A Study of the Loss of Institutional Trust after a Merger by Steve Maguire and Nelson Philips

Introduction

The given paper represents the analysis of the article ‘Citibankers’ at Citigroup: A Study of the Loss of Institutional Trust after a Merger’ by Steve Maguire and Nelson Philips and published in the Journal of Management Studies. Thus, the main goal of the given essay is presented by the analysis of the institutional trust before and after a merger of Citicorp and Travelers into Citigroup. The analysis is aimed at the identification of the managerial perspectives introduced in the case study and critical discussion of the issues of institutional trust, organizational identification, and identity demonstrated by the employees of Citicorp after its merger with Travelers.

The authors of the article made profound research on the lack of institutional trust and identity by the employees of the Citicorp after its merger with Traveler. The researchers raise two main questions in their case study. The first one touches upon the identification of the reasons for the low level of institutional trust among the organizational members while the second one covers the role of organizational identification and identity. The qualitative research of a single case study was chosen as a research method by the article contributors. Moreover, while compiling the discussed article, Steve Maguire and Nelson Philips used both the primary sources, like the annual reports of the researched companies, press releases, HR reports, and corporate video materials, as well as the secondary sources, such as interviews with employees conducted after the merger of the two companies, reports of the stock analysis, etc. (Maguire & Philips 2008)

Article Analysis

Often, the merged companies continue their functioning as two separate independent units due to the hostile relations between the companies’ employees. It nullifies the effect of the transaction on a merger. Whatever well-organized the process of the merger preparation and implementation is the transaction cannot be considered effective if the operational synergy is not achieved. It is unattainable without the synergy of the personnel of the merging companies, which makes it a crucial problem in this framework. After the merger, the companies’ workers neither understand each other nor accept the new corporative culture and values. It results in the communication gap, leading to poor collaboration and failure of the merger expectations (Wilmarth 2013).

In their research, the authors of the article discuss the merger of the company’s Travelers and Citicorp into one – Citigroup, which took place in 1998. This case study was chosen due to a number of reasons such as the uniqueness and trust dynamics in the merger situation; the merger was the largest at the time the research was conducted; the histories of both companies were legally available for the academic research; and the merger had occurred shortly before the given research started, thus the studied questions of trust were clear for the research participants. Moreover, the research composed of four basic steps. Initially, the researchers gathered data from available databases, transcripts of the interviews with employees, and documents. The next step included the coding of the information received from the interview scripts regarding the identification, organizational identity, and institutional trust. The following stage covered the records on the evolution of the Citicorp employees’ identity after the merger. The last step involved the analysis of the received information and findings (Maguire & Philips 2008).

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To understand the processes within the merged organization, it is necessary to present the short history of the company’s development. Citigroup Inc. is the largest international financial conglomerate, being one of the world leaders in the sphere of financial service. The company was formed on April 7, 1998, as a result of the merger of Citicorp and Travelers Group. The bank operates the assets with a total cost of over $1.9 trillion, and Citigroup is considered the primary dealer of the securities of the U.S. Treasury (Wilmarth 2013).

As already mentioned, the launch of Citigroup as a conglomerate started from the merger of two companies, Travelers and Citicorp. The multinational Citicorp and the association of different companies Traveler Insurance merged into one big corporation in 1998. The merger was considered illegal because of the Glass -Steagall Act, which did not allow banks to merge with insurance companies. However, Chuck Prince and a group of lawyers found an article in the law under which the U.S. Federal Reserve could guarantee a two-year trial period to the company after which the bank had to tear the insurance assets away. Thus, the executive director of Citicorp considered that two years would be enough to change the law. However, Citigroup sold practically all its insurance assets probably because of the unsuccessful use of the joint assets of the two merged companies (Maguire & Philips 2008).

Although this transaction was declared as a merger, actually it was an operation of shares exchanged. Moreover, Travelers Group acquired all shares of the Citicorp Company for $ 70 billion, having issued 2.5 new shares of Citigroup for each Citicorp’s share. Owing to this operation, the existing shareholders received about half of the new company that carried out its activity under the name “Citi”. However, the Travelers’ image of “a red umbrella” was chosen as a logo of the company and used it until 2007 (Maguire & Philips 2008).

Therefore, the article under analysis focuses on the merger of the two companies and the changes in the organizational identity and identification occurring after the process had been completed. The psychological aspects of the process include the identification changes since the merger of the organizations is directly connected with the change in the group membership for the personnel. These processes lead to the fact that all workers become the employees of the new organizational structures. In this regard, there are also changes in the identification with these structures. The organizational identity is understood as a set of characteristics and attributes of the organization, shared by its members and differentiating it from other similar organizations (Semercioz, Hassan & Aldemir 2011).

The incompatibility of the corporate cultures (lack of mutual understanding, different expectations, and clashing management styles) contribute to the unsuccessful mergers. The large-scale transactions demand assimilation, including cultural, of the merged companies. The most typical reasons for the failure of the international alliances are also connected with problems at the HR level. In other words, the inability to cope with the cultural distinctions and lack of mutual trust (lack of personnel synergy and discrepancy of the corporate and country cultures) compose more than 70% of the unsuccessful mergers. The factors hindering the assimilation of the organizational identification and identity include the negative assessment of changes, emotional intensity connected with lack of information, absence of a uniform image of a corporation, and high commitment of employees to their companies before the merger (Chun 2009; Wilmarth 2013).

Despite the fact that the discussed amalgamation was announced as the merger of two equal organizations, the employees experienced the lack of institutional trust. It is a certain level of the expectation of the conscientious performance of functions and obligations by people, social institutes and society in general and is closely connected with information, control, and the extent of socialization. The institutional trust can be an indicator of the legitimacy of public institutes and consolidations of society in the living conditions of the uncoordinated social orders. Thus, the researchers of the analyzed article state that lack of institutional trust is a barrier to the main communicative link between the company’s employees – sharing knowledge (Chun 2009).

In the context of a merger, trust fosters integration, co-operation and commitment to shared goals, so understanding and addressing issues of trust are crucial. The absence of trust, on the other hand, represents a barrier to sharing knowledge between individuals from different legacy organizations and, thus, to finding solutions to post-acquisition problems (Maguire & Philips 2008).

Moreover, how the subjects accept the formally established norms and rules and how much they want to follow them is a crucial factor in this regard, and it concerns the organizations and people who manage them. The institutional trust is set if it corresponds to the expectations of the subjects, and the way they exist from the point of view of efficiency and justice. The institutional trust is defined by two components. One of them concerns the way companies can provide effective economic activity. The second component belongs to the fair structure of the companies, the contents of the formal rules, the mechanism of decision-making and the structure of the organizations (Chun 2009; Lee, Wu & Lee 2009).

Therefore, for the productive work of the merged organizations and the formation of the institutional trust, they should correspond to the requirements of a fair structure, on the one hand, and promote the achievement of the maximum economic efficiency, on the other hand. Thus, these conditions are interconnected. It is impossible to achieve the desired financial result without applying the principles of economic efficiency. Moreover, neglecting the issues of justice towards the personnel of the merged companies will hinder the achievement of the desired economic result (Lee, Wu & Lee 2009).

Institutional trust can continue to be undermined if individual employees do not identify with the post-merger organization. As ambiguity surrounding Citigroup’s identity was reduced, it became clear to Citibankers that they did not identify with the new organization in which they found themselves (Maguire & Philips 2008).

The research shows that there were distinctions in the status of employees from both organizations. The workers of the companies differently endured the process of merger and treated the newly formed organization. Thus, the employees from Travelers had a better identification with the new entity than the workers of Citicorp, whose identification with the new organization formed after the merger was particularly low (Semercioz, Hassan & Aldemir 2011; Shukla, 2014).

The authors of the researchers assume that the sense of continuity is the key in ensuring the identification of workers with the new organization. If workers do not consider the future merger as a change that will strongly influence their daily work, their identification with the parental organization is easily transformed into the identification with the new entity. On the other hand, if the changes in the organizational culture and climate caused discomfort or created a gap between daily processes before the merger and after it, it is improbable for the workers to be identified with the new company at the same level as they used to be with the parental organization (Lee, Wu & Lee 2009). This case represents gaps in the organizational identification and a lack of institutional trust of the Citicorp workers, who have to form a new identification with the newly merged organization. Thus, the results obtained by the researches show that the main aspiration during the merger should be the creation of the feeling of continuity in workers. In addition, it should be also noted that the subordinated position leads to the gap between the identification before the merger and after it (workers are compelled to reconsider the membership; there is the possibility of the emergence of intergroup differentiation effects) (Maguire & Philips 2008).

The analysis of the findings of Steve Maguire and Nelson Phillips allows for determining the main causes of the lack of institutional trust and discrepancies in the corporate culture of the new Citigroup Company. Firstly, it is the shortcomings in the planning of the future merger. Secondly, it includes the mistakes in the key personnel appointments. As a result of the merger of Citicorp and Travelers, the chairmen of the merging companies John Reed and Sandy Weil became the co-chairmen and CEOs in the new company. It was difficult for them to divide the powers and responsibilities clearly. Therefore, the new organization had two CEOs representing the former management of the previous companies. Both of them had the veto on major decisions. Soon, it became clear that their developmental strategies strikingly differed. Taking into account the history of each company and the developed organizational cultures, this difference strongly interfered with the integration of two structures into the uniform wholesale division, leading to a conflict. Thirdly, the absence of institutional trust, different philosophies, and values of the merged companies led to the new organizational realities, as well as the inability of people to attain constructive cooperation. Thus, the changes had a considerable impact on workers and the overall atmosphere in the company (Maguire & Philips 2008; Shukla, 2014; Wilmarth, 2013).

According to Maguire & Philips (2008), there are the following consequences of the lack of institutional trust in Citigroup:

• The stressed psychological atmosphere in office (70%);

• A noticeable decrease in the devotion and loyalty of workers in relation to the company (45%);

• The reduction of the innovative activity of employees (40%);

• A growing number of conflict situations between the personnel of both companies (35%);

• Changes in the personnel requirements to the remuneration level (35%);

• The dismissal of some valuable experts (30%);

• A decline in work productivity (25%).

The next reason for the deficiency in the institutional trust is represented by the ineffective organizational structure and the system of its management, absence of the coordinated structure and the necessary norms and regulations of the behavior of the personnel in the merged company. For the formation of the functional and highly efficient structure of the merged company, it is necessary to consider such aspects as the distribution of the purposes and tasks between divisions and employees, specification of the structure and subordination of services, distribution of the functions of management and responsibilities between CEOs, etc. (Shukla 2014)

Insufficient study of the corporate culture, the management, and personnel of the merged company, as well as the underestimation of the existing distinctions, represent another issue regarding the organizational identity and identification. The following steps are necessary for the optimization of the organizational structure in Citigroup: the analysis of the existing structure and control system of the company, definition of the degree of their compliance with the organizational strategy, differentiation of the functional tasks, spheres of responsibility and powers between divisions, the development of alternative options for the organizational structure, as well as the choice of the most suitable one (Lee, Wu & Lee 2009; Shukla 2014).

Thus, the given paper represents the analysis of the article, researching the conflict issues in the merged company. From the unitary perspective, the lack of institutional trust in the merged company shows the poor management of Citigroup. According to this approach, the organization could be effective if all employees identified themselves with the company’s goals and objectives. Taking a radical perspective, the conflict between the workers of the two companies after the merger is a natural phenomenon, and the organization can exploit its employees for its own goal, thus increasing the profits and raising capital. From the pluralist point of view, the problem of the institutional trust within the merged company can be solved by means of negotiations and compromises. Thus, the employees of Citicorp could articulate the lack of trust to the employees from Travelers, discussing the gaps in communication and establishing an equal management system and corporate culture combining the interests of both groups in the merged company.

Conclusion

Having analyzed the case study devoted to the merger of Citicorp and Travelers, it is possible to conclude that the interests of the modern researchers are focused on the organizational identification and identity, as well as the lack of the institutional trust of the employees in the merged companies. Thus, the merger and the sharp change of the company’s strategy that followed, as well as the introduction of essentially new corporate standards are major causes of the change of corporate culture and organizational identity. The implementation of the changes in the corporate culture and the increase in the institutional trust promotes the achievement of personnel synergy of the personnel, which would boost the company’s development, consisting in the motivation of people and maintenance of those communicative aspects that can contribute to the formation of new developmental level of the merged company.