THE EFFECT OF CORPORATE RESTRUCTURING ON EMPLOYEE PERFORMANCE
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CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Corporate restructuring aims to improve an organization’s operations; yet, the negative impacts of such an exercise can have a significant influence on employee morale, especially if the restructuring effort results in the loss of many positions (Kabiru, 2017). Low morale among survivors may have a negative impact on the company’s overall performance. To avoid upsetting feelings and sensibilities, business organizations reorganizing should take every measure to protect their employees’ interests (Kabiru, 2017). Corporate restructuring has become an increasingly common feature of management life, as an unprecedented number of businesses around the world reorganize their divisions, restructure their assets, streamline their operations, and spin off their divisions in an effort to improve overall performance.
According to Byars (2016), companies can reorganize during both lucrative and bad periods. The reorganization may be required owing to a variety of circumstances, including the organization’s commercial growth, a broad client or product base, the extension of product lines through acquisitions, or the formation of a joint venture with another business to reach new markets (Byars, 2016). Staffing levels must be modified in restructuring methods to maintain a sufficient number of resources in a company structure capable of responding swiftly to market changes (Hoskisson et al., 2019). When the present structure fails, businesses and economies reorganize to improve or survive (Sander, 2016).
Corporate restructuring is the process of rebuilding an organizational structure in order to focus on and enable the most important operations to the company’s strategy to perform ideally (Pearce, 2019). It frequently requires reducing management levels, rearranging organizational components through divestment and/or acquisition, and shrinking the workforce. Modern managers may be unable to escape the need for a restructuring plan when implementing change in order to present a strategic alternative to the firm in resolving operational and financial difficulties (Band & Tustin, 2018). Departmental rearrangement frequently enhances decision-making processes at the subordinate level, as well as service delivery. Corporate reorganization may lead to layoffs and bankruptcy (Khandwall, 2017).
Employee effect is often avoided during restructuring operations, and legislative rules are also enacted to protect employees’ interests first. Corporate restructuring can be used to reduce costs, generate economies of scale, improve efficiency, and increase profitability. Different approaches and tactics may be adopted at different times by different firms. As a result, corporate restructuring serves as both a growth strategy and a problem-solving tool. Corporate restructuring has three key dimensions: cost restructuring, governance reformation, and downsizing (Kinyua & Kihara, 2021).
Cost restructuring refers to actions taken by a company to improve its operational efficiency through cost reduction (Estin, 2018). It allows a company to thrive amid the complexities of a particular business environment, which may include mergers and acquisitions (Estin, 2018). Governance reformation, on the other hand, comprises replacing the top management team, realigning the management structure, modifying the tenure of the top leadership, or evaluating management compensation (Lebans & Euske, 2016; Kinyua & Kihara, 2021).
Governance reformation not only reduces unnecessary costs associated with remuneration and inefficient departments, but it also aids in the acquisition of the necessary managerial skills to ensure financial sustainability following the merger process (Bowman & Singh, 2013; Lebans & Euske, 2016; Airo, 2019). Downsizing is the process of reducing inefficient functional departments and workers in order to save operational costs.
Estin (2018) discovered that cost restructuring improves organizational performance by changing operations and business processes and engaging in cost-cutting initiatives to increase profitability and better adapt to changes in the operational environment. They receive the benefits of reduced operating expenses. Ngige (2012) discovered that banks that employed more cost-cutting initiatives were more likely to enhance their overall business performance.
Frone and Blais (2020) found that organizational downsizing has a detrimental impact on employee outcomes, causing employees to suffer negative job rumination, mental and/or emotional work exhaustion, and an inability to unwind. However, Kinyua and Kihara (2021) discovered that downsizing, which includes reducing the number of divisions, shrinking employees, and merging departments, improves the financial performance of media companies in Kenya. Unlike the studies undertaken by Frone and Blais (2020) and Kinyua and Kihara (2021), Ekechi and Umar (2020) discovered that corporate restructuring, which includes altering the organizational leadership of a specific institution, actually improves employee performance.
Lawson and Okorafor (2023) intended to determine how corporate restructuring incorporating governance reformation, with a particular emphasis on change management, affects employee performance among health workers in Rivers State. The findings revealed that change management that includes tight stakeholder participation and clear communication between top management and employees increases employee productivity and work quality among healthcare personnel.
Informational transparency, or giving employees with relevant and precise information, will allow them to quickly respond to organizational changes (Rawlins, 2008). Furthermore, when management is reformed to understand the needs of many stakeholders and how to meet them depending on priority level, staff become more effective and efficient in their service delivery (Ad-esse Consulting, 2008).
Karanja (2015) attempted to determine the impact of management change on employee performance, with a focus on technology changes in the business, changes in managerial structure, and changes in management roles and responsibilities. According to the findings, change management enhanced employee performance at the Postal Corporation of Kenya. Lawson and Okafor (2023), together with Ekechi and Umar (2020), were able to reach identical conclusions. Furthermore, Dereso and Kant (2023) found that company restructuring encompassing governance reformation, namely leadership change, strategic changes, and technical improvements, improves employee performance.
Corporate restructuring has a considerable impact on employee performance, with the potential for both positive and negative effects. The impact is determined by a variety of elements, including the type of the restructuring, communication strategies, employee involvement, and leadership effectiveness. Uncertainty about job security, duties, and responsibilities commonly causes employees to experience heightened stress and worry, which has a negative influence on their performance while they negotiate the unclear scenario. Employees’ initial performance may suffer while they adjust to new tasks and expectations resulting from restructuring, which includes changes in job roles and responsibilities.
Effective and unambiguous communication during the restructuring process is critical for boosting employee morale and maintaining high performance levels. Efficient leadership gives direction, assurance, and chances for people to communicate their concerns, lowering the negative impact on performance. Furthermore, restructuring creates opportunities for employee training and development, allowing them to negotiate change and flourish in their new roles. The implementation of restructuring can either strengthen or degrade company culture and values. Aligning the process with the company’s values encourages employee commitment and performance, even in the face of considerable change.
Nonetheless, job instability generated by restructuring might result in an increase in the number of people leaving the organization, which can have a detrimental influence on productivity and morale, particularly if highly talented individuals decide to leave. As a result, effective management of these aspects is critical in minimizing negative repercussions and maximizing the potential of restructuring to increase employee performance.
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