differentiate between employees when determining high versus low performers. This is demonstrated by the managers’ failure to utilize more of the rating range when evaluating subordinates. The managers tend to evaluate all employees as average performers and are reluctant to provide constructive criticism to employees. When a majority of the employees are evaluated as average, senior management is unable to determine how employees are ranked within the organization. The problem can be associated not only with the inherent conflicts between managers and subordinates, but also the fact that many of Kaufman’s managers are promoted without proper managerial training. Therefore, the less seasoned managers may not have learned the skills necessary to manage others, to objectively evaluate the employees they supervise, or to coach/mentor their subordinates.

Kaufman has also come across several biases in the PA system that stem from manager favoritism and lack of uniformity in the evaluation process. Annually disparate individual performance ratings are also witnessed. For example some employee ratings change from year to year dependent upon a number of factors including if a new manager evaluating the employee, or that employee being courted by a competitor that year. Kaufman noticed that there was disparity among the overall branches as well. Some managers evaluated on a more stringent basis than others, often leading to more successful branches having lower performance ratings than less successful branches. Favoritism is another example found at Arrow. Some managers gave employees that worked closely with them higher ratings than those that did not.

There are also many concerns regarding the actual performance appraisal form itself. Issues of particular concern include: the appraisal function is only performed once a year; performance competencies are not clearly aligned with the companies goals; the form appears to be trait based and subjective; employees receive their rating from their immediate boss (who may not be involved with the employee on day to day basis); the form uses the same criteria to address all jobs (very generic and shallow); the form at times does not take into account all aspects of an employees job functions; employees have not been allowed to give feed back on criterion; and there is not an evaluation system in place to identify whether the form and performance appraisal system as a whole are effective. Managers were also concerned that Kaufman was setting a percentage amount on how many employees should be in each rating category and was demanding that each person receive a rating of at least a two on at least one of the seven criteria for evaluation.

Arrow has grown significantly, changed its organizational focus, and acquired several companies since its inception. Senior management at Arrow must rely on the validity of the performance appraisals in determining who to keep on board when integrating new companies into the fold. To meet these goals, Arrow must reanalyze its existing PA system in order to build a more effective PA system. Arrow must begin by determining the purpose of the performance appraisal. The purposes of the PA at Arrow are to provide an accurate uniform system for performance, identify areas for improvement, identify those who should be promoted or those who have the greatest future potential, and to develop existing teams into better, more dynamic groups of people.

After determining the purpose of the PA system, the next step is to conduct a needs assessment for the organization, including position appraisals (i.e. job analysis), and individual/person analysis (these analyses can be captured by employee surveys, interviews, and focus groups). This will provide the feedback and information necessary to developing the measurements and content of the performance appraisal form. When determining the measurements and content, Arrow should determine the dimensions to be appraised, while using objective criteria based on standards set for performance utilizing the job analysis and/or judgmental criteria based on knowledge, skills, abilities and other criteria(KSAO’s – provided in job analysis), behaviors and performance. The recommended solution is a mix of both to fully assess all aspects of an individual or team performance.

In addition to the content, one must consider the rating format, or method that needs to be adopted for the appraisal form. There are several types of rating formats, however, the most preferred format for Arrow is the Behavior Observation Scale (BOS), which incorporates very specific job activities and goals. The BOS is also easy to put together, provides specific feedback to rate the employee, and provides a positive forum for evaluation process. Raters need to be aware there is a tendency to make trait-based judgments with this format. The BOS format is simple to use and understand, is strongly associated with tasks performed, and includes parallel stimulus/response, (S-R) tracking measures. The expected result is that the scores on the stimulus scale will be the same as on the response scale, and will produce the behavior desired by the Arrow executive team.

There are several factors Arrow should keep in mind when developing the content of the performance appraisal form that could impose different biases upon the rating process. Some biases already exist in the current PA environment at Arrow such as: leniency tendency; giving high ratings regardless of actual performance; central tendency; giving middle of road ratings; and affect tendency; rating others according to the rater’s feelings towards that employee. There are several other biases to be aware of: severity tendency; halo/horns; stereotyping; primacy/recency effects; and fundamental attribution error.
Properly developing a rater and ratee training program is essential to the PA system as well. The training will provide the raters with the understanding of how to avoid or respond to bias situations, while provide the ratees with information and expectations of what they will experience throughout the process. The raters and ratees should also be trained to understand the observations made and how to keep a diary of daily activities. The program should also incorporate frame of reference training to avoid making inferences or assumptive statements about the behavior of the ratee. When inferences versus behaviors are indicated in the PA, the ratee can become defensive, negating the desired effects of the PA system.
Defining the raters and the ratees and determining if the ratees’ performance assessments will be based on individual or team performance should be determined as part of the development of the rater program. An important determination in defining the raters is deciding who is in the best position to observe the ratee and provide feedback about the ratee’s performance. Arrow should incorporate multiple sources of feedback, such as 360degree feedback, with observation appraisals from a variety of people (at least 3) who interact with the employee on a regular basis. The raters should only rate the performance criteria that are actually observed in their interactions with the ratee. This feedback can come from the ratee’s supervisors, peers, subordinates, clients and self-assessment. For 360degree feedback to be successful the organization must be prepared, therefore management buy-in is key as resources and time are critical to the process.

A useful tool for the rater to use in the interview process is an appraisal checklist (see appendix A). The appraisal checklist is essential in making sure that the rater follows guidelines and covers all items to be addressed in the interview.

The performance appraisal should be implemented so that it occurs at least every six months, and if possible, on a quarterly basis with a strong emphasis on two-way communication. In actuality, PA management is a continual exercise. When there are no surprises to either party, supervisors can cultivate desired behaviors on a daily basis. A consistent evaluation process is key in recognizing the success and validity of the system, as well as providing a method to incorporate suggestions received in a feedback retrieval process. Arrow should assess the value of the PA system by polling the raters and ratees to determine its accuracy, usefulness.

Finally, the PA plan should be incorporated within all human resource functions and management areas, such as employee training and selection processes. Training is an important function of a successful human resource management practice. As mentioned previously, there is a need for a management training program (external to the PA system training functions) that would facilitate a smoother transition for the young employees promoted to management positions. This will alleviate some of the issues raised by employees such as managers not knowing how to manage the employees they supervise.

Job analysis is an integral function in both the selection process and a solid PA system. It is important to strongly define the KSAO’s, core competencies, and job functions in order to hire and then cultivate the caliber of employees that are needed at Arrow. Incorporating the selection process, training, and performance appraisal functions into a database that can be accessed through the human resource information system is essential to providing a uniform system of checks and balances between these functions, thereby allowing Arrow to meet its goal toward developing a better workforce.

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