July – December 2019

The relationship between employee performance assessments, self-esteem, self-efficacy and intention to stay

The relationship between employee performance assessments, self-esteem, self-efficacy and intention to stay

The Steinhoff Saga Management review - University of Stellenbosch Business School

July – December 2019

The relationship between employee performance assessments, self-esteem, self-efficacy and intention to stay

The relationship between employee performance assessments, self-esteem, self-efficacy and intention to stay

By Tarryn Gill Mushfieldt

  • DEC 2019

17 minutes to read

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Achieving a high-performance organisational culture

Attributes of high-performance organisations include a clear vision and value proposition, realistic and measurable objectives, inspired leadership, and a commitment to act in the best interests of shareholders and customers. Yet at the heart of these organisations are the employees whose day-to-day efforts play a significant role in the organisations’ ultimate success. While organisational effectiveness is heavily dependent on employees’ skills and experience, how employees are treated in the workplace and how they view their own contribution are equally (if not more) important.

Various studies have shown that effective performance management practices are key to ensuring high-performance employee behaviour. Managers need to strike a balance between ensuring that the work gets done in line with organisational objectives and recognising that employees have different personalities, emotional triggers and stress tolerance levels. Pushing too hard, for example, can lead to despondency and under-achievement. Similarly, an impersonal, task-driven approach can prove to be counter-productive. Managers should rather aim to get the best out of their employees by acknowledging their strengths and shortcomings, and helping them to satisfy their own personal career aspirations. Providing sufficient opportunities for training and professional development is critical for productivity, while involving employees in decision making and work design can boost their motivation levels. Even offering reward-based incentives can encourage excellent performance.

While organisational effectiveness is heavily dependent on employees’ skills and experience, how employees are treated in the workplace and how they view their own contribution are equally (if not more) important.

An important tool in the process of building a high-performance organisational culture is the employee performance assessment. Here a manager gives employees feedback on their performance over a specified period against agreed objectives, as well as a performance rating. Feedback invariably covers both positive and negative aspects of individuals’ performance. Not surprisingly, some employees do not take kindly to criticism – even if it is intended to be constructive. To be found wanting in certain areas can be a blow to some people’s self-esteem. As a result, they might start to doubt their self-efficacy, which is their perceived ability to cope with the demands of the job, and to question whether they should stay at the organisation.

How performance assessments impact employees’ self-esteem, self-efficacy and intention to stay is of great importance to results-driven and quality-focused organisations. However, to date, research on the interrelationships among these different phenomena has been limited. The main purpose of this study (which formed part of the researcher’s Master of Business Administration degree) was to address this knowledge gap by examining how feedback from managers during the performance assessment process impacts employees’ self-esteem, self-efficacy and intention to stay. The study, which was qualitative in nature, comprised a literature review and semi-structured, face-to-face interviews with a group of employees (spanning different occupational levels and performance categories) in a financial services organisation in South Africa.

Employee performance assessments: A double-edged sword?

Performance assessments have a dual purpose: on the one hand, they tell employees how they have fared in relation to agreed financial and/or operational targets, which could prompt rewards or some sort of remedial action; on the other hand, they provide a yardstick of whether or not the organisation as a whole has met its objectives, which could necessitate changes of a more strategic nature. Thus, while laying the foundation for employees’ ongoing development, performance assessments also offer clues to the organisation’s overarching challenges and priorities.

A performance assessment relies on a set of key performance indicators (KPIs) which managers evaluate at regular (say, six-monthly) performance reviews. Managers also provide a performance rating, indicating how well an employee has performed relative to the standard. The fact that performance can be measured helps to ensure that the award of any merit bonuses is objective and fair.

Notwithstanding the structured approach followed in performance assessments, the quality of execution is dependent on the relationship between the manager and the employee, as well as the nature of the support provided by the manager from one performance review to the next. When conducted in a professional and caring manner, a performance assessment can be a positive, worthwhile experience which prompts higher levels of employee engagement and achievement. When conducted in a careless or insensitive manner, it can be a demoralising experience, which focuses on the negative rather than on finding ways to leverage an employee’s existing talents and enhance performance through training or mentorship.

How performance assessments influence employees’ self-esteem, self-efficacy and intention to stay are discussed in more detail below.

Managers need to strike a balance between ensuring that the work gets done in line with organisational objectives and recognising that employees have different personalities, emotional triggers and stress tolerance levels.

  • Self-esteem

Self-esteem refers to how positively people view themselves – that is, whether they feel capable of performing, achieving success and making a valuable contribution. Self-esteem is linked to concepts like self-confidence, self-respect and self-worth.

Employees’ experience in an organisation strongly influences their self-esteem, which is evident in their attitudes and behaviour. The interactions they have with their manager will contribute significantly to their organisational experience and self-esteem, particularly as a superior‒subordinate relationship is characterised by a certain amount of tension. Self-esteem in turn has a strong bearing on an employee’s job performance. Therefore, a manager should, in assessing performance, aim to keep the individuals’ self-esteem intact or even boost it if possible. That is not to say that unsatisfactory performance should be overlooked, but a cautious approach is recommended – particularly if the sub-optimal performance might be attributable to stress or feelings of being unappreciated.

  • Self-efficacy

Self-efficacy is linked to self-esteem, but refers to people’s belief in their ability to perform a designated task or job in a particular environment. It is therefore more situational. Yet it influences future behaviour because it is associated with people’s expectations of their ability to deliver positive results on a sustainable basis.

In an organisational context, a lack of self-efficacy among employees can be linked to a perceived lack of proficiency or even a lack of knowledge as to how to execute a task. This can result in employees feeling insecure and self-critical, which erodes their self-efficacy. The more complex a task or job to be performed, the higher is the risk of employees’ self-efficacy being compromised.

When it comes to performance assessments, managers need to ensure that employees are properly informed about the expectations surrounding a task or job and, furthermore, that they receive proper training in order to develop the necessary competencies. Regular interactions with, and feedback from, the manager are important. When employees receive positive and/or constructive feedback, their self-efficacy will rise. This provides a firm foundation for continuous improvement.

When people leave, they take knowledge of the business, skills and institutional memory with them, often leaving a void that is difficult to fill.

  • Intention to stay

Employees’ intention to stay at an organisation is influenced by a number of factors, with emotional well-being being a key driver. Having a clear purpose, the opportunity to learn, and being recognised and valued are important contributors to employees’ emotional well-being, and therefore their desire to stay. Such aspirations can be satisfied through a well-designed personal development programme and an effective performance management system. In contrast, reasons for employees leaving an organisation include inadequate remuneration, a lack of recognition, a lack of trust in the leadership, a poor work culture, ineffective performance management practices, and limited career prospects.

Strained manager‒employee relationships will, as noted earlier, erode employees’ self-esteem and self-efficacy and could hasten their departure from the organisation. In this regard, employee complaints could range from managerial neglect to excessive micro-management and a fixation with short-term performance at the expense of personal growth. Of course, employees might decide to leave because they are poor performers, despite being given ample opportunities and encouragement. They are simply not prepared to put in the effort to meet the standards of the organisation or to uphold its values.

Employee retention is an ongoing challenge for organisations. When people leave, they take knowledge of the business, skills and institutional memory with them, often leaving a void that is difficult to fill. This hampers productivity and puts additional pressure on remaining staff members. An effective performance assessment system can help to detect employee dissatisfaction or waning morale before negative feelings escalate into an irreversible decision to leave the organisation in search of greener pastures.

What the interviews revealed

All participants highlighted the importance of management feedback – in fact, they considered it to be the most important element in the employee performance assessment process, with transparency being a central pillar. Regular feedback helps to ensure that performance remains in line with expectations, thereby acting as a sort of continuous assessment ‘dipstick’. This should minimise the risk of ‘surprise’ ratings being awarded when the formal performance reviews are conducted. In addition, participants emphasised that ongoing two-way communication is valuable because it facilitates timeous corrective action or a change in direction, if necessary.

Interestingly, those participants who were in the top-performer category met with their managers more frequently than those in the bottom-performer category. Besides having regular monthly meetings with their managers, top performers reported having frequent, impromptu conversations about various aspects of the work – which they found useful. Bottom performers reported having fewer feedback sessions with their managers and also that sometimes the performance ratings they received did not correlate with the feedback they had been given at their monthly meetings – that is, the ratings were lower than anticipated. This suggests that their managers found it difficult to speak openly and honestly about their sub-standard performance, even though the monthly meetings provided the ideal opportunity to raise the subject and discuss possible solutions in the lead-up to the formal review sessions.

Regular feedback helps to ensure that performance remains in line with expectations, thereby acting as a sort of continuous assessment ‘dipstick’.

All participants were of the view that managers should give balanced feedback, offering recognition for a job well done, while also suggesting ways in which they could improve. In a high-performance environment, they said, there is unfortunately a tendency for managers to dwell on what has not gone well. Focusing more on the positive aspects of their performance, and not simply taking the latter for granted, would go a long way towards boosting their morale. Participants said that they did not enjoy feedback sessions in which their manager did all the talking. The value of the session, they said, was in the exchange of opinions and ideas. They also said that they appreciated it when their manager took an interest in their personal lives and did not confine their discussions to work only. This paved the way for a better long-term relationship.

Although the employee assessment process can be a source of anxiety and (depending on the outcome) can negatively affect employees’ self-esteem and self-efficacy, a number of participants reported that they had grown accustomed to the idea that the rating reflected their performance in defined circumstances. It did not validate or invalidate them as human beings; nor was it a predictor of how they would perform in the future. Furthermore, performance at work should not simply be in reaction to external stimuli and events; employees’ own sense of purpose and their inner spirit should be the main driving forces behind their professional endeavours and accomplishments.

The participants were generally of the view that the organisational culture had a major influence on their decision to stay – more so than their relationship with their manager. Mixing with high-calibre staff, contributing towards the realisation of an exciting vision and living the kind of values that make for a better society all helped to give them an identity. However, the importance of an effective performance management system should not be downplayed. It is, after all, one of the keys to persuading employees to aspire to greater things.

To wrap up

Encouraging high levels of performance among employees is a complex undertaking. There is no magical formula that will work in all organisations, all of the time, among all categories of employees. Employee performance invariably fluctuates in response to external stimuli and internal drivers and concerns, some of which are difficult to discern from a management perspective. In this regard, the employee performance assessment can be a valuable tool. When used effectively, it gives definition to the management task ‒ ensuring the systematic scoping of work and the setting of realistic targets, which can be measured, reported and acted on. It also provides a useful framework for an employee development programme, taking fears, concerns, hopes and aspirations into account. When viewed together, the insights gained from employee performance assessments constitute a useful barometer of the organisational climate, which can inform human resources and other strategies.

When viewed together, the insights gained from employee performance assessments constitute a useful barometer of the organisational climate, which can inform human resources and other strategies.

Among the recommendations flowing from the study are: (1) to delink the performance rating – which is often used to arrive at a monetary reward – from the performance assessment, which should mainly have a developmental focus; (2) to build a strong feedback culture in the organisation which encourages managers to face performance issues (both positive and negative) head on when they occur; and (3) to hold employees accountable for upholding the organisation’s values through their behaviour and results.

  • This article is based on the research assignment of Tarryn Gill Mushfield – an MBA alumnus of USB. The title of her research assignment is: The relationship between employee performance assessments, self-esteem, self-efficacy and intention to stay.
  • Her study leader was Prof Mias de Klerk, Professor of Leadership and Organisational Behaviour, Director: Centre for Responsible Leadership Studies (Africa) and Head of Research at USB.

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The potential role of coaching for executives dealing with the impact of a retirement transition

The potential role of coaching for executives dealing with the impact of a retirement transition

The Steinhoff Saga Management review - University of Stellenbosch Business School

July – December 2019

The potential role of coaching for executives dealing with the impact of a retirement transition

The potential role of coaching for executives dealing with the impact of a retirement transition

By Tessa Deighton

  • DEC 2019

17 minutes to read

SHARE

Retirement: a welcome relief or a shock to the system?

For many people, work is an intrinsic part of life. Besides being a source of livelihood, work can afford people a daily routine, an opportunity to interact with other professionals, an environment that encourages learning, personal satisfaction for a job well done, and prestige. When people stop working as a result of retirement, their lives often change dramatically.

For some, retirement represents a welcome next phase in their personal journey as they are free to spend more time with their families or engage in long-neglected leisure activities. They may even move into a new occupation that involves fewer or more flexible working hours. For others, however, retirement induces uncertainty and fear. Not only does it herald the loss of a regular income, but it can also rob people of their social status and sense of self-worth. When people’s personal identities have become intertwined with their professional pursuits and achievements, retirement can be a rude awakening.

Retiring at the age of 60 or 65 is no longer a foregone conclusion. Many people, either willingly or otherwise, take early retirement which might see them exit their companies in their 50s. With many companies under pressure to make way for new generations of employees, the early retirement provision is gaining ground. In contrast, some people who reach their companies’ official retirement age are asked to stay on, possibly under a contractual arrangement. While no two people’s reactions to retirement are the same, studies have shown that corporate executives – given their level of responsibility, visibility, earning power and social status – often find the transition to retirement particularly challenging. Having given so much of their time and energy to their corporate duties, they are often left wondering who they are when their high-profile professional life comes to an end.

When people’s personal identities have become intertwined with their professional pursuits and achievements, retirement can be a rude awakening.

It is becoming increasingly evident that coaching has an important role to play in preparing corporate executives for retirement. Coaching helps executives to view retirement as a natural phase in their lives, which is full of promise and not simply the sad conclusion to the illustrious career that once defined them. It shows them how to reflect on their attributes and aspirations and to repurpose their lives so as to find new forms of enjoyment and fulfilment. Little research, however, has been conducted on the transition into retirement from an executive coaching perspective.

The main purpose of this study (which formed part of the researcher’s Master of Philosophy degree in Management Consulting) was to address this knowledge gap by exploring the benefits of coaching to corporate executives who are making the transition to retirement. The study, which was qualitative in nature, comprised an extensive literature review and personal consultations (using semi-structured interviews) with six retiring corporate executives and five coaches with experience in working with retirees from the corporate world.

The transition to retirement: a three-phase process

Retirement is neither quick nor simple. It is a transition, which can be emotionally, psychologically and financially challenging and can even affect people’s physical health. Involuntary retirement (in the face of retrenchment, an early retirement policy or ill-health) can be more difficult for an individual than voluntary retirement because an unwelcome early departure can trigger emotional and financial distress.

The transition to retirement can be seen to have three main phases: pre-retirement, retirement and post-retirement. The pre-retirement phase relates to the period in which individuals are still working but considering or facing the prospect of retirement. This is when they should start thinking about what life will or should be like once they leave formal employment. Of particular importance are the financial resources they will need and how they will spend their time. In the retirement phase, individuals face the end of formal employment head-on and may even take on some sort of bridge or volunteer employment to extend their working life, albeit in a less intense form. The post-retirement phase sees individuals putting financial and other plans into effect, thereby cementing their transition to a different type of lifestyle.

It is during the post-retirement phase that the appropriateness and thoroughness of earlier plans are put to the test. Factors such as financial and physical health, personality, gender, age, education, leisure pursuits, status and family support structures all need to be considered when charting the way forward. In this regard, pre-retirement support can go a long way towards ensuring optimal results.

Do men and women react differently to retirement?

There is no hard-and-fast rule in this regard. Men often have higher earning power than women and are more likely to carve out a personal identity from their status at work and their professional achievements. Thus, the prospect or reality of retirement could be more stressful for men, particularly if they occupy or once held a high-level executive position.

Owing to their varied responsibilities (work, child-rearing, caring), many women do not experience the same level of anxiety as men when retirement approaches. Anxiety aside, women who have not progressed to the upper echelons of management because they have had to balance their responsibilities at work and home (which can be career-limiting) may find that their pensions are not big enough to sustain an adequate lifestyle after retirement. Where women have had unbroken corporate careers, though, retirement generally induces as much emotional upheaval as it does for their male counterparts in the corporate world.

A good education generally has a positive effect on how men and women adjust to retirement and encourages them to engage in other profitable or cognitive pursuits after they retire, which can contribute to their general well-being and longevity.

Coaching for a smoother transition to retirement

Planning for retirement should ideally start early on in people’s careers. Financial planners have long advocated this practice, although the psychological impact of retirement is frequently overlooked. All too often, the opportunities associated with retirement are obscured by a heavy veil of fear and uncertainty.

Those who are preparing for retirement need to banish from their minds the idea that their knowledge, experience and advice will be enthusiastically sought once they have left formal employment – otherwise their ego is likely to be seriously bruised.

Coaching can help corporate executives, who have become accustomed to driving productivity and shareholder value, to embrace a different and potentially more powerful purpose in life. Through coaching, they learn to confront their fears, consider various lifestyle choices and implement realistic plans that will make retirement a reality they can actually look forward to. Coaching helps people to look at their lives holistically, define their short- and long-term needs and aspirations, and decide how they would like their pathway into the future to be paved. ‘Owning’ the process will allow them to make necessary adjustments along the way, which will minimise the risk of difficulties and disappointments later.

In a nutshell, the act of coaching promotes self-awareness through a collaborative, outcomes-driven approach. Self-awareness is a key ingredient in building mastery, which gives retirees a sense of being in control and facilitates a smoother transition from retirement planning to actualisation. While goal-setting is advisable, squeezing too many goals into a concentrated period is counter-productive as there is a strong risk that they will not be achieved. This could trigger disillusionment. Moreover, goals need not be staid. They could, for example, be the result of creative visualisation of coveted ‘bucket list’ items. Retirement coaching could straddle one, two or more years and span multiple sessions, although there is no prescribed time frame or format. Circumstances will dictate what interventions are desirable.

One participant spoke poignantly of his descent from “hero to zero”. He used his authority and influence in his corporate role to make things happen, but upon retirement he became nobody and had to sort out his own problems.

Various models have been developed to support transition or retirement coaching, but all – to a greater or lesser extent – focus on building individuals’ self-awareness and self-confidence so that they are better equipped to embrace change. For example, Bridges’ Transition Model recognises three distinct stages relating to retirement: (1) letting go of current circumstances; (2) coping with the ‘neutral’ zone when confusion or uncertainty often peaks; and (3) embracing new beginnings. These broadly mirror the pre-retirement, retirement and post-retirement phases discussed earlier. Often it is beneficial to combine retirement coaching with financial coaching because there tends to be a strong link between financial know-how and security and emotional well-being.

What the interviews revealed

The corporate executives who were interviewed for the study were retiring for different reasons: one was leaving at the normal retirement age stipulated by the company; three were facing involuntary, early retirement; one was opting for voluntary early retirement; and one was pursuing a voluntary extended retirement option. All had had some retirement coaching. The coaches who were interviewed had all once been corporate executives or directors and had strong coaching credentials. The most common issues raised during the interviews were the following:

  • Control over the exit conditions

The circumstances giving rise to the executives’ retirement prompted different reactions. Those executives whose impending retirement was involuntary showed signs of being in denial and were very uneasy about the prospect. Those facing more favourable exit conditions (where retirement was voluntary) had a much more positive attitude. Although participants were in favour of receiving ‘step-down’ or contract work from their companies, they acknowledged that in most cases BEE policies were an impediment.

  • Control over resources

It was evident that the level of comfort or anxiety that the executives experienced was directly linked to how much control they had over resources like finances and time. For example, the thought of having more time on their hands but less money raised their anxiety levels. Anxiety went hand in hand with feelings of insecurity about the unknown.

Coaching helps executives to view retirement as a natural phase in their lives, which is full of promise and not simply the sad conclusion to the illustrious career that once defined them.

Some participants admitted to being in denial – not wanting to accept the inevitability of losing their corporate responsibilities and status. They also feared that after operating in a high-pressure environment, their days would feel empty. While travel and hobbies could consume retirees’ time, more often than not they were looking to devote time to ‘meaningful’ pursuits.

Money was a major concern. Although one might expect retiring corporate executives to be well provided for financially, extraordinary expenses (such as second marriages and additional children later in life) could erode their capital base and leave them with insufficient resources for a comfortable retirement. Health was identified as a factor that inevitably becomes more important with the passing of years and can be a stress trigger if not properly managed.

  • Identity, status and ego

Some participants spoke of the challenge of having to accept that, after a long and distinguished career, they were seen to the door with a small box of possessions – as if their contribution to the company over the years had been of little consequence. It is common for retirees – particularly those who have lived energetic lives in the corporate fast lane – to think that they have become indispensable to their companies. But this is rarely the case. Even the most revered senior figure tends to be forgotten within a relatively short space of time and the company moves on.

Those who are preparing for retirement need to banish from their minds the idea that their knowledge, experience and advice will be enthusiastically sought once they have left formal employment – otherwise their ego is likely to be seriously bruised. Another important finding was that retirement is generally associated with old age and a reduced capacity to work. Such a perception can damage people’s sense of self-worth.

  • Inter-relational considerations

The loss of work-related networks and friendships was another area of great concern, as was the loss of corporate support services such as software technicians, accounting officers, financial advisors, and so on. One participant spoke poignantly of his descent from “hero to zero”. He used his authority and influence in his corporate role to make things happen, but upon his retirement he became nobody and had to sort out his own problems. Retirement also impacts family relationships, particularly the spousal relationship. Newly retired corporate executives and their spouses could find themselves having to renegotiate their roles at home to ensure a smooth transition, particularly if retirees have more free time but finances are stretched. Couple coaching might be beneficial in such a case.

Final thoughts

Providing retirement coaching to executives is not something that any person can do. It calls for a professional who is mature in age (and has experienced life’s knocks), well educated, experienced in retirement dynamics, skilled in coaching techniques, and a good and empathetic listener. In addition, for coaching to be effective, there must be buy-in from the retirees themselves. Even if they are harbouring feelings of insecurity or resentment about having to withdraw from corporate life, they should be open to the possibility of their post-retirement life being enjoyable and even empowering. Corporate entities in turn can play an important role by introducing a retirement coaching programme as a standard offering. People should ideally join the programme about five years before their anticipated retirement date to allow sufficient time for personal reflection, scenario planning and the crafting of a well-considered retirement strategy.

Coaching can help people to look at their lives holistically, define their short- and long-term needs and aspirations, and decide how they would like their pathway into the future to be paved.

Engaging the services of newly retired executives to mentor younger staff members on their developmental journey would provide added benefits to the company and would also help the retirees in question to make a more confident and comfortable transition.

  • This article is based on the research assignment of Tessa Deighton – an MPhil in Management Coaching alumnus of USB. The title of her research assignment is: The potential role of coaching for corporate executives dealing with the impact of a retirement transition.
  • Her study leader was Dr John Morrison, a Senior Research Consultant at USB, who specialises in project management, research methodology and research coaching.

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The importance of strong corporate governance in a complex world

The importance of strong corporate governance in a complex world

The Steinhoff Saga Management review - University of Stellenbosch Business School

July – December 2019

The importance of strong corporate governance in a complex world

The importance of strong corporate governance in a complex world

By Hendrik Steynberg

  • DEC 2019

14 minutes to read

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It is about leadership and strong corporate governance

The world is becoming increasingly complex and interconnected, with organisations under pressure to deliver value to shareholders while also remaining accountable to society as a whole – all against the backdrop of rising competition. Moreover, many organisations are part of sophisticated supply chains, which are conduits for information, goods, services and payment flows, both locally and internationally. In such a climate, inspired leadership and strong corporate governance are paramount.

Corporate governance refers to the measures introduced and the steps taken to ensure that an organisation’s management acts in the interests of shareholders and other stakeholders, using resources effectively and adhering to the principles of transparency and accountability. Corporate governance has two primary functions: driving the organisation forward (directing performance) and exercising prudent control over the operation (controlling conformance). Together these two functions help to ensure that the organisation remains progressive and forward-looking, but operates within realistic and ethical boundaries.

Many high-profile corporate failures in recent years have put the spotlight on governance issues and raised questions about whether traditional governance rules, structures and mechanisms should be overhauled.

Many high-profile corporate failures in recent years have put the spotlight on governance issues and raised questions about whether traditional governance rules, structures and mechanisms should be overhauled. Corporate governance is typically associated with financial oversight provided by an organisation’s board of directors and the agency relationship it has with management and shareholders. However, there is a growing body of opinion that corporate governance should extend beyond the boardroom – that it should be practised by managers throughout the organisation. For example, the devolution of accountability to successive levels of management would help to improve both financial and non-financial performance, evidenced in enhanced employee morale and customer satisfaction. Having more managers involved in determining the future trajectory of the organisation and continuously monitoring progress could be both empowering and energising for the people concerned.

A more focused and energised operation, in turn, should lead to better organisational performance. By extension, supply chain performance should also improve because more managers (being accountable) will be able and willing to make a positive contribution to those aspects against which supply chain performance is measured, such as cost reduction, on-time delivery, throughput, compliance and achieving a high-performance culture.

Is there a link between corporate governance and organisational performance?

Some say that the quality of corporate governance directly affects an organisation’s performance ‒ that the design of a system of governance and its enforcement are important determinants of whether the organisation will consistently meet its objectives or, alternatively, produce erratic or insipid results. If that is the case, then strong corporate governance and effective leadership go hand in hand.

There are numerous examples of corporate governance lapses in various supply chain performance areas, which contribute to organisations’ poor results or even demise. Not only do these failures deal a blow to shareholders, employees and supply chain partners, but they are also sometimes damaging to the economy as a whole. Sadly, lapses in corporate governance (both within organisations and among supply chain partners) are often the result of unethical behaviour, such as backdating contracts, offering cash inducements to secure business deals and misrepresenting financial results.

Yet, despite the apparent evidence, the link between corporate governance and organisational performance is not clear-cut. A number of studies have failed to detect a direct relationship between corporate governance measures and performance outcomes, possibly because other factors (including an organisation’s size, financial stability and position in the market) help to cloud the issue. It is possible, for example, for an organisation to be doing well financially in the absence of a sound system of governance. In contrast, the failure to implement a proper risk management strategy, which would see an organisation pursuing opportunities in an informed manner, could negatively affect performance – even with financial controls in place.

Other studies have shown that an organisation’s strategy will influence the chosen style of governance. For example, if shareholder value is the board’s chief concern, corporate governance will be geared towards maximising profits without transgressing the law. On the other hand, if a growth strategy is the board’s main focus, less importance might be attached to rigorous corporate governance.

Sadly, lapses in corporate governance … are often the result of unethical behaviour, such as backdating contracts, offering cash inducements to secure business deals and misrepresenting financial results.

It has been suggested that corporate failures are attributable not so much to the absence of corporate governance mechanisms as to the lack of clear governance processes ‒ such as how governance is exercised in an organisation and how the outcomes are acted upon. In other words, it is not only about having the right tools; it is also about using them in the most effective way.

The purpose of the study

In the light of these uncertainties, a study was undertaken to establish the relationship between the internal control aspects of corporate governance (aimed at risk mitigation) and supply chain performance.

The study comprised a literature review and a quantitative survey conducted among a sample of 196 employees in a multinational organisation whose supply chain operation was located in South Africa. The latter was responsible for procuring and supplying materials and services to the organisation’s manufacturing plants as well as organising the logistics to transport final products to customers. The questionnaire-based survey was aimed at soliciting employees’ views about the importance and impact (either positive or negative) of the internal controls that had been implemented, below board level, on supply chain performance in the organisation.

One way of ensuring an effective governance process is to implement a governance framework which sets out the rules and parameters for exercising financial and operational oversight. To this end, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) published an internal control integrated framework guide in 1992, which has been regularly updated over the years. The COSO internal control framework was introduced at the multinational organisation participating in the survey with a view to ensuring that risks threatening the achievement of organisational objectives remained at acceptable levels. The COSO framework has five dimensions, each of which comprises various elements:

(1)   The control environment (e.g. promotion of integrity, ethical values and moral behaviour);

(2)   Risk assessment (e.g. identification and mitigation of risks);

(3)   Control activities (e.g. implementation of appropriate controls to minimise supply chain risks);

(4)   Information and communication (e.g. development of an effective information system and promotion of open communication among employees and stakeholders);

(5)   Monitoring activities (e.g. regular review and strengthening of controls, and acting on results of monitoring activities).

While financial controls are vital, on their own they are unlikely to deliver the well-founded and sustainable value to which a high-performance organisation aspires.

Findings from the survey

Perceived importance of internal controls

All respondents saw great value in the organisation’s internal control framework (ICF), with control activities viewed as the most important dimension and monitoring activities as the least important dimension for strong supply chain performance, although the differences in the perceived importance of the five dimensions were in most cases marginal. When comparing the responses of those working in the supply chain function and those working in the operations business units, the only significant difference was in their views about monitoring activities: the supply chain staff attached much more importance to this dimension than the operations business unit staff.

Those elements considered to be the most important for supply chain performance were: integrity, ethical values and moral behaviour; the identification and mitigation of risks; and the implementation of appropriate controls to minimise supply chain risks.

It has been suggested that corporate failures are attributable not so much to the absence of corporate governance mechanisms as to the lack of clear governance processes ‒ such as how governance is exercised in an organisation and how the outcomes are acted upon.

Perceived impact of the implementation of internal controls

About two-thirds of respondents said that the implementation of the internal control framework (ICF) had enabled supply chain performance, while one-third of respondents said that it had not. Of the five dimensions, the implementation of control activities had, according to the respondents, had the greatest enabling effect, while the implementation of information and communication had had the least enabling effect. There was little difference in the views of the supply chain staff and the operations business unit staff regarding the implementation impact of the ICF.

In terms of supply chain performance variables, the ICF was perceived to have the greatest impact on the variable of achieving a high-performance culture and the least impact on the variables of on-time delivery and cost reduction.

Key insights

Notwithstanding the mixed views found in the literature on the link between corporate governance and organisational performance, the survey confirmed that those working in different functional units and at different occupational levels in the organisation considered corporate governance to be very important for effective supply chain performance. The fact that an internal control framework (ICF) had been implemented at the organisation appears to have given structure and clarity to the governance process, although more could be done to ensure the effective implementation of controls below board level, which would positively impact supply chain performance.

It was interesting that control activities received the highest ratings both in terms of perceived importance and impact, since a high level of control can lead to bureaucracy and a loss of efficiency. However, as certain studies have revealed, it is often poor implementation of controls at different levels of the organisation and across the various stakeholder groups, rather than the inherent nature of the control mechanisms themselves, that compromises effective supply chain performance.

Clearly, collaboration and strong communication should be the cornerstones of a corporate governance strategy, with ethical leadership providing the reinforcing structure.

Clearly, collaboration and strong communication should be the cornerstones of a corporate governance strategy, with ethical leadership providing the reinforcing structure. While financial controls are vital, on their own they are unlikely to deliver the well-founded and sustainable value to which a high-performance organisation aspires.

  • This article is based on the research assignment of Hendrik Steynberg – an MBA alumnus of USB. The title of his research assignment is: An evaluation of a governance framework implemented as an enabler of supply chain performance: Evidence from a South African multinational organisation.
  • His study leader was Prof Mias de Klerk, Professor of Leadership and Organisational Behaviour, Director: Centre for Responsible Leadership Studies (Africa) and Head of Research at USB.

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Cipla-Medpro acquisition the pre- and post-merger story

Cipla-Medpro acquisition: the pre- and post-merger story

The Steinhoff Saga Management review - University of Stellenbosch Business School

July – December 2019

Cipla-Medpro acquisition: the pre- and post-merger story

Cipla-Medpro acquisition the pre- and post-merger story

By Nishant Saxena and Prof Marius Ungerer

  • DEC 2019

20 minutes to read

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The appeal of the pharmaceutical market in Africa

The global pharmaceutical industry is massive, with reported annual revenues in excess of US$720 billion. As costs rise and populations age, many governments are actively promoting the use of (quality) generic pharmaceutical products, which constitute a much cheaper but nevertheless worthy alternative to the patented originator products.

With its fiscal constraints and high poverty levels, Africa constitutes a very good market for generics. The pharmaceutical market in Africa – currently valued at US$6‒7 billion ‒ is predicted to grow significantly in the coming years in view of ever-expanding populations and the relatively high prevalence of HIV/Aids-linked illnesses on the continent. South Africa’s share of this market is estimated to be US$3 billion. It is against this backdrop that Cipla India Limited, a Global Top 20 generic pharmaceutical company based in Mumbai in India, made its strategic acquisition of Medpro South Africa in 2013.

The ability of a generic pharmaceutical company to grow its business is heavily dependent on the speed with which it launches a generic drug after the patent of the originator drug expires.

This paper, which was prepared in the form of a case study, traces the circumstances leading up to the Cipla-Medpro acquisition and examines what steps the new CEO and his team took to overcome many of the integration hurdles that presented themselves in the period following the acquisition. The case study is divided into two parts. Part A covers the preparation stage and early post-acquisition challenges; Part B outlines how management tackled these challenges to put the company onto a much steadier path.

Great expectations: background to Cipla India’s acquisition of Medpro South Africa

Cipla India had been looking to make the transition from an owner-driven firm to one with a more professional corporate identity and an extended reach. International expansion was a key objective as this would enable the company to scale up its operation and make its drugs available to those in need in developing countries. Making affordable drugs accessible to the masses had been the vision of the original founder of the company (who in turn had been inspired by Ghandi’s quest to make India self-reliant in medicines) and it remained a core value throughout the company’s nearly 80-year history. Management consulting firm McKinsey was brought on board to help formulate the optimal expansion and growth strategy for Cipla India. Key criteria used in evaluating different regional alternatives were the size of the pharmaceutical market and the perceived ease of integration.

Medpro had through the years operated much like a close-knit family … Decision-making largely rested with the CEO, who relied on his instincts and experience to steer the company.

South Africa offered much promise and Medpro South Africa was viewed as an excellent potential partner. In 2013, Medpro was one of South Africa’s largest pharmaceutical companies, was listed on the JSE and already had strong ties with Cipla India. Under a 20-year supply and manufacturing agreement (which was due to expire in 2025), Medpro imported generic drugs from Cipla India and sold them in South Africa. Medpro had a solid reputation in the market, buoyed by a diverse product portfolio and an excellent reputation in the trade, particularly among pharmacies. South Africa’s proximity to the rest of Africa (which Cipla had its sights on) was also a strong drawcard.

Although Medpro had seen exponential growth in revenue since it was established in 1992, by 2012 profitability was under severe strain. The South African rand had depreciated by 50 per cent (from R6.7/US$ to R10/US$) in the space of two years, leading to much more expensive imports. As 90 per cent of Medpro’s imports were dollar-based, the company’s cost of goods shot up. However, at the time, the South African government imposed price restrictions on the industry, which saw Medpro’s gross margin and after-tax profit margin decline significantly. By the end of 2012, the company’s profit figure stood at only R30 million, against revenue for the year of R2 billion. The company was also facing some governance challenges, which led to both the CEO and CFO stepping down.

The Medpro board saw the need for a strategic partner to help restore financial stability and effective governance at the company. Cipla India looked like the optimal choice because it had a long-standing relationship with Medpro and the companies’ product lines and supply chains were well established. As Cipla India largely controlled Medpro’s cost of goods through its pricing structures, it was decided that an equity partnership/acquisition would help to stabilise Medpro’s finances in the face of severe currency fluctuations. Furthermore, by acquiring Medpro, Cipla India would avert the possibility of any hostile takeover bid for the company by a competitor, which would be likely to threaten Cipla India’s ongoing sales to Medpro. After lengthy negotiations, Cipla India’s 100 per cent acquisition of Medpro was formalised in July 2013, in a deal valued at US$450 million.

The integration plan

Cipla India decided to retain most of the original management of Medpro following the acquisition, but the CEO position needed to be filled. Following a headhunting exercise, Paul Miller was appointed. Miller had extensive experience leading multinational companies in Europe, China and South Africa and also had noted skills in managing the integration process following mergers and recalibrating the operations for growth. Before joining Medpro, he had been vice-president and managing director of the South African operation of Mylan, the world’s largest generic pharmaceutical company. As a person, Miller was described as an inspiring leader and a strategic thinker who could build effective teams, while being humble and approachable at the same time.

Cipla India assembled a six-member integration team comprising experts from its own ranks to oversee the following functions for a six-month period: finance, IT, HR, manufacturing, product portfolio and legal.

Post-acquisition headaches: the early days

In the first year after acquisition, Medpro’s revenue and profit levels were lower than expected. Even its growth rate lagged behind that of the market. The company’s disappointing performance can be attributed to the following main factors:

This was Cipla India’s largest acquisition ever … To add to the challenge, Cipla India was trying to remove the remaining traces of its entrepreneurial character in favour of a more polished corporate personality.

  • Business challenges

The ability of a generic pharmaceutical company to grow its business is heavily dependent on the speed with which it launches a generic drug after the patent of the originator drug expires. For some years, Medpro had been falling behind its competitors in submitting new products to the Medicines Control Council in South Africa. As a result, its product portfolio was ageing and newer players were aggressively discounting Medpro on pricing.

Although Medpro enjoyed excellent relationships with roughly 3 000 independent pharmacies in South Africa, corporate pharmacies like Dis-Chem and Clicks had been gaining ground and together they had acquired about 30 per cent of the market. Intent on running efficient operations and expanding their networks, these entities were tough negotiators when it came to pricing. Medpro also faced competition from these large entities’ own house brands.

As much as 25 per cent of Medpro’s turnover came from government tenders, which involved much lower prices than private-sector deals. In addition, the government’s long payment lead times (90 to 120 days) and relatively short supply contracts (two to three years) put strain on the company’s cash flow and made planning difficult.

Medpro’s factory in Durban, which had cost the company R400 million since 2007, was using only 20 per cent of its capacity. Clearly, local manufacturing was not a core part of the business, possibly owing to a lack of specialised skills to turn the facility into a productive source of value.

Medpro was short of cash. The limited growth potential of an ageing product portfolio, low margins generated by its government tender business, rising costs due to inflation and a depreciating currency, and an underperforming factory all conspired to stifle revenue. Medpro’s loan of R300 million before the acquisition had ballooned to nearly twice that figure, adding to the company’s interest payment burden.

At the heart of the strategic turnaround plan was the need to align the Indian parent company and the South African subsidiary in such a way that their cultural identities would become seamlessly intertwined.

  • Regulatory challenges

In 2013, the Medicines Control Council tightened its rules for the submission of new products. An extended timeline for registrations was particularly problematic as Medpro had submitted very few products in the preceding few years (making catch-up difficult) and so the company ran the risk of being marginalised by more active industry players.

Cipla India, owing to its exposure to the US Food and Drug Administration (FDA) and World Health Organization (WHO), put a strong emphasis on quality assurance at Medpro and substantially increased the human resources component in the quality assurance department. Although this was a sensible move in the long run, there were initially some stock-out problems and product release delays.

  • Economic and political challenges

While the rand had depreciated sharply during the two years prior to the acquisition, it lost another 30 per cent of its value (for various economic and political reasons) in the year following the acquisition. This prompted serious questions about Medpro’s ongoing profitability and even the rationale for the acquisition. While the cost of goods was going up, prices needed to withstand rising competition from local (less import-dependent) suppliers.

  • Cultural challenges

Despite their evident synergies, Cipla India and Medpro turned out to have very different business cultures. Medpro had through the years operated much like a close-knit family. Loyalty and strong performance were generously rewarded by an indulgent CEO, and expensive sales conferences in far-off locations were commonplace. Decision-making largely rested with the CEO, who relied on his instincts and experience to steer the company. Everyone worked in silos and there was little cross-functional exposure or consultation. Medpro focused, much as a start-up would, on growth, but neglected to invest in streamlined processes and systems, supported by appropriate technologies. This had compromised efficiency. In keeping with Medpro’s laissez-faire business culture, employees’ performance was largely gauged through qualitative assessments. Some employees complained of a lack of fairness and equity in this regard and also that insufficient attention was given to preparing them for long-term careers.

Cipla India, in contrast, was much more structured in its business approach and more frugal in its spending habits. Sales conferences, for example, were practically non-existent. The new CEO of Medpro, Paul Miller, brought a much stronger sense of discipline to the company, stressing the importance of systematic analysis and transparent governance. He also believed firmly in consultation and well-informed, consultative decision-making. The latter proved to be alien to the Medpro employees, with some bemoaning the fact that seemingly endless round-robins and strategy sessions were slowing decision-making at the company. Cipla India added its own layer of governance requirements to the mix. In the face of sudden and sometimes dramatic change, ‘us’ and ‘them’ camps started to emerge.

This was Cipla India’s largest acquisition ever – and so it could not afford to fail. Yet there was a general lack of experience in running operations outside India. To add to the challenge, Cipla India was trying to remove the remaining traces of its entrepreneurial character in favour of a more polished corporate personality. At the end of its six-month stint, the integration team concluded that most of the ‘hard deliverables’ (such as financial and manufacturing systems alignment) were in place. However, the ‘soft deliverables’ (particularly the merging of business cultures) still needed attention. The feedback from the newly acquired entity in South Africa was less favourable, with some people claiming that the level of trust between the Indian parent and the South African operation had deteriorated.

Although the new CEO focused heavily on overhauling the operation and boosting revenues, he continued to promote the Cipla ideology of working hard and working ‘smart’ in order to make a difference in patients’ lives.

By July 2014, the problems gripping the company – both of an internal and external nature – painted a very worrying picture. In the face of Medpro’s poor financial results and dwindling market share, the global leadership even contemplated selling the asset. Could Paul Miller confront the myriad problems head on and turn the company’s fortunes around?

Fast forward to 2017: from vision to action

By April 2017, Cipla-Medpro South Africa was in a far healthier state than it had been three years earlier. Paul Miller had implemented a bold turnaround plan, tackling the many obstacles that lay strewn in the company’s path and crafting a more robust operation with strong potential for growth. Cipla-Medpro South Africa had become one of the fastest-growing and most profitable pharmaceutical companies in the country, turnover had doubled and ROIC (return on invested capital) had more than doubled since 2014. Overall, business performance was well ahead of that projected at the time of the acquisition and staff morale was high. The Cipla parent company had also given the South African team the responsibility for the whole sub-Saharan African region, thereby boosting its global turnover.

This almost unprecedented turnaround can largely be attributed to Paul Miller’s clearly articulated vision for the company and his unwavering commitment to make the company the best it could be. Although the new CEO focused heavily on overhauling the operation and boosting revenues, he continued to promote the Cipla ideology of working hard and working ‘smart’ in order to make a difference in patients’ lives. Having taken a candid look at what had gone wrong at the company, Miller and his management team formulated a new strategic plan to rejuvenate the business. The strategic plan had four focus areas:

  • Strategic focus area 1: innovation and growth

Much effort went into fixing the fundamentals in the business, which included analysing existing brands, products, pricing and customers in order to optimise their value and expose new opportunities. A number of key brands were given special attention, evidenced in new packaging, bolder promotion and keener pricing, as well as doctor education to drive awareness and acceptance. Greater emphasis was also placed on new product development and submissions to the Medicines Control Council and the forging of new alliances with pharmaceutical entities in South Africa to expand Cipla-Medpro South Africa’s marketing and sales reach.

 

  • Strategic focus area 2: operational efficiencies

Relentless cost control was one of the pillars of the rejuvenated operation. Among the strategies implemented were: a freeze in staff numbers for two years and the redeployment of selected staff members to high-growth areas; more rigorous cost control in raw material purchases and overhead structures; better inventory management; and improved payment terms from government and other key clients. A significant milestone was the dramatic increase in factory utilisation from 20 per cent to 90 per cent. The factory also became a green operation.

  • Strategic focus area 3: leadership and culture

The appointment of Paul Miller proved to be pivotal to the company’s operational and financial transformation. Another sound strategic move was the appointment of Indian expats to the key positions of heads of Finance and Manufacturing, respectively, to improve global engagement. The highly structured and consultative decision-making style was retained, with monthly governance sessions instituted, at which executives would brainstorm ways to enhance the business operation and solve problems.

The Cipla-Medpro South Africa story offers important insights into how even the most difficult international merger/acquisition can be pulled off if there is talented and committed leadership, supported by a clear vision.

Performance management was given a shot in the arm with the introduction of the DNA (Develop, Nurture, Achieve) model which set out measurable goals each year for the CEO, in consultation with Cipla India. These goals were then devolved to all levels of staff in the company. In addition, salary increases and annual bonuses were linked to performance, and career development and succession planning were prioritised.

  • Strategic focus area 4: ‘One Cipla’

At the heart of the strategic turnaround plan was the need to align the Indian parent company and the South African subsidiary in such a way that their cultural identities would become seamlessly intertwined. ‘One Cipla’ was the new mantra. What helped the process were regular interactions between the Mumbai- and South Africa-based employees, the standardisation of HR policies and the adoption of some of the most successful practices from the two legacy businesses. For example, Cipla India introduced the sales conference concept among its sales force and also adapted some of Medpro’s social responsibility initiatives for its own purposes.

Final thoughts

The Cipla-Medpro South Africa story offers important insights into how even the most difficult international merger/acquisition can be pulled off if there is talented and committed leadership, supported by a clear vision. Yet no company, least of all in South Africa, can afford to become complacent. The external environment is in constant motion, with new and unexpected pressures frequently upsetting the status quo. Vigilance and adaptability are essential for success. Cipla-Medpro South Africa would be wise, therefore, to keep its feet on the ground as it continues to reach for the stars.

  • Find the original journal article here: Saxena, N. & Ungerer, M. (2019). Cipla-Medpro acquisition: the pre- and post-merger story. Emerald Emerging Markets Case Studies, 9(1), 1-42. https://doi.org/10.1108/EEMCS-12-2017-0260
  • Nishant Saxena is the global chief strategy officer at Cipla Ltd, Mumbai, Maharashtra, India.
  • Prof Marius Ungerer teaches strategic management, leadership and change management on programmes such as the MBA, the MPhil in Management Coaching, and the PGDip in Leadership Development at USB. He is also an annual Visiting Professor at the NUCB Graduate School, International MBA Program, Nagoya, Japan, and a visiting faculty member of the University of Johannesburg.

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Bank lending to SMEs and business cycle in South Africa after the global financial crisis

Bank lending to SMEs and the business cycle in South Africa after the global financial crisis

The Steinhoff Saga Management review - University of Stellenbosch Business School

July – December 2019

Bank lending to SMEs and the business cycle in South Africa after the global financial crisis

Bank lending to SMEs and business cycle in South Africa after the global financial crisis

By Foluso Akinsola and Sylvanus Ikhide

  • DEC 2019

10 minutes to read

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The global financial crisis that was precipitated in the late 2000s paved the way for several years of economic restraint, and in some cases triggered recessions, in various parts of the world. Economic downturns place a particularly heavy burden on banks since they find it more difficult to raise new capital, extend new loans and meet their capital adequacy requirements. When capital is constrained, banks have two options: reduce lending or raise new equity. Most banks prefer to reduce lending as it is less expensive and less complex than raising new equity and is also more palatable to shareholders.

Economic downturns place a particularly heavy burden on banks since they find it more difficult to raise new capital, extend new loans and meet their capital adequacy requirements.

Financial crises: why SMEs feel the heat more than others

Small and medium enterprises (SMEs) are highly dependent on banks for external finance, especially working capital. Yet in the face of a financial crisis they are much more vulnerable than large corporations. This is because banks typically resort to tightening their lending criteria (such as making collateral requirements more onerous), which many SMEs are hard-pressed to meet. SMEs are viewed as relatively risky borrowers. They are also less financially sustainable than large corporations and in the face of a depressed economy their closure rates are higher.

Another area of concern is that during an economic downturn or full-blown crisis, SMEs are disproportionately affected if banks follow a procyclical approach to credit extension. Many international studies have revealed that banks extend more loans to SMEs when economic conditions are buoyant (and banks are more flush with cash) than when economic activity is at a low ebb. Thus, there is a ‘procyclical’ relationship between what is going on in the business cycle and banks’ lending behaviour. A drawback of this approach is that it accentuates the fluctuations in the business cycle and can prolong or deepen recessions when they come along. Not surprisingly, SMEs bear the brunt of these extended negative cycles and associated ‘credit crunches’ more than larger commercial entities.

When capital is constrained, banks have two options: reduce lending or raise new equity. Most banks prefer to reduce lending as it is less expensive and less complex than raising new equity and is also more palatable to shareholders.

Considering that SMEs play a pivotal role in their countries’ economies, their generally precarious position vis-à-vis established financial norms is cause for great concern. In South Africa, it has been estimated that 91% of formal enterprises are SMEs, which contribute between 52% and 57% of GDP and 61% of employment. The figures for most other African countries are similar. It would be a step in the right direction if SMEs enjoyed greater immunity from the vagaries of both the global and local financial environments.

While the financial crisis has generated a great deal of interest internationally in whether and how banks have modified their lending behaviour towards SMEs, relatively little research has been done on how SMEs have been affected in South Africa. Where studies have been conducted, they have largely been of a qualitative nature. The purpose of this study was to investigate bank lending to SMEs during the global financial crisis and whether its response to the business cycle was positive or negative. Vector autoregressive modelling was used, with monthly data sourced from the South African Reserve Bank (SARB) for the period 2008‒2014.

In South Africa, it has been estimated that 91% of formal enterprises are SMEs, which contribute between 52% and 57% of GDP and 61% of employment.

The study not only makes a valuable contribution to the quantitative literature on bank lending to SMEs in South Africa, but the results should also help to inform policies aimed at prioritising lending to SMEs during times of crisis – when a financial lifeline is most urgently needed.

Key finding from the study and the way forward

The study revealed strong evidence of credit procyclicality between the business cycle and bank lending to SMEs in South Africa during the period under review. This finding suggests that many banks reduce their lending during lean times when there is increased risk of non-payment and their capital base shrinks. This could have economy-wide repercussions as SMEs, being the important economic actors that they are, would be cut off from credit which is often needed to sustain their operations and growth.

Banks extend more loans to SMEs when economic conditions are buoyant (and banks are more flush with cash) than when economic activity is at a low ebb. Thus, there is a ‘procyclical’ relationship between what is going on in the business cycle and banks’ lending behaviour.

There is a clear need for the banking sector to make more – not less – credit available to SMEs during significant economic downturns or crises, underpinned by innovative checks and balances to mitigate risk. SMEs would also benefit if they had access to a more diverse range of finance options which could be appropriately tailored to their specific needs – rather than be forced to measure up to a ‘one-size-fits-all’ standard. The introduction of forward-looking, credit-supporting policies would help to accelerate this process.

There is a clear need for the banking sector to make more – not less – credit available to SMEs during significant economic downturns or crises, underpinned by innovative checks and balances to mitigate risk.

  • Akinsola, F. & Ikhide, S. (2019). Bank lending to small and medium scale enterprises (SMEs) and business cycle in South Africa after the global financial crisis. The Journal of Developing Areas, 53(1), 79-94. DOI: 10.1353/jda.2019.0005
  • Foluso Akinsola is a doctoral graduate of development finance from the University of Stellenbosch Business School.
  • Sylvanus Ikhide is a professor of Development Finance from the University of Stellenbosch Business School.

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This is how South Africa can handle the growing demand for higher education

This is how South Africa can handle the growing demand for higher education

The Steinhoff Saga Management review - University of Stellenbosch Business School

July – December 2019

This is how South Africa can handle the growing demand for higher education

This is how South Africa can handle the growing demand for higher education

By Annaliese Jeanne Badenhorst

  • DEC 2019

30 minutes to read

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Why is higher education so important?

In South Africa, higher education is mostly offered through private education, and through open and distance learning (ODL). Here, ODL refers to the amalgamation of open learning (with open referring to no specific entry qualifications) and distance education (usually digitally delivered).

South Africa’s triple challenge of poverty, inequality and unemployment has severe consequences for the economic, social and political conditions in the country. Private higher education, offered as distance education, could potentially help to address all three of these challenges.

Numerous studies have investigated the link between education and economic growth, showing that it is most likely the combination of factors resulting in sustained economic growth. However, the policy dilemma that South Africa is facing is how to spend money to best address poverty, inequality and unemployment. Should tertiary students receive free education while thousands of primary school kids are still using pit toilets and secondary learners cannot read or write?

Indeed, the expansion of tertiary education in South Africa (and in Africa) has significant potential to increase the per capita income growth rates of the county. Therefore, how can South Africa make higher education more accessible over the next ten years?

About open and distance learning

Open and distance learning (ODL) has grown in popularity due to its perceived potential to increase access to education – ultimately to gain qualifications to ease unemployment. Developing countries, especially, are turning to ODL to help solve their problems of lack of resources and access to higher education. The advantages of OLD include cost-efficiency, easier access, flexibility and lifelong learning. ODL also comes with challenges, like older students, lower completion rates, and the risk of favouring accessibility over quality.

Public versus private higher education

Private higher education has seen significant growth over the past few decades. Today, about one-third of all higher education enrolments are at private institutions.

Free higher education is seen as the best and sometimes only way out of poverty and unemployment.

The public versus private question of higher education has raised debates on social and economic policy. The debate continues around the private versus social or public benefit of education, i.e. who bears the cost and who gets the benefit from higher education. Should higher education be publicly funded if the greatest portion of the benefit will be the personal gain in terms of higher lifetime salary earned?

Developing countries like China, India, Nigeria and South Africa have the potential of a demographic dividend, where a large proportion of the population is young and potentially productive workers. However, the demographic dividend can only be realised by countries that are able to educate and train these young people and provide jobs for them. The increase in demand for higher education in these countries can arguable only be met with a combination of private and public higher education.

It is interesting to note that the remarkable growth in private higher education enrolments happened despite some formidable forces. These forces include unparalleled growth in public enrolments in the same time; partial privatisation of public institutions oftentimes helping to expand public enrolment; persistent expression of the view that higher education is a public good and a basic human right; responsibility for higher education provision assigned to the state with the resultant begrudging acceptance of private higher education; expanding regulation in terms of quality assurance and accreditation systems.

Although private higher education holds many benefits, it also has shortcomings. In a study of private higher education in Africa it was concluded that even though private higher education was successful in improving access to education, the quality of education, student experience and the recognition of qualifications, it nevertheless failed to reduce costs and retain skills on the continent.

How can higher education help South Africa to grow?

Both private education and open and distance learning (ODL) has the potential to increase access quickly for masses of students, and at lower cost than traditional face-to-face instruction that needs expensive physical infrastructure.

The private sector can arguably provide this increased access more efficiently than government. Above all, South Africa, like most developing countries, simply does not have the budget to provide higher education for all that demands it, because the country also has to meet the increased demands for better housing, health and schooling – all which are essential for economic growth.

The private sector, on its own or in partnership with the public sector, is thus perfectly positioned to provide increased higher education access where governments are unable to. This is why this study explored how the combination of private and ODL in the higher education sector will evolve over the next ten years in South Africa.

How was the study conducted?

The method used to explore the future of private, and open and distance higher education in South Africa over the next ten years was strategic foresight – the capability to craft a diversity of forward views, and to apply emerging insights in practical ways. In this study, framing, scanning and forecasting (scenarios) were used to develop future scenarios for the private and ODL higher education sector. This is how the scenarios were developed:

Step 1: Identifying the scenario field

The issue to be addressed by the scenario process is: What is the future of private ODL in higher education in South Africa over the next ten years? How can private ODL assist to solve some of the current higher education problems in the country?

Step 2: Identifying the key factors

This step comprises describing the scenario field according to the key factors (trends, variables or events) that impact the field, while also serving as the means for the field to have an impact on the world. These key factors, which were identified during the causal layered analysis and environmental scanning processes, are detailed below:

  • #Feesmustfall: The most important recent event that impacted the higher education industry is the announcement in 2018 of free higher education for poor students. The NSFAS system that provided loans and bursaries to students was changed to a system of student grants to qualifying students from poor families to study at public universities and colleges. The #feesmustfall movement has significantly increased the demand for higher education, for both public and private providers. Free higher education is seen as the best and sometimes only way out of poverty and unemployment. However, the expectation has been created that higher education must be free for poor students, and hence private providers are finding it more difficult to charge and collect tuition fees. Private providers are facing the dual challenge of increased demand but more resistance to fee payment. The reality is that the ‘excess’ students will not automatically find their way to private institutions unless free education is expanded to the private sector, or if alternative methods of financing can be found. With South Africa’s large youth population it is expected that the demand for free higher education will increase over the next ten years.
  • Poor school outcomes: Poor school outcomes in terms of literacy and mathematics skills has a significant impact on the higher education sector. Students are ill equipped for the demands of higher education. Students take longer to complete their courses and the dropout rates are very high. On the other hand, poor school outcomes also create opportunities for the higher education sector to focus on courses that help students to complete or improve their matric results, or to gain basic literacy and numeracy skills. It is expected that this trend will not change significantly over the next ten years.
  • Unemployment: The high unemployment rate in South Africa both has an impact on and is impacted by the higher education sector. The high number of unemployed youth is due in part to their poor schooling and lack of higher education. Young people with some further education are more likely to find employment. Being unemployed makes it very difficult if not impossible to access educational opportunities. It is not expected that South Africa’s unemployment rate will change significantly over the next ten years.
  • Skills shortage: South Africa is experiencing both a skills shortage and a skills mismatch. The country has a surplus of low and unskilled workers, while the modern economy needs higher skilled workers. Government has also not put policies in place to assist with the transition of workers from vanishing low-skilled jobs to the new higher skilled ones. The continued decline of industries like farming and mining is exacerbating this trend. It is anticipated that the skills shortage in the country will continue to increase over the next ten years.

The reality is that the ‘excess’ students will not automatically find their way to private institutions unless free education is expanded to the private sector, or if alternative methods of financing can be found.

  • Technology: Technology has significantly changed the face of higher education, especially in the ODL sector. The mode of delivery is now through online, individualised courses, with study materials provided electronically. In South Africa, a large part of the population still does not have access to the internet. In addition, data is still expensive compared to international standards. Thus, even though it is expected that technology will play an increasingly significant role in higher education, it is expected that in South Africa the technology adoption will be slower than internationally over the next ten years.
  • Open and international education: The trend for open higher education (without academic admission requirements) is growing internationally, but is not yet as prevalent in South Africa. Taking into account the country’s past and current poor school outcomes, open education may be the only way for previously disadvantaged groups to gain access to further education. Going hand in hand with open education is the internationalisation of higher education. Technology has made it possible for students all over the world to attend virtual classrooms via the internet (MOOCs, Getsmarter). Higher education businesses thus have to compete globally for students. It is expected that the opening up and internationalisation of higher education will continue or even speed up over the next ten years.
  • Private education: Internationally, private education is growing rapidly. In South Africa, two large listed private education companies, Advtech and Stadio, have announced ambitious expansion plans for their higher education businesses. In the light of the huge demand for higher education, which the public sector will not be able to meet in the short term, huge opportunities remain for the private sector, and for public-private partnerships. Over the next ten years, the demand and opportunities for private providers are expected to grow.
  • Changing skills demand: One of the major trends that the higher education industry in developed countries has to contend with is changes to the types of skills being demanded by the Fourth Industrial Revolution. The challenge for higher education institutions is to identify which courses to discontinue and which new courses to develop. Due to the uncertainty and the fast pace of change in the skills market, the ability to learn has become a key skill. ‘Learning how to learn’ is already one of the most popular online courses. The implication for the industry is that ‘what’ people learn will be changing, and there may be a shift from focusing on ‘specific’ job-related training to ‘general’ skills training. It is anticipated that the pace of changes in skills demand will speed up over the next ten years.
  • Lifelong learning: The trend of lifelong learning has implications for both ‘who’ is being trained and ‘what’. Higher education institutions will have to adapt to cater for older students, and possibly more educated students. Over the next ten years it is expected that the demand for lifelong learning will increase.

Step 3: Analysing the key factors

After the key factors had been identified, they were assessed according to the degree of unpredictability or uncertainty, and the degree of impact or importance. This was done to test whether the ‘key’ factors were in fact the key uncertainties impacting on the future of the industry.

Step 4: Scenario generation

The study developed four scenarios for higher education in South Africa over the next ten years. The scenarios were generated using the following two pivotal uncertainties:

  1. Will the future demand for higher education be for structured (mostly classroom based) or unstructured learning (shorter, open access, skills-based courses, taken at the learner’s own time and place, usually online, with little or no prerequisites)?
  2. Will the future supply of higher education be increasingly public or private?

Four possible scenarios were developed: the status quo, distinction, pass and fail scenarios:

Status quo scenario

The current state of higher education in South Africa will continue more or less as it is for the next ten years. Using the two pivotal uncertainties, the current state can be described as mainly public and structured.

About 80% of higher education students are studying at public institutions, with only the minority of 20% at private institutions. Courses at these public institutions are mostly structured three- or four-year diplomas and degrees, with strict entrance criteria and formalised curriculums. Even though the largest public higher education institution in the country, Unisa, is a distance only provider, the majority of students at public institutions are attending classroom-based lectures. In this scenario, looking at the next ten years in South Africa, the following factors remain more or less unchanged: high unemployment levels, poor school outcomes and skills shortage. It is anticipated that it would take much longer than ten years to significantly improve school outcomes because some of the underlying causes like poor teacher training, the lack of investment in school infrastructure in poor areas and the current below average learner performance in basic skills like reading and mathematics will not be addressed quickly and sufficiently. The recent significant increase in the budget allocation for higher education has come at the cost of basic education, where the budget for infrastructure has been reduced. If some of the increased funds for higher education can be used to train school teachers then school outcomes may show some improvement, but so far there has been no indication that the higher education funding will be used to address specific skill shortages.

With the status quo, the current high unemployment levels as well as the shortage of skills continue over the next decade. The country’s economic growth rate has been very low, and government does not seem to have plans to address either the economic growth or unemployment.

In terms of addressing the skills shortage, government has started building two new universities, but demand for higher education far exceeds supply, as can been seen from the current NSFAS applications. Once again, there are no plans to address specific skills shortages, like teachers, scientists, computer programmers and software engineers.

The #feesmustfall campaign continues to put pressure on government for free education.

Government has already increased the budget allocation for the next two years to include second and third year students (this year only covered first year students). Currently, NSFAS only covers public education, thus if this policy remains, the demand for public education will continue to increase. As long as NSFAS does not finance studies at private institutions, the growth prospects of private institutions remain limited.

With the status quo, the current split between public and private higher education provision remains more or less constant, thus the majority of students will be at public institutions. Without specific intervention, the balance between public and private higher education will remain at current levels.

Developing countries, especially, are turning to open and distance learning to help solve their problems of lack of resources and access to higher education.

Private education relies on paying customers, but the current low economic growth rate and the high number of indebted credit consumers makes it difficult to envision significant growth in the industry. The private providers can assist with the increased demand that has been created for higher education, but some form of government intervention will probably be needed, either through funding or policies to specifically promote private education.

The status quo also assumes that most higher education students attend classroom-based lectures

and that ODL remains a minor player in the higher education industry. Most courses will be structured diplomas or degrees with strict entrance requirements. The structured nature of these courses will continue to put them beyond the reach of many South Africans who did not have adequate schooling results and who may have limited time and resources for further studies.

Stringent entrance requirements will continue to put barriers in the way of ‘non-traditional’ students who are seeking to overcome past poor schooling outcomes. Higher education will remain accessible only to those who have already achieved some measure of success in good school results.

The status quo scenario shows that South Africa will make slow progress towards addressing the skills shortage, unemployment and economic growth. Higher education is delivered mainly through public, classroom-based institutions. No significant increase in access takes place and public institutions continue to expand at a slow pace. Growth in private institutions is modest. Structured courses will take preference over less structured, ODL courses.

Distinction scenario

In this scenario, South African higher education gets a distinction. This scenario projects a future for higher education over the next ten years where both public and private institutions significantly increase the number of students gaining access. At the same time, higher education courses become shorter, skills based and more unstructured. More students get access and complete their courses successfully, because courses are tailored to student and industry needs, hence reducing the skills shortage and unemployment, and potentially aiding economic growth.

An important factor in realising this scenario is that public and private institutions will work together, either informally or through public-private partnerships. The best outcome for higher education will be achieved if the best of public and the best of private higher education are combined, and the best assets and skills of each leveraged to the gain of all students. There are already a few examples of where public and private institutions are working together. For example, Unisa students attending classroom lectures at private colleges, hence private tuition used to obtain a public qualification. Other examples include government departments paying for their staff to study at both public and private institutions.

Public universities have limited infrastructure and state subsidies to deal with the growing demand, whereas private entities such as Stadio have raised millions to expand private higher education access. Stadio plans to expand into fields like medicine and engineering, which are qualifications that are expensive to develop and accredit, thus it would make more economic sense to partner with existing public institutions to share resources. Public institutions have a lot of knowledge capital that can be leveraged by private institutions through either classrooms or distance learning. By working together, access is increased significantly and cost-effectively, and some progress made to alleviate the skills shortage in the country. In this scenario, government sees the private sector as a partner in providing access to higher education to an increasing number of students.

By working together in partnership, the financing of higher education is applied where it is utilised most efficiently, for both public and private studies. Rather than ‘forcing’ students to public institutions (some that have less than stellar reputations), because only public studies are funded, students can go where it suits them best. ODL studies are traditionally less costly than classroom studies, hence by paying for private ODL studies government is assisting many more students from the same budget. Government continues to look for the most cost-effective ways of studying in order to make a significant improvement to the country’s skills shortage.

Increased access to higher education not only relies on more ‘seats’ being made available at both public and private institutions but also for access to be more ‘open’. This means that access is available to everyone, regardless of past academic performance or other selection criteria.

To cater for both the unskilled and those requiring mid-career retraining, courses that are shorter less structured and more skill focused are developed. Someone making a midlife career change does not necessarily have the time and money to complete a full three-year degree, but they can complete a one-year focused skills programme. All higher education institutions will be considering the job requirements in designing future courses. Future job seekers will acquire a portfolio of skills and courses, rather than follow a fixed degree programme. A balance is achieved between public and private institutions and between structured and unstructured higher education.

The message of the distinction scenario is that South African higher education, and hence the country, will only be successful if both private and public institutions work together in all areas of higher education.

Pass scenario

In the third scenario, South African higher education achieves a pass grade. In the pass scenario, higher education develops to be more private and less public.

Two potential wild cards or black swans for the higher education industry in South Africa have been identified; the one relating to privatisation or nationalisation, and the other relating to technology development.

Over the next ten years, private higher education increases its share from the current 20% to over 50% of students, which brings the country more in line with other developing countries. It is forecasted that enrolments at public institutions stagnate, while the growth occurs mainly at private institutions. The stagnation at public institutions is the result of increasing demands for free education, the failure of the NSFAS system or shortage of government funds. Simultaneously with increased privatisation, higher education also becomes more unstructured, open and distance based, and international. Increased privatisation of higher education happens because of either specific government intervention to promote private higher education, or through a deterioration of public education, or a combination of both. Government encourages more private institutions through deliberate policies and by making it easier to register private institutions by local and international institutions. By facilitating the funding of private studies, either directly (grants) or indirectly (bank loans), government significantly increases the supply and demand of private studies. By promoting private studies, government is using the private sector to accommodate the excess students that the public institutions do not have space for. ODL institutions are uniquely situated to cost-effectively handle the overflow of students. It is cheaper and quicker to expand capacity at ODL institutions, because there is no need for additional costly physical infrastructure.

In this scenario, it is anticipated that the enrolments at public institutions stagnate at current levels

for two reasons. Firstly, due to the high cost of free public higher education, it is unlikely that government can afford to expand access significantly. Secondly, since government has only built two new universities in the last 20 years, it is unlikely that it will have the capacity or the budget to build many new public institutions over the next ten years.

Government has not indicated that it plans to either build more facilities or significantly increase the number of places at current institutions. Therefore, if the country wants to significantly improve the skills shortage and unemployment, it would be up to the private sector to supply such skills.

If the #feesmustfall campaign continues to cause disturbances at public institutions, students may be disinclined to go there and many may prefer private institutions. Similarly, the problems at NSFAS, which has been put under administrative management recently, may cripple public institutions, if funds are not dispersed to them timeously. Students may prefer to attend private institutions that are not affected by political problems.

Private institutions are better at adjusting to the trends of changing skills demand and lifelong

learning. Some of the international ODL institutions, especially the online educators, have been much quicker in adjusting their course offerings in response to the changes in skills demand than

the traditional public providers. The demand for shorter skills-based programmes is increasing, especially for workers that do not have the time or money for a full course or degree.

This scenario is better than the status quo, because supply (access) in the private higher education

sector is expanded and it plays a bigger role in alleviating the skills shortage in the country, and possibly also unemployment. At the same time, less structured, shorter, open-access programmes make higher education more accessible and affordable to more students.

Fail scenario

In the last scenario, South African higher education fails. This scenario envisages a decline in both

public and private higher education, thus fewer students at both public and private institutions.

The failure of the NSFAS student financing scheme leads to fewer students being assisted financially and hence fewer students studying at public institutions. Continuing administration and financing problems at NSFAS result in delays of payments to public institutions, which puts them under severe financial strain. Questions are also arising around government’s ability to fund the increased budget allocations for higher education as the scheme is extended to second and third year students over the next few years.

As the scheme continues into future years, the institutions’ funding is more and more based on government funding. Should government not be able to meet all the funding requirements, or if government decides to reprioritise spending (like to primary education or national health care), public institutions are forced to reduce their student intake.

This scenario anticipates that private higher education will simultaneously decline, or at best

remain static. If there is no significant change to the way private studies are financed, private institutions will not expand significantly to take up the slack from public institutions. Similarly, without government policies specifically promoting private higher education, growth in the sector will remain subdued.

It is expected that the opening up and internationalisation of higher education will continue or even speed up over the next ten years.

This scenario expects that the problems of high unemployment, skills shortage and poor school outcomes will continue, or possibly even worsen over the next decade. In this scenario both education and the country fail.

Step 5: Scenario transfer

What can one do with these scenarios? Some of the recommended scenario transfer options for this study are impact analysis, actor analysis, sectoral analysis, strategy development and policy evaluation, and backcasting.

Wild cards and black swans

Wild cards are events that have a low probability but that can have a high impact. Similarly, black swans are random, unsystematic and unforeseen events that could have a high impact on a business or sector. They are often described as the ‘unimaginable’. Two potential wild cards or black swans for the higher education industry in South Africa have been identified; the one relating to privatisation or nationalisation, and the other relating to technology development.

What did the study find?

To recap, this study wanted to find out if and how the combination of private and ODL higher education can help to address South Africa’s education challenges over the next ten years.

The study has shown that both private and ODL higher education providers are uniquely situated to address some of the main challenges that higher education will face. Indeed, the increasing demand for access to higher education can be met with an increasing supply of both private and ODL institutions.

ODL institutions already have the capacity to enrol many more students, and private groups have raised funding to expand their capacities. ODL specifically addresses some of the trends in higher education like changing skills demands and the need for lifelong learning. ODL also opens access for those who did not have the opportunity in the past or with inadequate schooling, a significant constituency in South Africa.

The scenario exercise showed that the best outcome for higher education in South Africa will be if public and private institutions both form part of the future. This creates the opportunity for private-public partnerships to deliver the best education outcomes.

The scenarios show where higher education policy in the country needs to be focused. Policy makers need to decide on the best balance between public and private higher education, and also on the balance between structured programmes and open, unstructured programmes. Appropriate policy will encourage private investment and partnerships in the industry. Government should also expand financing to students at private institutions.

It is recommended that the expansion of private higher education is encouraged through relevant government policies. Private capital should be encouraged to invest in higher education, both as new ventures and the expansion of current institutions.

In terms of future strategies, it is recommended that both private and public institutions become more ‘open’ in terms of entrance requirements, are less structured, and develop shorter, skills-based modular courses. The transferability of credits and qualifications between institutions also needs to be made easier. In addition, private institutions should focus their efforts on areas where skills shortages have been identified.

A further recommendation is that both government and the private sector explore ways to work together to create the best outcome for higher education in South Africa through public-private partnerships, joint ventures and other collaborative efforts.

  • This article is based on the research assignment of Annaliese Jeanne Badenhorst – a PGDip in Futures Studies alumnus of USB. The title of her research assignment is: The future of private, open and distance higher education in South Africa over the next ten years.
  • Her study leader was Prof André Roux, programme head of USB’s portfolio of Futures Studies programme. Prof Roux lectures in Management Economics and Africa Country Risk Analysis at USB

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Downsizing How this effects the emotions of the leaders implementing the change

Downsizing: How this affects the emotions of the leaders implementing the change

The Steinhoff Saga Management review - University of Stellenbosch Business School

July – December 2019

Downsizing: How this affects the emotions of the leaders implementing the change

Downsizing How this effects the emotions of the leaders implementing the change

By Leslie William Thomas

  • DEC 2019

22 minutes to read

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Downsizing is difficult

Increased globalisation, fierce competition and an informed consumer base are leading to more organisations implementing measures to ensure they have a competitive advantage, provide value to stakeholders and focus on sustainability. Downsizing is one such strategy.

This study, conducted among participants in a South African liquor company, explored how executioners – those individuals tasked with executing the downsizing – experienced their responsibilities.

How do these corporate leaders cope with the emotional burden of implementing the downsizing? How do they deal with the anxiety, anger, guilt, envy, relief and denial typically associated with this?

There is growing evidence that executioners suffer from similar symptoms as those who are survivors and victims of downsizing even though their experiences differ.

There is growing evidence that executioners suffer from similar symptoms as those who are survivors and victims of downsizing even though their experiences differ.

Why the need to downsize?

Downsizing – also called restructuring, redundancy, delayering or rightsizing – is a change management approach used by many organisations to decrease their number of employees. In the past, downsizing was usually driven by difficult economic times. It has now become a strategy to improve organisational performance because downsizing can help to reduce costs, cut down on bureaucracy, facilitate quicker decision making, encourage entrepreneurship and increase overall profitability.

Themes in understanding the emotional experience of downsizing

What does the literature say about the emotional experience of victims and survivors (and executioners) in the downsizing process? What are the themes deemed important in understanding survivors’ emotional experiences and reactions in this context?

  • Job insecurity: Researchers have shown that job insecurity increases, leading to negative responses that in the long term can harm both the organisation and the individual. Having said this, those leaders who have to execute the downsizing are survivors themselves and are just as much at risk at losing their jobs.
  • Guilt, anxiety, fear and anger: During downsizing and after its conclusion, symptoms such as depression or anger as a result of survivor guilt is a serious concern for downsized organisations. Guilt is created as a result of inequity, motivating survivors “to redress this guilt through behavioural or psychological means”. Some survivors who perceive unfairness in the dismissal of a co-worker may exhibit behaviour like increasing work performance to offset such guilty feelings. Some researchers found that survivors were more task driven post-downsizing and worked harder in order to compensate for these feelings. Other researchers argued that the survivors’ reason for working harder was as a result of them wanting to protect their employment status in the company as they fear the impact of future downsizings and possible job losses. Those executioners who were in a close relationship with victims experienced higher levels of anxiety as opposed to those who executed administrative functions. In extreme cases, managers resorted to committing suicide as living with their guilt was no longer possible.

Why was this study undertaken?

While much has been written about the reactions of survivors and victims, little is known about the emotional experience of those leaders who have to implement the downsizing.

Research on executioners (also called executors, downsizers, downsizing agents, executioners  or implementers) is limited both locally and internationally as studies mostly capture the reactions of victims (those who exit the organisation during the downsizing) and survivors (those who remain in the organisation), or concentrated on the financial and organisational consequences of downsizing.

A review of the literature on this topic shows different views of how survivors’ previous experiences with downsizing affect their perception of, and responses to, later experiences with downsizing. On the one hand, a significant number of North American researchers argued that survivors may benefit from earlier experiences with downsizing as this will help to make them more resilient over time. On the other hand, some management scholars found that experiencing multiple occurrences of downsizing made survivors more vulnerable over time and intensified feelings of stress.

Some researchers found that survivors were more task driven post-downsizing and worked harder in order to compensate for these feelings of guilt.

This study was undertaken to explore the effect of past exposure in downsizing on the emotional experience of those managers who have to implement the downsizing. The research was conducted in a South African firm and sought to confirm the work of Gandolfi (2009) and others in a different geographical setting.

How was the study conducted?

This study sought to capture the real-life experience of those leaders responsible for the planning and execution of downsizing in a large organisation that has first-hand experience of mergers and various waves of downsizing and restructuring.

The sample participants chosen for this study were those leaders who had to implement the structural changes. Qualitative data was obtained through semi-structured interviews with 12 such executioners: five manufacturing managers, two HR executives, two HR managers, one SHERQ manager, one quality manager and one programme manager. The participants had 107 years of combined work experience at management level and an average of four downsizing contacts per individual.

 What did the study find?

Four key themes emerged from the processed data:

  • Proximity to the change: The emotional experience of executioners in downsizing is determined by proximity to the change. Hence, the direct role of executioners in crafting change impacts their experience. Also, the closeness of their relationship with the victims impacted their emotional experience.
  • The impact of past exposure to downsizing: Past experience in downsizing has an influence on the emotional experience of executioners in subsequent downsizings. Past experience impacts their experience from a process perspective.
  • Coping mechanisms: Executioners employ different coping mechanisms to reduce the emotional impact of the change on themselves. These coping mechanisms include emotional, cognitive and physical distancing.
  • The key role of support: Executioners need support to help release emotions as a result of the impact of the downsizing experience. This includes support inside and outside the work environment.

Executioners employ different coping mechanisms to reduce the emotional impact of the change on themselves.

Theme 1: Proximity to the change

The first main theme that emerged from the research was the emotional response of the executioners. While executioners described their roles as emotionally taxing, their experiences varied. The following contributed to the emotional response of and the intensity felt by executioners:

  • Proximity to the emotional aspects (how close in the process they were to victims)
  • The role that executioners play in crafting the business case for change and the decision-making processes
  • The closeness of the relationship to the downsized.

Research showed that executioners who are closer to the epicentre of the emotional aspects as a result of direct contact with the downsizing victims are substantially more exposed to emotional pain. For most of these executioners, the experience was not pleasant. One participant indicated: “It’s never an easy conversation. No matter how many times you do the process, it never gets easier. It is always a dreaded conversation … It is really a combination of feelings from gosh, this person mustn’t commit suicide or do something crazy … so that’s why I think for me seeing that person go through that, you feel emotional and I get teary.”

Executioners who only performed tasks in the background were shielded from exposure to the emotional pain.

Another factor influencing the emotional experience of executioners is the direct role played by the executioner in crafting the change. Many executioners expressed feelings of guilt, sadness, anger, fear anxiety and concern. Most of them described feelings of extreme guilt when they felt that they were responsible for causing the pain and distress in those being downsized.

The closer the relationship with the victim, the more intense the feelings of guilt and sadness felt by the executioner.

The executioners struggled to deal with their emotions during and even after the event when they, by virtue of their role, contributed to the change and decision-making process resulting in others being downsized. The direct role that executioners play in the crafting of change also puts them in an advantageous position of having access to more information. However, they had to keep this information confidential until official announcements were made, and often had to sign non-disclosure agreements. In the absence of information to employees, rumours spread. In the absence of an official story, people made their own story. This led to more anxiety for these executioners. As one participant commented: “The feelings of anxiety and uncertainty is inversely proportional to the amount of information the organisation provides.”

Executioners felt as if they were forced to lie and deceive colleagues. A group of participants felt that some of these actions were not aligned with their values and some executioners struggled with dissonance. Most of the executioners were not comfortable to go about their tasks in a business as usual way, knowing that change was on the horizon.

A further factor influencing the emotional response of executioners is the closeness of the relationship that the executioners had with the victims. The closer the relationship with the victim, the more intense the feelings of guilt and sadness felt by the executioner. Most of the executioners said that it was more challenging to exercise their executioner responsibilities when dealing with employees with whom they had long-standing relationships, or when they knew about these employees’ personal circumstances. As one participant explained: “If you have that bond with a person then it doesn’t matter if it is your first or last time, it is personal.”

Theme 2: The impact of past exposure to downsizing

The role of past experience in carrying out downsizing activities was the second theme that emerged.

Research has shown that survivors who have already experienced downsizing may interpret a more recent downsizing differently from those who never had such an experience before. Veteran employees who have been through downsizing before may, as a result of constant reflection, benefit from coping mechanisms and strategies that they have developed.

On the other hand, some researchers suggested that repeated downsizing episodes had a cumulative negative effect on survivors’ well-being, as the continual fear of potential job loss together with the pressure from an increased workload led to chronic stress over time, which weakened the individual’s mental coping resources. Hence, most survivors do not become resilient after repeated waves of downsizing exposure. Instead, they became more vulnerable.

… some researchers suggested that repeated downsizing episodes had a cumulative negative effect on survivors’ well-being, as the continual fear of potential job loss together with the pressure from an increased workload led to chronic stress.

Participants in this study indicated that past experience in downsizings provided insight into expectations for future downsizings. This allowed them to be better prepared for the process aspects of the change. Some of the participants felt that the preparation and execution of the process trumped any thoughts of the emotional aspects, confirming that previous downsizing experience helped them to be more task focused. One participant noted, “You take the emotion out because you prepare for the process”.

Past experience in downsizing also impacted the way in which executioners prepared themselves for the emotional aspects of the change. Most participants found themselves better skilled to execute the process and better prepared for difficult conversations. As one executioner commented: “So in this final wave of change, it was upsetting, a lot of anxiousness … but I was more prepared for it this time now. I have a better set of skills than I did six years ago … and hence I found myself in a little bit of a better emotional state and psychological state.”

Some, especially among the HR participants, highlighted that over time they became veterans of the process and even a little emotionally distant. Emotionally numb executioners felt less emotionally taxed, allowing them to remain seemingly objective. The likelihood of burnout was found to be higher among survivors of multiple downsizings.

Most of the participants agreed that when other factors – such as relational closeness to the victim and proximity to the emotional aspects of change – are present, delivering the bad news to employees was never easy. What’s more, each situation was unique.

Theme 3: Coping mechanisms

The third theme to emerge was the coping mechanisms used by executioners to deal with the intense emotional aspects of downsizing.

Research has shown that the implementers of downsizing employ various coping techniques to lessen the negative effects of their emotional experiences. This enables them to remain composed and sensitive towards victims during the downsizing.

Executive managers were found to cope better before and during the downsizing than middle managers who used avoidance and disengagement coping strategies. Executive managers applied positive thinking while middle management reflected on their sense of helplessness to control the situation. Executioners also used emotional distancing techniques – such as detached concern (like a doctor who detaches himself from the emotions associated with a situation to make clearer decisions while still being empathetic towards the patient), physical distancing and cognitive reframing (where the individual reframes a negative situation into a positive or at least neutral one).

Most of the executioners said that support outside of the workplace was more available and effective than the support provided by the organisation.

In this study, the executioners used the following distancing reactions to decrease their stress levels:

  • Emotional distancing: To remain objective and feel better prepared for rational decision making during the process, participants sought to disengage emotionally from the process.
  • Cognitive distancing: Executioners also distanced themselves cognitively from the emotional epicentre and the pain caused as a result of their actions. This involved substituting negative aspects of an event with more neutral or positive features. Normalising, denial of injury and perception of justice and fairness were some of the tactics employed by executioners. To try and reduce the feeling of personal responsibility in letting people go, executioners normalised downsizing as necessary to build a sustainable business for the future: “It is positive to create a long-term sustainable business for the greater majority.” Denial of injury is another tactic employed. This is where executioners believe that victims do not suffer hurtful consequences. In this case, some of the executioners believed that the individuals received generous packages and that retrenchment actually led to new opportunities for these individuals. Some participants appeased feelings by suggesting that the process was fair and just, with one participant commenting: “Non-performing and free-riding individuals were exited in an amicable way.”
  • Physical distancing: Some executioners eased their feelings by engaging in physical distancing tactics. As one participant said, “When it comes to the team, after someone has exited the team, everyone has lost someone and they need space to grieve. I then just stay out of their way.”

Theme 4: Different forms of support

A fourth theme that emerged was the need for executioners to have an outlet or avenue of release for the emotions experienced. Most of the participants described a need for a support structure within and outside of the workplace to help them deal the emotions and stress.

Most participants felt that support from peers, colleagues and even line management was not adequate. They agreed that much more work needs to be done to ensure adequate support – like training interventions for the role, and more peer and line management interaction to deal with the emotional aspects of the process.

Most of the participants said that support from family and religious groups were important while some actively engaged in sports and recreational activities. Most of them said that support outside of the workplace was more available and effective than the support provided by the organisation. As one participant said, “I have a good support structure at home … I can talk about stuff with my wife; you know just unload some burden and get a non-judgemental feedback from her, obviously within no disclosure rules.”

Organisations will already do well if they abolish the terms affected and non-affected employees in downsizing and start to realise that everyone is affected in downsizing. The survivor, victim and executioner are all affected by the downsizing activities.

Downsizing affects everyone

The findings of this study illustrated that the work of executioners is emotionally challenging and that there is evidence of survivor syndrome in executioners. Also, participants experience at least the same if not a higher intensity of emotional stress after numerous downsizings. Those at the epicentre of the emotional aspects experience the intensity of emotions more prominently than those who do not come in contact with victims. In addition, when there is a close relational connection with the victim, the emotional stress increases.

This study has shown that previous experience in downsizing does make it easier for executioners to deal with the process. However, too much exposure to downsizing can create a sense of emotional numbing. Emotional numbing together with distancing techniques can reduce stress levels in executioners and make the task more bearable. This coping mechanism may work in the short term. However, it holds risks in the long term. Disconnecting from one’s emotions may lead to long-term physical, mental and emotional issues. Here, relying on support inside the company and especially outside of the workplace can help executioners to process the emotions associated with downsizing.

What should the organisation do?

This study confirms how emotionally strenuous it is for executioners to fulfil their role as downsizing agents and suggests that careful consideration should be given to equip such managers with the right set of skills.

It is recommended that organisations reflect on three areas regarding downsizing: the impact of downsizing on executioners, the effect of the coping mechanisms they use, and the role “veteran” executioners should play in subsequent change initiatives.

In downsizing … people are the first aspect spoken about, but the last group spoken to.

Organisations will already do well if they abolish the terms affected and non-affected employees in downsizing and start to realise that everyone is affected in downsizing. The survivor, victim and executioner are all affected by the downsizing activities. Adequate training needs to be in place to help executioners understand the process side of downsizing as well as the emotional aspects thereof. Executioners should receive training in how to lead others through such change while instilling hope in survivors and victims. In essence, organisations should explore how best to equip executioners with the appropriate technical, emotional and leadership skills for their task.

The findings also highlighted the value of effective communication channels and timeous messaging to lower the emotional stress of executioners. As the researcher observed during this study: People are the first aspect spoken about, but the last group spoken to.

  • This article is based on the research assignment of Leslie William Thomas – an MBA alumnus of USB. The title of his research assignment is: A manager’s experience in corporate liposuction: The effect of past or present downsizing on the emotional experience of leaders who have to implement downsizing.
  • His study leader was Prof Mias de Klerk, Professor of Leadership and Organisational Behaviour, Director: Centre for Responsible Leadership Studies (Africa) and Head of Research at USB.
  • Gandolfi, F. (2009). Executing downsizing: The experience of executioners. Contemporary Management Research, 5(2), 185–200.
  • Radcliffe, V. S., Campbell, D. R., & Fogarty, T. J. (2001). Exploring Downsizing: A Case Study on the Use of Accounting Information. Journal of Management Accounting Research, 13, 131–157.

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Downsizing How this effects the emotions of the leaders implementing the change

What drives over-indebtedness in SADC countries?

The Steinhoff Saga Management review - University of Stellenbosch Business School

July – December 2019

What drives over-indebtedness in SADC countries?

What drives over-indebtedness in SADC countries

By Kingstone Mutsonziwa and Dr Ashenafi Fanta

  • DEC 2019

17 minutes to read

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Why credit is important?

Credit plays a key role in modern society. It helps people to smooth consumption and maintain a lifestyle when they earn less than they spend. It also allows people to cope with the consequences of illness, job losses, emergencies and unforeseen expenses. Credit can provide individuals with start-up capital to get their businesses off the ground and to pay for education in order to obtain employable skills. In general, consumer credit can empower people to make better lives for themselves by leveraging their future earning potential. At a macro level, the expansion of credit fuels household consumption, which is important for economic growth.

The rise in indebtedness

As access to credit increases, so does indebtedness among individuals. This is driven by a “culture of consumption” engendered by massive growth in consumer goods and the “democratisation of credit” leading to easier access to credit. Today, over-indebtedness has become a serious concern and an agenda item for policy makers in countries all over the world.

As access to credit increases, so does indebtedness among individuals. This is driven by a “culture of consumption” engendered by massive growth in consumer goods and the “democratisation of credit” leading to easier access to credit.

But what causes over-indebtedness?

Various factors contribute to over-indebtedness. These include:

  • Certain behaviours: Behavioural science attributes over-indebtedness to impulsivity, overconfidence bias and the illusion of control.
  • The occurrence of risk events: This includes job loss, marital breakdown, unforeseen expenses and poor financial management, modifying the initial conditions in which the contract between creditor and debtor was concluded.
  • Supply-side factors: These include lenders advertising and structuring their products in a way that would take advantage of the psychological biases and weaknesses of customers; and wider access to the formal financial services.
  • The lending policies of banks: A bank’s lending policy can determine an individual’s access to credit. In the UK, for instance, reckless lending was is found to be one of the causes of susceptibility to credit card misuse and over-indebtedness among young consumers.
  • Demographic factors: Factors such as age, gender, number of dependents, work status, marital status, illness or disability, financial literacy can help to explain over-indebtedness.
  • Cross-borrowing: Over-indebtedness can also be caused by cross-borrowing, which happens when one lender fails to satisfy the borrower’s needs.
  • Home-ownership: It has been reported that home ownership can increase the likelihood of over-indebtedness due to the availability of collateral.
  • Interest rates, inflation and house price increases: At a macro level, changes in interest rates, general inflation and house price increases are likely to lead to over-indebtedness.
  • Financial innovation: Financial innovation such as mortgage securitisation is considered to contribute to over-indebtedness.

At an individual level, over-indebtedness can lead to an increased chance of emotional distress, deteriorating well-being and/or mental health, poor health, higher perceived stress and depression, high blood pressure, family breakdown, and higher divorce rates. Over-indebtedness is also associated with decreased self-esteem and social relationships. More concerning, over-indebtedness may increase a person’s chance of involvement in crime like theft and robberies.

Excessive accumulation of debt can also cause households’ social and economic well-being to deteriorate, thus leading to poverty. Over-indebtedness can even create poverty, particularly among low-income, old age households and single-parent households with young children.

At a macro level, over-indebtedness can hamper consumption over business cycles and amplify recessions. It can lead to an increase in non-performing loans, which can weaken bank balance sheets and can cause a credit crunch as financial institutions become cautious about lending. According to the EU, household over-indebtedness adversely affects the overall health of the economy by curtailing aggregate demand, employment and growth.

Behavioural science attributes over-indebtedness to impulsivity, overconfidence bias and the illusion of control.

Taking a new look at the link between over-indebtedness and poverty

Although understanding the extent of over-indebtedness and its link with household welfare can provide input for workable policy interventions, research is marred by measurement problems caused by lack of uniformity in capturing the construct. The link between increased indebtedness and macroeconomic stability is relatively well researched. However, there is a lack of research on the link between over-indebtedness and poverty. That is why the researchers of this article introduced new measures of over-indebtedness using demand-side financial inclusion data to help explain the link between over-indebtedness and poverty in Southern African economies.

How the study was conducted

The authors analysed the determinants of over-indebtedness and their links with poverty using data from the FinScope Consumer Surveys conducted by FinMark Trust in different years on 51,359 individuals from 11 Southern African Development Community (SADC) countries (Botswana, Democratic Republic of Congo, Madagascar, Malawi, Mauritius, Mozambique, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe). The FinScope survey typically covers demographic details of respondents, access to utilities, how they access financial services such as savings, credit and insurance products, and whether they used formal or informal financial institutions.

With the growing importance of mobile money as a channel to provide financial services to the hitherto financially excluded segment of society in Africa, a new module was added to solicit information on the extent of access to mobile phones and mobile money.

Measuring over-indebtedness and poverty

There are various definitions of over-indebtedness, making it difficult to measure the construct. According to the EU, households are considered over-indebted if they find it difficult to meet their commitments, whether these relate to servicing secured or unsecured borrowing or to payment of rent, utility or other household bills. Other researchers classify individuals as over-indebted if they are spending more than 25% of their gross monthly income on unsecured repayments; or more than 50% of their gross monthly income on total borrowing repayments (secured and unsecured); or have four or more credit commitments; or are in arrears on a credit commitment for more than three months; and declare their household’s borrowing repayments to be a “heavy burden”. It has also been said that a household can become over-indebted when its total borrowing repayments reduce its income to below the poverty line.

More concerning, over-indebtedness may increase a person’s chance of involvement in crime like theft and robberies.

In this paper, the researchers considered a person as over-indebted if that person:

  • Is borrowing to repay another debt
  • Does not want to borrow because of too much outstanding debt
  • Had a loan application turned down because of too much debt
  • Had debt restructured
  • Defaulted on a debt obligation
  • Had a garnishee or emolument order or have been garnisheed.

As a result of data unavailability, the researchers were compelled to use food poverty as the only variable available across the countries in the study. To generate the poverty variable, they used the statement “Gone without food due to lack of money”. Responses to the statement were recorded as “Always, Sometime, Rarely and Never”. They collapsed “Always and Sometimes” into 1 and “Rarely and Never” into 0. Those who always or sometimes had to go without food are considered economically poor.

The analyses provided interesting insights into over-indebtedness at a regional level. For example:

  • 32% of adults in the region are indebted and access credit from banks, or other formal or informal sources.
  • 36% of adults are credit literate, which exceeds the percentage of those who are indebted.
  • A quarter of adults in the region are over-indebted. Although this does not seem too much when viewed in isolation, it is worrisome given that only one-third of adults are indebted. It suggests that, on average, 78% of adults that access credit are over-indebted.
  • Informal credit is more popular than either bank credit or other formal credit.
  • Penetration of bank credit is small with only 6% of adults having access to it while 10% have access to credit from other formal institutions and 17% have access to informal credit.

There is the potential to access secured formal credit because 63% of adults own residential property. The analysis of home ownership by rural/urban shows that home ownership is higher in rural areas. However, formal financial institutions are scant in rural areas. This means people in rural areas may not be able to use their properties as collateral to access credit. Also, homes in rural areas usually have no title deeds and thus cannot be used as collateral to borrow money.

… household over-indebtedness adversely affects the overall health of the economy by curtailing aggregate demand, employment and growth.

Drivers of over-indebtedness

Over-indebtedness can be triggered by a combination of supply-side factors, personal characteristics and risk factors. This analysis focused on the personal characteristics of adults – such as credit literacy, number of institutions from which credit was obtained, source of credit, home ownership and socio-demographic characteristics. This is what the analysis found:

  • Credit literacy: Credit literacy is negatively related to over-indebtedness in Mauritius, Mozambique, Swaziland and Zambia, suggesting that credit literacy helps to keep individuals from accumulating debt to the extent that they are unable to pay it back. In Botswana, Madagascar, Malawi South Africa and Tanzania, credit literacy is positively related to over-indebtedness, implying that credit literate individuals are more likely to be over-indebted. This may be attributed to a measurement problem.
  • Number of institutions from which credit was obtained: The number of institutions from which credit was obtained is generally related to over-indebtedness, except in Mozambique and Zambia. Individuals who access credit from multiple sources (like banks, non-bank formal institutions and informal institutions), are more likely to experience over- This implies that cross-borrowing may be viewed as a signal to potential over-indebtedness.

Informal credit is more popular than either bank credit or other formal credit.

  • Cross-borrowing: This study’s cross-borrowing measure has a limitation in that it captured borrowing across lenders in the banking, non-bank and informal financial sectors. As a result, cross-borrowing within each sector has not been considered due to data unavailability. Future studies using cross-borrowing within each sector can provide a more accurate picture of its effect on over-indebtedness.
  • Home ownership: This is positively related to over-indebtedness in six out of the ten countries included in the analysis. Ideally, home owners are expected to exhibit better household welfare levels and be less likely to experience over-indebtedness. In an economy with a developed mortgage market, a positive link might suggest high level of indebtedness driven by home loans and the subsequent inability of home owners to repay their outstanding mortgages. However, given that the mortgage markets in many SADC countries are underdeveloped (the mortgage loan to GDP ratio is less than 10% except in South Africa, Mauritius and Namibia), the alternative explanation for the above relationship might be that home owners have a relatively better chance of accessing credit using their property as a collateral compared to non-home owners, and hence they have a higher chance of over-indebtedness.
  • Income: Contrary to expectation, increased income is likely to increase over-indebtedness, suggesting that perhaps behavioural rather than economic factors better explain over-indebtedness.

The link between over-indebtedness and poverty in the SADC countries

This analysis focused on the effect of over-indebtedness on poverty, which is one of the welfare indicators. Based on the data, over-indebtedness increases the chance of poverty except in Botswana, Mauritius and Madagascar. It has also been said that over-indebtedness can erode income to the extent that people are unable to afford the basic needs of life. The negative relationship between over-indebtedness and poverty in Botswana, Mauritius and Madagascar might be due to individuals using excessive debt as a means of subsistence. However, a caveat to this conclusion is the potential role of social capital to increase individuals’ coping ability.

… homes in rural areas usually have no title deeds and thus cannot be used as collateral to borrow money.

Home ownership is related to a lower chance of experiencing poverty in five out of nine countries. Home owners in Botswana, Malawi, Swaziland and Zimbabwe are more likely to experience poverty while those in South Africa, Mauritius, the Democratic Republic of Congo, Tanzania and Madagascar are less likely to experience poverty. In this study, the home ownership variable was based on whether respondents lived in the property they own. This could bias the results as this approach disregarded the quality of the property. Respondents that owned property in urban areas were more likely to exhibit better welfare outcomes compared to their counterparts in rural areas.

Number of dependants is related to an increased chance of poverty in countries except in

Swaziland, Tanzania and Zimbabwe. The negative relation between dependants and poverty in Swaziland, Tanzania and Zimbabwe might be due to the contribution of dependants to household income in rural areas through agricultural labour, thus increasing these households’ coping capacity.

Obviously, income and employment decreased the chance of poverty across all the countries. Similarly, the incidence of poverty was lower in urban areas than in rural areas, implying that the brunt of poverty rests on the shoulders of rural people.

In general, over-indebtedness is related to an increased chance of experiencing poverty in South Africa, Malawi, Swaziland, Tanzania and Zimbabwe. In Botswana, Madagascar and Mauritius, the over-indebted are less likely to experience poverty, which might be due to the poor in those countries financing their cost of living by obtaining credit from multiple sources.

Conclusions

The results suggest that over-indebtedness is driven by, among others, lack of credit literacy, cross-borrowing and a lack of income. The results also suggest that over-indebtedness is likely to impoverish the indebted.

Contrary to expectation, increased income is likely to increase over-indebtedness, suggesting that perhaps behavioural rather than economic factors better explain over-indebtedness.

These findings have important policy implications. Policies that encourage access to financial services such as credit should therefore be designed in such a way that increased financial inclusion does not aggravate poverty and inequality. Also, government agencies such as central banks and treasuries should educate individuals on the benefits and costs of credit.

  • Find the original article here: Mutsonziwa, K., & Fanta, A. (2019). Over-indebtedness and its welfare effect on households: Evidence from the Southern African countries. African Journal of Economic and Management Studies, 10(2), 185-197. https://doi.org/10.1108/AJEMS-04-2018-0105
  • Kingstone Mutsonziwa is from Department of Information and Research, Finmark Trust, Johannesburg.
  • Dr Ashenafi Fanta is a senior lecturer in Development Finance and programme head of USB’s PhD in Development Finance.

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Remittances in sub-Saharan Africa Do they help or hamper financial sector development

Remittances in sub-Saharan Africa: Do they help or hamper financial sector development?

The Steinhoff Saga Management review - University of Stellenbosch Business School

July – December 2019

Remittances in sub-Saharan Africa: Do they help or hamper financial sector development?

Remittances in sub-Saharan Africa Do they help or hamper financial sector development

By Dr Pieter Opperman and Prof Charles Adjasi

  • DEC 2019

13 minutes to read

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It’s about sending money home

Migration is part of Africa as people search for opportunities to improve their lives. Those who find work in other countries, send money home to help those left behind. In the past, migrants used both formal and informal systems to transfer money to their countries of origin. However, it is now required that these external sources of funding are transferred through official channels. This has a significant impact on the formal banking system and on financial sector development.

Also, according to the World Bank, sub-Saharan Africa remains the most expensive region to send money to, with Nigeria the leading remittance-receiving country in the region. With billions of dollars being “sent home”, it is worth investigating the impact of these remittances on the financial system.

What did the study investigate?

Migration in Africa is increasing. A better understanding of the consequences of remittance-receiving patterns – not only remittance levels – on the receiving economies and how this affects financial sector development is therefore becoming more important.

Migration in Africa is increasing. A better understanding of the consequences of remittance-receiving patterns … is therefore becoming more important.

This study looked at the relationship between remittances, remittance volatility and financial sector development in sub-Saharan Africa between 2002 and 2014. The study distinguished between the effect of remittances and remittance volatility on financial sector depth and financial sector efficiency.

This is important for policy purposes considering the increased importance of remittances as a source of external financing for people in sub-Saharan Africa. This knowledge can help to craft appropriate policies to harness the full benefits of these remittance flows.

The good and the bad about remittances

The related literature has not provided a consistent theoretical framework to explain the relationship between remittances and financial development. Yet, there are various reasons why remittances could have a positive impact on the banking sector and stock market development:

  • Banks: The banks handling the remittances can, for example, increase their income by charging processing fees. They can also gain valuable information about these often unbanked households, enabling them to offer credit and other banking products to the remittance recipients. It was also found that when remittances are irregular, households tend to save this money for a rainy day or for asset accumulation – which means banks could offer them financial products to safeguard these funds.
  • Stock market development: Through smoothing household consumption over time, spending could be delayed via saving and investment in the stock market. Remittances, as an external source of income, can contribute to disposable income which may lead to more investment in stocks, prompting more stock market investment.
  • Macroeconomic stability: A high level of stable remittances would help to protect a country from capital flight from the stock market and therefore have a positive impact on stock market development.

From a policy perspective this knowledge can help to craft appropriate policies to harness the full benefits of these remittance flows.

However, remittances may also negatively impact the development of the financial  sector:

  • When remittances are used for survival, it does not benefit financial development in the long run.
  • It could be argued that, in countries with less developed banking sectors, households are more inclined to use the remittance money for household expenses. Households are therefore provided with a substitute way to finance their needs without relying on the formal banking system. The more people receive remittances, the less their need to take up credit from a bank. Remittances will therefore have a negative effect on financial depth measures such as domestic credit to the private sector because of lower credit demand.
  • Remittances can act as substitutes to the banking sector if banks increasingly charge higher transaction costs.
  • Households receiving an increase in disposable income record higher consumption levels, shrinking the labour supply because of an increased demand for leisure. As the labour supply decreases, real wages increase and are further stimulated by the consumption boost. Households subsequently react to higher wages by increasing their labour supply, which can lead to a slight increase in aggregate employment. Overall, this can lead to higher wages, consumption, inflation and interest rates, which could be detrimental to financial sector development.
  • A remittance shock could reduce disposable income and negatively impact stock market development. Remittance volatility can negatively impact stock market development.

Remittances, remittance volatility and financial sector development

The results from the study indicated that remittances act as a substitute for the formal banking system in sub-Saharan African countries. Remittance volatility was negatively related to banking sector depth.

Evidence was found that remittance volatility is detrimental to banks’ financial efficiency. An increase in remittance volatility would increase banks’ net interest margins and overhead costs to total assets. Banks end up charging more with increased remittance volatility. When banks and intermediaries charge extreme transfer fees because of volatile flows, it can negatively impact financial system efficiency.

When remittances are used for survival, it does not benefit financial development in the long run.

It was found that remittances significantly impact stock market efficiency but not stock market depth. This should not be surprising as most sub-Saharan African stock markets remain thin and illiquid providing limited investment opportunities. Furthermore, self-interest remittances are driven by investment opportunities and are more sensitive to financial development levels. In sub-Saharan Africa it appears as if remittances are motivated by altruistic reasons.

About the cost of remitting money to another country

The researchers felt that the cost of remittance transfers needs to be looked at.

According to the World Bank, Africa is the most expensive region to send money to. In addition, it should be noted that the high transaction costs associated with remittances may encourage migrants to rather use informal channels. Or maybe the question should be: Do some remittances end up via informal channels due to the high cost of transfer and subsequently result in irregular and volatile flow in the formal financial system?

Instead of charging higher transactions fees, the banks handling the remittances can gain valuable information about these often unbanked households, enabling them to offer credit and other banking products to the remittance recipients.

The current structure and policy stance of many African countries with respect to the financial sector is inclined towards universal banking. This may reduce the incentive for banks to structure innovative offerings alongside remittances so as to encourage retention of remittances in the banking system for savings and investment. There are transfer policy implications for financial sector development. Perhaps we need specialised finance houses to handle remittance transfers and structure it with unique financial services and offerings which encourage savings and investment for recipients. However, it has been noted that a behavioural lethargy may exist in certain African countries towards new financial institutions due to the perceived high cost of financial services. A further policy implication is that behavioural constraints from the demand side should be taken into consideration by policy makers in the banking sector.

What are the implications of this study for policy development?

Here are some of the policy implications based on this study:

  • Understand the financial needs of remittance-receiving households: One policy implication is that the formal banking sector should investigate the financial needs of remittance recipients over and above basic transaction services. If banks offer other banking products to remittance-receiving households, this may lead to increased demand for credit from such households.
  • Monitor the predictability of remittances: The study results indicated that remittance volatility is detrimental to financial sector development. A policy implication is that sub-Saharan African countries should have measures in place to monitor the predictability of remittances. This is important as sub-Saharan Africa is the third highest recipient region of remittances as a percentage of GDP. In addition, the percentage of individuals living in countries other than those of their birth is rising.
  • Take a new look at self-interest remittances: Self-interest remittances, as opposed to remittances for altruistic reasons, are concerned with investment opportunities and are more sensitive to financial development levels. Countries in sub-Saharan Africa should consider policies to attract more investment from their diaspora.
  • Look at the high cost of transferring remittances: The cost of remittance transfers needs to be investigated. Lowering transaction costs should result in more remittances being channelled through formal channels, making flows more predictable and less volatile. More competition in the formal money transfer market may also help to decrease costs and encourage financial inclusion.

Perhaps we need specialised finance houses to handle remittance transfers and structure it with unique financial services and offerings which encourage savings and investment for recipients.

  • Find the original article here: Opperman, P., & Adjasi, C. K. D. (2019). Remittance volatility and financial sector development in sub-Saharan African countries. Journal of Policy Modeling, 41(2), 336-351. https://doi.org/10.1016/j.jpolmod.2018.11.001
  • Dr Pieter Opperman is a visiting local faculty member at USB.
  • Prof Charles Adjasi lectures in Development Finance at the University of Stellenbosch Business School. His fields of expertise include the development of financial markets in Africa, international trade dynamics and foreign direct investment.

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