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ISSN 2156-7506

Copyright 2012 IJCBS

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VOLUME 3 NUMBER 4 April, 2012

International Journal of Contemporary Business Studies

Academy of Knowledge Process

w w w . a k p i n s i g h t . w e b s . c o m

An International Journal Published by

Impact of Leverage on Stock Returns Empirical Evidence from Karachi Stock Exchange (KSE)-Pakistan Sumayya Chughtai,Farah Zamir,Ayesha Riaz,Farah Khan

The Role of Human Resource Practitioners Maintaining Sustainability In Organisations: Some Empirical Evidence Of Expectations, Challenges And Trends Dr A J du Plessis, Ms S Paine, Dr C J Botha In Financial Meltdown Are Countrys Stability Factors of More Interest to Foreign Investors? A Critical Examination Wajid Shakeel Ahmed, Muhammad Tahir Masood, Ph.D., P.E., Dr. Husnain A. Naqvi, Jibran Sheikh Is Outward Bound Training (OBT) An Effective Tool for Human Resource Development (HRD)? A Case Study from Sri Lanka Dr. Mohamed Esham, Krishanthi Ganga Vithana Literature Review: Service Quality in Higher Education Institutions in Malaysia Anantha Raj A. Arokiasamy Adversity Quotient: A new paradigm to explore Er. Shivinder Phoolka, Dr. Navjot Kaur A study on the international diversification in the emerging equity market and its effect on the Indian capital market Sk Samim Ferdows , Abhijit Roy


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International Journal of Contemporary Business Studies Vol: 3, No: 4. May, 2012 ISSN 2156-7506 Available online at http://www.akpinsight.webs.com

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Saddal H.A Editor-in-Chief

Editorial Board



International journal of Contemporary Business Studies A journal of Academy of Knowledge Process


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VOLUME 3, NUMBER 4 April, 2012 Contents:

# Impact of Leverage on Stock Returns Empirical Evidence from Karachi Stock Exchange (KSE)-Pakistan Sumayya Chughtai,Farah Zamir,Ayesha Riaz,Farah Khan.6

# The Role of Human Resource Practitioners Maintaining Sustainability In Organisations: Some Empirical Evidence Of Expectations, Challenges And Trends Dr A J du Plessis, Ms S Paine, Dr C J Botha... 16 # In Financial Meltdown Are Countrys Stability Factors of More Interest to Foreign

Investors? A Critical Examination Wajid Shakeel Ahmed, Muhammad Tahir Masood, Ph.D., P.E., Dr. Husnain A. Naqvi, Jibran Sheikh.35 # Is Outward Bound Training (OBT) An Effective Tool for Human Resource

Development (HRD)? A Case Study from Sri Lanka Dr. Mohamed Esham, Krishanthi Ganga Vithana.427 # Literature Review: Service Quality in Higher Education Institutions in Malaysia Anantha Raj A. Arokiasamy 51 # Adversity Quotient: A new paradigm to explore Er. Shivinder Phoolka, Dr. Navjot Kaur67 # A study on the international diversification in the emerging equity market and its

effect on the Indian capital market Sk Samim Ferdows , Abhijit Roy,,79


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Impact of Leverage on Stock Returns Empirical Evidence from Karachi Stock

Exchange (KSE)-Pakistan

Sumayya Chughtai PhD scholar, Mohammad Ali Jinnah University

Lecturer, International Islamic University Islamabad, Pakistan

Farah Zamir

Lecturer, International Islamic University Islamabad, Pakistan

Ayesha Riaz

International Islamic University Islamabad, Pakistan

Farah Khan

International Islamic University, Islamabad, Pakistan

ABSTRACT

This study is aimed to determine the impact of leverage on stock returns. The basic objective is to identify whether the capital structure of a firm impacts the returns of its stock being traded in the stock exchange market.The approach used to conduct the study is based on Fama and French (1993) three-factor model. We have basically extended their model by including a fourth factor of leverage. The basic methodology used to identify the impact of leverage on stock returns is same as used in three-factor model to identify the impact of size premium and value premium on equity market returns. The study is basically conducted on 36 non-financial leading firms of Pakistan listed on Karachi Stock Exchange (KSE)-100. Time horizon that this study covers ranges from January 2007 till December 2010. The results indicate that leverage has no significant impact in explaining the stock returns of a company. Hence, capital structure of firm proves to be of no value in determining excess stock returns. In addition to that it also reveals that for the said time period there is no size effect as well as value effect present in KSE market. Only the market premium has been given by KSE during 2007-2010 period. This study provides important implications for Pakistani investors who are willing to invest in KSE because it provides an insight to investors regarding capital structure and stock return relation as well as regarding two important market anomalies (value premium and size premium). The study highlights the impact of firm specific factors like market capitalization, Book Value-to-Market value ratio (BV/MV) and Debt to Equity ratio (D/E) on stock returns apart from the impact of market specific factors like return of market portfolio. Key Words: KSE, CAMP, Size, Value, leverage


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INTRODUCTION Markowitz (1952) did one of the major advancements in finance; which is the recognition that the creation of an optimum investment portfolio is not simply a matter of combining numerous securities, but the investors must consider the relation between the investments to have an optimum portfolio.He proposed that investors must consider a balance between the risk and return. Markowitz Portfolio theory (1952) tells us that how the investor should minimize the risk and maximize his return. The capital market theory extended portfolio theory and a model for pricing all risky assets was developed by Lintner (1965), Sharpe (1964), Black (1972)andMossin (1966) independently. The resultant model was the Capital Asset Pricing Model (CAPM), which allowed the investors to determine the required rate of return for the risky investments. CAPM linked the excess return with market return.

Ri = Rf + (Rm Rf )

Merton (1973) gave Intertemporal Capital Asset Pricing Model (ICAPM) which further linked the excess return to the market return along with other several variables like wealth as well as state factors; which opened ways to multifactor models.Then Ross (1976) proposed the Arbitrage Pricing Theory (APT), this theory is often considered to be the alternative to CAPM. APT tells us that an assets returns can be predicted using the relationship between that same asset and many common risk factors. APT uses the risky assets expected return and the risk premium of a number of macro-economic factors. Unfortunately, APT failed to tell that what common risk factors must be included to calculate the return of the security. Then finally Famaand French (1993) gave another multifactor approach in response to serious criticism on CAPM in explaining realized stock returns. They discovered that 2 classes of stocks have tendency to do better than the market as a whole:

(1) Stock with small market capitalization (small capitalization firms outperform high capitalization firms also known as size premium)

(2) Stocks with high book to market ratio (value stocks outperform growth stocks also known as value premium).

As a result of these two things they added two new factors to the CAPM. The model says that the expected return on a portfolio in excess of the risk-free rate [E(Ri)- Rf] is explained by the sensitivity of its return to three factors:

(1) Excess returns being given by market (Rm Rf) (2) Return on portfolio with small capitalization stocks minus return on a portfolio with large

capitalization stocks (SMB; small minus big) (3) Return on portfolio with low B/M stocks minus return on portfolio of high B/M stocks (HML;

high minus low). Specifically, the expected excess return on portfolio i is;

E(Ri)-Rf= 1[(Rm)-Rf] + 2(SMB) + 3(HML) +alpha

Where [(Rm) Rf], (SMB) and (HML) are expected premiums (market, size and value premiums respectively) and the factor loadings, 1,2 and 3 are the slopes in the time series regression. The size premium is measured by SMB and value premium is measured by HML. is effective return.Fama and French (1993) find that the three-factor risk return relation is a good model for measuring the returns of portfolios formed on size and book-to-market-equity ratio basis.


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In this paper we have introduced a 4th factor in existing Fama and French (1993) three-factor model to make it a four-factor model. This 4th factor is leverage or LMU [emphasis added] (Leveraged minusUnleveraged portfolio of stocks). Hence in this four-factor model we assume:

(1) High Cap stocks outperform low Cap stocks (2) Value stocks outperform growth stocks (3) High Leveraged stocks outperform Low leveraged stocks known as Leverage Premium [emphasis

added].

This Leverage premium is measured by an additional 4th factor in three-factor equation called LMU [emphasis added]. This LMU is return on portfolio with leveraged stocks minus return on portfolio with unleveraged stocks (or low leveraged stocks).This factor determines whether the leverage has any impact on stock returns of a company or not. The equation comes out to be in the following form finally.

E(Ri)-Rf= 1[(Rm)-Rf] + 2(SMB) + 3(HML) +4(LMU) + alpha

RESEARCH OBJECTIVES We have attempted to study whether the capital structure of a firm has any impact on the risk premium given by its stocks. The objectives of the research can be outlined as follows:

To determine the impact of leverage on stock returns To identify whether there is any kind of size premium given by KSE To identify whether there is any kind of value premium given by KSE To determine that what impact market premium has on stock returns To determine the validity of Fama and French three factor model in Pakistans market

SIGNIFICANCE OF RESEARCH This study provides important implications for Pakistani investors who are willing to invest in KSE because it provides an insight to investors regarding capital structure and stock return relation as well as regarding two important market anomalies (value premium and size premium). The study highlights the impact of firm specific factors like market capitalization, Book Value-to-Market value ratio (BV/MV) and Debt to Equity ratio (D/E) on stock returns apart from the impact of market specific factors like return of market portfolio. The paper provides evidence against CAPM as well as Fama and French (1993) three factor model validity in context of Pakistans market. It would help investors to identify which factor actuallyexplanatory in determining the returns of stocks held by them. LITERATURE REVIEW When there was a lot of empirically supported evidence against the validity of CAPM; Fama and French (1992) examined the combined impact of market beta, size, E/P ratio, B/M ratio and Leverage upon the cross section of avg. stock returns during the time horizon ranging from 1936 to 1990, for three stock markets namely NASDAQ, NYSE and Amex. Their study found insignificant. On the contrary when the authors studied individually size, Earning/Price ratio, B/M ratio and leverage were found significant for average cross-section stock returns. However when tested in combination size and B/M remained significant and nullified the impacts of E/P and Leverage upon average returns.Fama and French (1992) therefore concluded that in a rational market there are multiple factors associated with risk rather a single factor like CAPM(Black, 1972; Sharpe 1964; Linter, 1965).


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Fama and French (1993) three-factor-model was basically an extension to Fama and French (1992) study for stocks as well as bonds through time-series regression analysis. In total five factors were studied; for stocks 3 factors were found significant 1) Return on market portfolio, 2) firm size and 3) book to market value; however for bonds the two factors 4) term premium and 5) default premium were found insignificant. As a consequent of these findings Fama and French (1993) developed an asset pricing model known today as Fama and French Three-Factor Model which includes one old risk factor called market beta identified by Sharpe (1964) and Linter (1965) in addition to two new factors identified by Fama and French (1992) called size and value (so three factor model is an enhancement of CAPM). According to Fama and French (1993) three-factor model; expected return of a portfolio in addition to risk-free-rate is caused by its sensitivity to three factors. (a) Excess return being given by market (Rm Rf); (b) return on small capitalization minus large capitalization (SMB) (c) High Book-to-market minus Low Book-to-market (HML). Fama and French (1995) study argues that returns for high book to market equity stocks are greater than stocks with low B/M equity. They explained the reasoning behind it through understanding the properties of high and low B/M equity firms. Their study concluded that companies with high book to market equity normally remain in distress on regular basis and the companies with low book-to-market normally earn profits on a regular basis. Therefore the high return for high book-to-market stocks is justified as those investors are compensated for carrying risky and non-profitable securities. Malin and Veeraraghavan (2004) suggest that size premium is found in France and Germany as these markets exhibit the quality of outperforming small stocks by big stocks; however the researcher found an opposite behavior of stocks in UK market because in UK market large stocks produce larger returns as compared to small stocks. As far as the second factor in three-factor model known as value premium is considered their results show that low book to market value firms (growth stocks) guarantee higher returns as compared to high book to market stocks (value stocks) for France, Germany and UK markets by rejecting three factor model. Doan,Lin, and Zurbruegg (2010) studied returns of stocks being traded on US and Australian indices. They found that Australian stock returns are sensitive to co-skewnesswhereas US stock returns are more sensitive to co-kurtosis. The reason of this discrepancy in two markets is explained by the size-effect because Australian firms are small in size as compared to US firms listed on the indice that is in-line with three-factor model. Javid and Ahmad (2009) examined the macroeconomic sources of variation in returns of stocksfor Karachi Stock Exchange for the period of 1993-2004. They discovered that some factors had significant impact in determining the returns of stocks like consumption growth, inflation risk, call money rate and term structure whereas market return, exchange risk and oil prices risk had minimal role in pricing of a stock.Hanif and Bhatti (2010)realized that validity of CAPM needs to be tested in context of Pakistani market. Therefore they conducted the study on KSE for the period of 2003-2008 and their results argue that CAPM measured the returns of securities with accuracy only for a limited number of companies. For majority of the companies CAPM fails to measure the expected returns; as actual returns deviate from model based returns. The basic assumption of CAPM that high risk entails high return fails when it is tested on Greek stock market for the period of 1998-2002. The research indicates that securities with high beta does not entail a high return as compared to stocks with low beta. (Michailidis, Tsopoglou, Papanastasiou&Mariola, 2006)


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METHODOLOGY Data The sample used in this study consists of 36 non financial-companies, listed on Pakistans KSE 100 indice. The companies included in this sample cover a variety of industry sectors (like cement, food, oil and gas, tobacco, electricity, textile and automobile) and are Pakistans leading firms. Firms belonging to financial sector are excluded from the sample to enhance reliability. However as we required market portfolio returns as well in our study, therefore as proxy for market portfolio of Pakistan we used all 100 companies (both from financial and non-financial sectors) listed on KSE 100 indice. The daily returns of stocks in sample have been obtained from business recorder1. The study is conducted on market data of past 4 years. The sample period ranges from January-2007 till December-2010. We use 12 months Treasury bill rate of Pakistans t-bills as proxy for the risk-free rates obtained from Pakistan State Bank website2. KSE-100 indice values are used for proxy of market return; that are available at official website of KSE3. Portfolio formation and formulas for measurement The methodology of portfolio formation on basis of size (market capitalization) and value (BV/MV) is same as followed by Fama and French (1993). The 36 raw companies were sorted on the basis of Avg. yearly market capitalization initially from smallest to largest (A to Z) or such that firms sort in ascending order of size (small size firms on top and big size on bottom). Two portfolios with 18 companies each were selected from size based sorting. Then each of these 2 portfolios (containing 18 firms in each) was further sorted on the basis of avg. yearly Book value-to-market value ratio from largest to smallest (Z to A). The firms sort in descending order of their BV/MV ratio (firms with high BV/MV on top and low BV/MV on bottom). Then each 18 firms portfolio was further divided into 3 portfolios of 6 companies each after sorting BV/MV basis. This resulted in total 6 portfolios of 6 companies each on BV/MV basis for a single year. Each of these 6 portfolios was then ultimately sorted on the basis of Debt-to-equity ratios of each firm from largest to smallest (Z to A). The firms sort in descending order of their D/E ratio (firms with high debt on top and low debt or equity financing on bottom). Then each of six BV/MV based portfolio is further divided into two portfolios of 3 companies each. This resulted in 12 portfolios of 3 companies each on D/E basis for a single year. BV/MV ratio is calculated by using the following formula:

Book to market ratio = Book value of share/market Value of Share D/E ratio is calculated by using the following formula:

Debt to equity ratio= total long term debt/total equity For the firms D/E ratio is given in their annual reports, we used the figures without any further modifications. From daily prices the daily returns are calculated by using following formula:

Return of stock=Ln (Pt/ Pt-1) Where, Ln = Natural log Pt= Closing price of share on day t Pt-1 = Closing price of share on day t-1 Average monthly returns of stocks are calculated by taking averages of daily returns. 1www.brecorder.com/ 2www.sbp.org.pk/ 3www.kse.com.pk/


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DATA ANALYSIS Correlation analysis

Avg. Portfolio Returns Rm-RFR SML HML LMU

(Rp-RFR) or Rp1 0.273529 0.087574 0.140171 0.078406(Rp-RFR) or Rp2 0.435032 -0.23971 -0.19262 0.122217Rp-RFR) or Rp3 0.396407 -0.28146 -0.16232 0.109738(Rp-RFR) or Rp4 0.438067 -0.25205 -0.14818 0.087692(Rp-RFR) or Rp5 0.299346 -0.27094 -0.15706 0.117759(Rp-RFR) or Rp6 0.290547 -0.26827 -0.195 0.14102(Rp-RFR) or Rp7 0.566286 -0.13278 -0.11436 0.021451(Rp-RFR) or Rp8 0.531538 -0.13876 -0.11296 0.02585(Rp-RFR) or Rp9 0.459219 -0.23491 -0.17589 0.118758(Rp-RFR) or Rp10 0.532182 -0.22559 -0.17161 0.114838(Rp-RFR) or Rp11 0.398499 -0.24651 -0.18377 0.119466(Rp-RFR) or Rp12 0.402536 -0.20532 -0.20039 0.11849

Table 4.1: Correlation of Avg. portfolio returns with market, size, value and leverage premium for the period of 2007-2010

Table 4.1depicts the correlation between average portfolio returns in excess of risk free rate (Rp-EFR) and market premium (Rm-RFR), size premium (SMB), value premium (HML), and finally leverage premium (LMU) for all twelve portfolios during the period 2007-2010. It can be seen that average portfolio returns are positively correlated with market premium for all twelve portfolios during the time horizon of 2007-2010. However as the correlation values are no where greater than 0.5 so we can say that the correlation is positive but not very strong. This is true for all portfolios except Rp7, Rp8 and Rp10 where values are almost 0.5. The highest positive correlation is observed for portfolio Rp7 that comes out to be 32 % i.e. [(0.566286*0.566286)*100]; which means that 32% variability in average portfolio return is caused by market premium. Size premium (SMB) and value premium (HML) have a weak negative correlation with average portfolio returns except for portfolio return Rp1, whereas leverage premium has a weak positive correlation with average portfolio returns for all the twelve portfolios. Regression Analysis

Table 4.2: Regression statistics for portfolio 1 through portfolio 3 during time period 2007-2010

Portfolio 1 Portfolio 2 Portfolio 3 Coefficients t Stat Coefficients t Stat Coefficients t StatIntercept -0.04338 -2.77784 -0.11403 -48.3951 -0.11389 -45.1786 Rm- RFR 0.003006 2.018366 0.000746 3.321757 0.000715 2.975899 SML 0.011912 0.840668 -0.00436 -2.03994 -0.00528 -2.30758 HML 0.110575 1.236105 -0.02137 -1.58337 -0.02014 -1.3951 LMU 0.083665 0.677863 0.017928 0.962779 0.0166 0.833256


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Table 4.3: Regression statistics for portfolio 4 through portfolio 6 during time period 2007-2010 Portfolio 4 Portfolio 5 Portfolio 6 Coefficients t Stat Coefficients t Stat Coefficients t StatIntercept -0.11452 -43.8906 -0.11345 -43.4162 -0.11357 -49.1823 Rm- RFR 0.000827 3.322456 0.00053 2.126675 0.000456 2.068966 SML -0.0049 -2.07178 -0.00504 -2.12745 -0.00454 -2.16628 HML -0.01851 -1.23866 -0.01981 -1.32357 -0.0214 -1.61813 LMU 0.01426 0.69153 0.017168 0.831331 0.018288 1.002125

Table 4.4: Regression statistics for portfolio 7 through portfolio 9 during time period 2007-2010 Portfolio 7 Portfolio 8 Portfolio 9 Coefficients t Stat Coefficients t Stat Coefficients t StatIntercept -0.12008 -23.5214 -0.12071 -23.3895 -0.1137 -46.4744 Rm- RFR 0.002208 4.53563 0.002038 4.141026 0.000828 3.549436 SML -0.00529 -1.14166 -0.00544 -1.1616 -0.00443 -1.99412 HML -0.02365 -0.80882 -0.02367 -0.80064 -0.02024 -1.4441 LMU 0.011009 0.272861 0.011766 0.288474 0.018485 0.956083

Table 4.5: Regression statistics for portfolio 10 through portfolio 12 during time period 2007-2010 Portfolio 10 Portfolio 11 Portfolio 12 Coefficients t Stat Coefficients t Stat Coefficients t Stat Intercept -0.1137 -48.8806 -0.11396 -46.3617 -0.11346 -46.6352 Rm- RFR 0.000962 4.337809 0.000697 2.973042 0.000691 2.979673 SML -0.00422 -1.99879 -0.00456 -2.04567 -0.00382 -1.73211 HML -0.01904 -1.42911 -0.02124 -1.5085 -0.02193 -1.57385 LMU 0.018354 0.998465 0.01769 0.910657 0.017443 0.907211

Table 4.2, 4.3, 4.4 and 4.5 depict the regression statistics for the twelve portfolios under research. The results indicate that only market premium is significant for the study undertaken as only for this variable the value of t stat is greater than 2 (t stat>2). All other independent variables i.e. SMB, HML and LMU are found to be insignificant for Karachi Stock Exchange for the period of 2007-2010. The results are consistent for all twelve portfolios under discussion. KSE market is found to be giving only market premium and market is not giving any kind of size or value premium. Similarly the capital structure of the firms is also not very explanatory in determining the returns of stocks. Other than market premium SMB, HML and LMU are not determining the average portfolio returns. Also the confidence interval for all portfolios ranging from Portfolio 1 through Portfolio 12 is found to be 95% that is highly significant for all variables.


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Descriptive statistics Table 4.6:Descriptive statistics for portfolio 1 through portfolio 6 during time period 2007-2010

Descriptive Stats Portfolio 1 Portfolio 2 Portfolio 3 Portfolio 4 Portfolio 5 Portfolio 6

Mean -0.05088 -0.1121510 -0.11183 -0.11257 -0.11152 -0.11173 Standard Error 0.014907 0.0025221 0.002656 0.002764 0.002625 0.002341

Median -0.09392 -0.11711 -0.11659 -0.11841 -0.11993 -0.11869 Standard Deviation 0.103278 0.0174734 0.018401 0.019152 0.018188 0.016222

Sample Variance 0.010666 0.0003053 0.000339 0.000367 0.000331 0.000263

Kurtosis -0.66043 -0.654259 -0.86723 -0.53793 -0.64298 -1.13165 Skewness 1.109715 0.0100711 0.113714 0.070343 0.14179 0.388219 Range 0.289902 0.0719213 0.071459 0.080385 0.075934 0.057285 Minimum -0.1526 -0.157416 -0.15358 -0.15727 -0.15674 -0.13935 Maximum 0.1373 -0.085495 -0.08212 -0.07688 -0.0808 -0.08207 Sum -2.44211 -5.383249 -5.36807 -5.40327 -5.35299 -5.36295 Count 48 48 48 48 48 48 Confidence Level(95.0%) 0.029989 0.0050737 0.005343 0.005561 0.005281 0.00471

Table 4.7: Descriptive statistics for portfolio 7 through portfolio 12 during time period 2007-2010

Descriptive Stats Portfolio 7 Portfolio 8 Portfolio 9 Portfolio 10 Portfolio 11 Portfolio 12

Mean -0.11743 -0.11808 -0.11183 -0.11189 -0.11205 -0.11169 Standard Error 0.005654 0.005565 0.00264 0.002636 0.002576 0.00253

Median -0.1177 -0.11894 -0.1177 -0.11712 -0.11749 -0.11809 Standard Deviation

0.039175

0.038553

0.01829

0.01826

0.017845

0.017532

Sample Variance 0.001535 0.001486 0.000335 0.000333 0.000318 0.000307

Kurtosis 13.9224 13.99063 -0.24407 1.058871 -0.63588 -0.7935 Skewness -3.44949 -3.46392 -0.05748 -0.39299 0.021972 0.090435 Range 0.214954 0.212461 0.081381 0.089578 0.074926 0.068026 Minimum -0.29539 -0.2921 -0.16234 -0.17294 -0.15457 -0.15074 Maximum -0.08044 -0.07964 -0.08095 -0.08337 -0.07964 -0.08272 Sum -5.63687 -5.66776 -5.3679 -5.37091 -5.37831 -5.36096 Count 48 48 48 48 48 48 Confidence 0.011375 0.011195 0.005311 0.005302 0.005182 0.005091

Table 4.6 and 4.7 displays the descriptive statistics for all twelve portfolios. Standard deviation statistics indicate that variation from mean values of return is high. We can see that except portfolio 1 all portfolios indicate a negative return or loss.Skewness values of returns are also positively skewed except


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for portfolios P7-P10. P7 through P10 are negatively skewed. The value of Kurtosis is less than 3(Kurtosis


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Fama, E. F.,&French, K. R. (1992). The cross-section of expected stock returns. Journal of Finance, 47(2), 427465.

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European Journal of Economics, Finance and Administrative Sciences, 120,140-153.Retrieved fromwww.eurojournals.com/ejefas_20_13.pdf

Javid, A. Y. &Ahmad, E. (2009).Testing multifactor capital asset pricing model in case of Pakistani

market.International Research Journal of Finance and Economics, 25, 114-138. Retrieved from www.eurojournals.com/irjfe_25_10.pdf

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and capital budgets.TheReview of Economics and Statistics, 47(1), 13-37. Malin, M., &Veeraraghavan, M. (2004). On the robustness of the Fama and French multifactor model:

Evidence from France, Germany, and the United Kingdom. International Journal of Business and Economics, 3(2), 155-176.

Markowitz, H. (1952). Portfolio selection.Journal of Finance, 7(1), 77-91. Merton, R. C. (1973). An intertemporal capital asset pricing model.Econometrica, 41(5), 867 - 887. Michailidis, G., Tsopoglou, S., Papanastasiou, D., &Mariola, E. (2006).Testing the Capital Asset Pricing

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Mossin, J.(1966). Equilibrium in a capital asset market.Econometrica, 34(4), 768-783. Ross, S. A. (1976). The arbitrage theory of capital asset pricing.Journal of Economic Theory, 13, 341

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risk.Journal of Finance,19(3), 425-442.


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The Role of Human Resource Practitioners Maintaining Sustainability In Organisations: Some Empirical Evidence Of Expectations,

Challenges And Trends

Dr A J du Plessis Department of Management and Marketing,

Unitec New Zealand, New Zealand

Ms S Paine Department of Management and Marketing,

Unitec New Zealand, New Zealand

Dr C J Botha School Human Resource Sciences, North-West University,

Potchefstroom, South Africa

ABSTRACT

To sustain competitive advantage, organisations rely on technology, patents or strategic positions and on how their workforce is managed. Emphasis on people to compete effectively in global economies requires HR practitioners to live up to the challenges, expectations and trends in HR functions. The aim was to establish if HR practitioners are equipped with the capabilities for the challenges, expectations and trends of HR effectiveness. Data was collected via an e-survey questionnaire, from 364 members of the Human Resource Institute of New Zealand. The response rate was 41%. Five closely related HR themes were focused on: the first two on the HR practitioners role as change agent and strategic partner. The three remaining themes focused on HR practitioners responsibility of improving relations in the organisation. Findings show high positive results in self-identified HR capabilities. This signifies that HR practitioners in New Zealand possess capabilities that can increase HR effectiveness. Key words: Expectations, challenges, trends, themes, value add

INTRODUCTION A companys workforce is the lifeblood of organisations and they represent one of its most potent and valuable resources according to Du Plessis (2009). Consequently, the extent to which a workforce is managed is a critical element in enhancing internal effectiveness and improving the organisations competitiveness. Human Resource (HR) practitioners play an increasingly vital role in maximising the efficiency of the organisations human resources since HR practices support employee behaviour that is critical for accomplishing key organisational processes, thus advancing organisational success (Nel, Werner, Poisat, Sono, Du Plessis, & Nqalo, 2011; Stone 2008; Rennie 2003; Wright & Boswell, 2002). It


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becomes evident that individuals performing in those HR roles need to be equipped with distinct capabilities that support the expectations, challenges and requirements of their roles and responsibilities. HR practitioners in New Zealand (NZ) have been exposed to challenges and opportunities initiated by the increasing change and complexity of the business environment. The emergence of globalisation, development in technology and telecommunications; the shift towards a knowledge-based workforce, labour legislation and intensifying competition for skilled labour create new competitive realities for organisations. Increasing tightening of competition implies that, regardless of the country in which they operate, organisations are all under pressure to react to these changing conditions by cultivating a competence in human resource management (HRM) (Du Plessis, 2009; Horgan, 2003). Organisations are now looking to the HR function to go beyond the delivery of cost effective administrative services and provide expertise on how to leverage human capital (Jamrog & Overholt, 2004). Simultaneously the role of HR practitioners as strategic business partners and leaders of change has also received considerable attention (Du Plessis, 2009; Rennie, 2003; Walker & Stopper, 2000). Ultimately, the competitive forces that organisations face today create a new mandate for HR and this necessitates changes to the structure and role of the HR function. In todays global economy HR practitioners must be prepared to meet the considerable challenges and expectations posed by the continuing evolution of their role and show how their function is creating and adding value to the organisation. As recognised by Ulrich and Brockbank (2005, 134) HR should not be defined by what it does but by its contribution to achieve organisational excellence. PROBLEM STATEMENT From the research problem, taking into account the broader focus on key HR activities and functions, one realises that there is a need to consider to what extent HR practitioners in NZ organisations are equipped with the capabilities that can fulfil the expectations, challenges and trends in HR effectiveness. OBJECTIVES OF THIS STUDY Several studies were done over the past years in NZ among HR practitioners future, capabilities challenges and expectations. The ultimate objective of this study is to determine the extent to which the current levels of capabilities of HR practitioners in New Zealand organisations match the challenges, expectations and trends of their current roles and responsibilities. By comparing this study with NZ organisations from previous studies add more value and it informs the reader of how changes have taken place over the past ten years in NZ. METHODOLOGY The quantitative methodology adopted was an e-survey; a questionnaire containing structured closed questions. This involved the selection of a sample of people from the HR practitioner population in NZ to ascertain how factors differ, and to make inferences about the population, or in other words generalising from sample to population. Reliability of this study was seen as high (41% responded) as previous leading HRM studies conducted in NZ were successful with a response rate of 11% and 34 % respectively. Sample selection The study focused on HR practitioners in NZ organisations who are registered as members of the Human Resources Institute of New Zealand (HRINZ). HRINZ have 3600+ individual members who are involved in the management and development of HR in private and public sector organisations throughout NZ. The


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target population was limited to HRINZ members that had registered to participate in HR research requests that HRINZ provided links to; the total number of HRINZ members in this category was 364. Data collection The data was collected via the e-survey, which was specifically designed for this study. The invitation to participate in this study went to 364 members of HRINZ. A total of 179 participants responded to the survey questionnaire, giving a response rate of 41%. Questionnaire The questionnaire consisted of six sections with 40 questions (this number was made up of main questions and sub-questions). Several sub-questions were formed to adequately explore each of the five HR themes researched in this study. All the questions in the questionnaire were closed questions. All five themes are covered in this article but due to the size of the study and length limitation for this article not all the information could be discussed. The Tables reflect the research questions used in this article, and the rationale for using the five specific themes is discussed later. LITERATURE REVIEW Background For decades HR practitioners have been tagged as administrators, however organisations are now looking to the HR function to go beyond the delivery of cost effective administrative services and provide expertise on how to leverage human capital (Jamrog & Overholt, 2004). Simultaneously the role of HR practitioners as strategic business partners and leaders of change has also received considerable attention (Rennie, 2003; Walker & Stopper, 2000). Ultimately, the competitive forces that organisations face today create a new mandate for HR and this necessitates changes to the structure and role of the HR function. The HR profession has been continuously evolving and changing over the past hundred years, adding more and different roles and responsibilities. When one traces the HR profession one finds that out of the Industrial Revolution, labour unions and the industrial welfare movement arose as well as groundbreaking research in scientific management and industrial psychology. In the 1980s climate of anxiety over prospects for economic growth, it became apparent that there was a need for the HR function to become more proactive and human resource problems needed to be anticipated and prevented or at least minimised (Gilbertson, 1984). This decade also saw the HR profession faced with criticism and questions regarding its validity, which subsequently resulted in a significant body of research that linked HR practices to organisational performance (Stewart, 1996). From the 1970s to the 1990s NZ experienced major developments in legislation impacting on employment relations, along with more economic restructuring and radical shifts in the labour demand and supply, enforced a growing awareness of the importance of the human asset (Gilbert & Jones, 2000). A generally harsher business environment and increasing competitive pressures caused the HR function to be increasingly seen as a specialist role (Macky, 2008). This made it necessary for HR practitioners to recognise that they had the potential to play a key part in maximising the efficiency of the organisations human resources. At the same time the role of HR practitioners in NZ organisations was becoming more strategic in orientation (Du Plessis, 2010; Du Plessis, 2009; Macky, 2008; Boxall, 1995; Stablein & Geare, 1993). HR practitioners started to depict themselves as strategic HR professionals who divided their roles into operations and strategy.


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The profile of the New Zealand HR practitioner had also changed dramatically. By the late 1990s the majority of HR professionals (60%) were well educated women with a degree or postgraduate qualification and a previous career in HR (Institute of Personnel Management New Zealand, 1997). Authors have taken different stances when referring to HR practices, but there was a consistent focus on the contribution of HR practices to enhancing human capital. Shared assumptions of a number of authors result in the definition that HR practices are a set of activities that actively contribute to achieving organisational objectives (Macky, 2008) and have the ability to gain competitive advantage over other firms (Barney & Hesterly, 2006). HR practices, i.e. the programmes, processes and techniques that direct the management of an organisations human resources can complement, substitute for, or even conflict with other organisational practices and at times arise from reactive and ad hoc choices made by HR practitioners in response to circumstances ( Wright & Boswell, 2002, Macky, 2008). HR practitioners are an active element in the implementation of HR practices because of their command of professional and business acumen. Their quality, extent of knowledge and experience, level of training and education, combined with a belief in their ability to achieve set objectives has a significant impact on the successful implementation of HR practices (Murphy & Southey, 2003).The five closest related themes focussed on in this article are: change management, recruitment and retention, work-life balance, diversity management, and HR as a strategic partner. These five themes are closely related and will be compared with earlier studies done in NZ on the same topics. Change Management Organisations that effectively manage change by continuously adapting their bureaucracies, strategies, systems, products and cultures in response to the impact of the complex, dynamic, uncertain and turbulent environment of the twenty-first century, are identified as masters of renewal according to Nel, Werner, Poisat, Sono, Du Plessis, & Nqalo, (2011). New Zealand businesses are not exempt from this trend and for the past decade organisations have been facing the need to change in order to remain competitive in the global market (Du Plessis, 2006). Consequently the HR function has become more multifaceted over the years as the pace of change quickens, requiring a transition towards more value-added roles, such as the role of a change agent (Holbeche, 2006). Unquestionably HR practitioners have a critical role to play to ensure that the change process runs smoothly, as change in itself causes a high level of turmoil in organisations (Nel et al., 2011). In the new economy HR practitioners, as organisational facilitators to change, have to have the capacity and discipline to make change happen and need to be skilled in the management of employee resistance to change (Macky & Johnson, 2003). The focus on the behaviour of employees is important as change has a way of scaring individuals into inaction, hence change facilitators need to possess the skills and tactics to modify employees perceptions and replace any resistance with motivation and excitement to make change more appealing and seemingly more likely (Dibella, 2007). Managed change is proactive, intentional and goal-oriented behaviour and in order to reduce the likelihood of failure, HR practitioners, in change agent roles, need to develop competencies that enable them to identify and anticipate possible problems that may arise (Cleland, Pajo & Toulson, 2000; Macky & Johnson, 2003; Ulrich & Brockbank, 2005; Ulrich & Smallwood, 2003). Overall, there is clear indication that change happens and the need to change is inevitable. Therefore HR practitioners need to facilitate organisational change and implement the necessary HR practices to ensure success (Joerres, 2006). This requires them to develop change management skills which include the capability to think strategically, engage employees, facilitate change and exceed expectations (Hayward, 2006). The need for change becomes evident when there is a gap between organisation, division, function or individual performance objectives and actual performance in the organisation.


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Du Plessis, Beaver and Nel (2006) refer to the research of Beckhard and Harris, more than two decades ago (1987) that the world in which organisations exist, and will be operating in future, is continuously changing. It changes in relationships among nations, institutions, business partners and organisations; changes in the makeup of the haves and the have nots; changes in dominant values and norms governing societies. It also changes in the character and culture of business or wealth-producing organisations; changes in how work is done and changes in priorities. The core dilemma for leaders and managers is to maintain stability and at the same time provide creative adaptation to outside forces, change assumptions, technology, working methods, roles, relationships and the culture of the organisation. The pressures of change threaten many traditional and long-held ways of managing and working. Dealing with change is among the greatest challenges facing managers in NZ and other countries, now and in the future in modern day business management. Managers as change agents planning to implement change must predict resistance to these changes as well. Resistance to change is a common human behaviour. Usually they misunderstand the changes and its implications; they do not want to lose something valuable and the fear for the unknown.According to Nel et al (2011) one key to managing resistance is to plan for it and to be ready for it with a variety of strategies to help employees to negotiate the transition. HR managers should therefore treat resistance as an opportunity to re-evaluate a proposed change and to identify and deal with the real barriers to change. Recruitment and Retention Organisations promote the idea that employees are their biggest source of competitive advantage. Yet, interestingly enough, too many organisations are unprepared for the challenge of finding, motivating and retaining skilled and talented individuals in todays labour market (Hrtel, & Fujimoto 2010). Attention has been drawn to an imminent shortage of capable workers by a number of global studies. According to two global surveys, conducted by McKinsey Quarterly in 2006 and 2007, finding talented people is the single most important challenge for organisations worldwide (Guthridge, Komm, & Lawson, 2008). The 2007 global Web survey, conducted by the Boston Consulting Group (BCG), established that managing talent, which involves attracting, developing and retaining all individuals with high potential, was one of the HR challenges demanding the most immediate action and greatest attention (Strack, Dyer, Caye, Minto, Leicht, Francoeur, 2008). The intensifying competition for talent and the increasingly global nature of the competition, makes recruitment and retention a strategic priority and it becomes vital for HR practitioners to rethink the way their organisations plan to attract, motivate and retain employees (Guthridge et al., 2008). HR practitioners have a key role to play in ensuring that organisations have a continuous supply of suitably qualified and trained employees. Reaching the best candidates in the market requires an advanced approach to sourcing talents. There is a need to renovate current recruiting and staffing processes and HR practitioners need to work closely with other departments and pay special attention to staffing issues (Strack et al., 2008). Despite the abundance of researchers offering a variety of techniques for the recruitment and selection of employees it is found that HR practitioners are often overwhelmed by the literature and fail to adopt the most appropriate methods (Heneman, Judge, & Heneman, 2006). Regardless of the fact that New Zealanders pride themselves on being early adopters of technology in the area of e.g. recruitment, NZ organisations are way behind US and UK trends (Kendrick, 2007). If, as alleged by Kendrick (2007,6), Human capital is a key resource for most companies, it is vital to recruit and select the right people. It also makes business sense to make recruitment an ongoing process and not just an event (Banks, 2007). This requires the skill to build a system whereby talent can be tapped into at any time rather than starting from scratch each time a vacancy arises (Jacobs, 2007).


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While organisations seek to identify, appoint and select quality people in a labour market where particular skills are sought after and personal commitment to organisational life is decreasing in favour of life-style needs, non-standard forms of recruitment (e.g. using recruitment agencies to locate the most appropriate individual) are on the increase (Fish & Macklin, 2004). This trend, on the one hand, gives HR practitioners additional time to deal with the variety of other HR activities that are inherent in their role. Nevertheless, it also has the potential to have negative implications such as loss of control of the recruitment process and extra costs associated with recruitment agencies. From a strategic HRM perspective HR practitioners can help to support the sustainability of an organisation through identification of capabilities specific to sustainability and by seeking to align recruitment and selection practices to these capabilities (Gloet, 2006). An important issue in the new economy is staff retention because without employees who are well integrated into the organisation and contributing to their best ability, success is short-term (Losey, Meisinger & Ulrich, 2005; Rennie, 2003). Problems, particularly with employees, have incidental effects causing further issues with training, planning and strategic decision-making. When set in a global context, this becomes even more complex and the selection and retention of a stable and committed pool of talent takes careful consideration (Rennie, 2003). As a result this requires more effort in implementing HR practices that can attract, maintain and motivate these employees (Drucker, 2006). The central conclusion of the Fortune Magazines survey of the worlds most admired companies summarised the expressed views of the CEOs stating: The ability to attract and hold on to talented employees is the single most reliable predictor of overall excellence (Storey, 2007, 9). On the other hand McKeown (2002, 152) recognises the link between retention and the employee and manager relationship by saying: Get it right and acceptable retention is almost assured; get it wrong and everything else will count for naught. Work-Life Balance Finding the balance between work and non-work, with neither of them intruding into the other in terms of time, resources and emotional energy (Macky, 2008) could be an elusive goal for more and more employees as the twenty-four hour, seven day working week gains ascendancy (Taylor, 2002). From an HR perspective, this issue causes significant concerns for organisations. The difficulty for employees to maintain a balanced life between the paid work they perform and increased responsibilities, such as looking after the elderly or dealing with financial pressures, can cause stress which can translate into decreased productivity and retention issues as employees will look for better working conditions (Hrtel & Fujimoto 2010). According to Barratt (2007, 5) employers will need to get serious about work-life balance and go beyond lip-service because: While organisations talk the talk of work-life balance, the majority are struggling to make it a reality. The organisations response to employees needs may range from family responsive programmes, which may include components such as leave programmes, dependent care and health/wellness programmes (Macky, 2008; Stone, 2008). Offering flexible work arrangements, which are the cornerstone of almost all work-life balance initiatives, can have significant beneficial results (Strack et al., 2008). One of the reasons for this may well be the fact that the one factor that helped employees achieve balance was something in the control of every employer -- that the company was actively helping to achieve a work-life balance for their employees (Campel, 2002). Many younger employees tend to have new and non-traditional expectations about work. A particular demographic challenge comes from generation Y (people born after 1980). As observed by Guthridge et al. (2008) these individuals demand, among other things, a better work-life balance. It becomes evident that these employees, who operate in positions based on their perception of the organisations commitment to work-life balance, need to be managed differently. Ultimately employees are interested in having both


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a good job and a life beyond work and there is a need for HR practitioners to implement policies and practices that will increase employee commitment (Du Plessis, 2006). This is also noted by Johnson (2000), who states that offering employees work-family balance appears to symbolise an employers concern for employees, leading to greater commitment to the organisation. Diversity Management Managing people from different cultures and backgrounds has become the norm for HR practitioners in NZ organisations because the face of the country is changing continuously. NZ is becoming an increasingly multi-cultural society (Du Plessis, 2009; Jones, Pringle, & Shepherd, 2000). According to Ulrich and Brockbank (2005) worldwide immigration patterns have sharply internationalised the labour force and there is a need for organisations to move beyond intellectual diversity and formally ingrain diversity into their culture. HR as a profession therefore has to recognise and espouse the value of diversity because diversity management has been identified as an emerging strategic necessity for survival in a globally diverse environment (Nel et al., 2011). Hrtel et al. (2010) believe it is the responsibility of HR practitioners to manage diversity and to teach other managers and employees what their role in diversity is. This is especially important for organisations in NZ because, like many other developed countries, NZ is experiencing skill shortages; in this context, valuing diversity management takes on a new urgency. Immigrants want to retain their cultural and linguistic identity even though they live in NZ (Rudman, 2010). This is creating further challenges to the HR practitioners ability to manage a diverse workforce. The challenge is to overcome stereotypes and prejudices and to welcome dissimilarities and differences because diversity management should view employees as unique individuals. It also needs to be noted that NZ has the unique existence of biculturalism, which refers to the influence that both Maori and European culture are meant to have on society and in workplaces (Jones et al 2000). Introducing Maori cultural aspects, such as whanau (support) interviews, which is a cultural sensitive selection and promotion method, enables individuals to stay true to their heritage and culture (Macky, 2008). In addition to this biculturalism, there is also a growing number of Pacific Island people, Asians, Indians and many other ethnic groups that can have implications on workplace diversity. Different interests, backgrounds, competencies, skills and talents, if harnessed properly, can be beneficial to productivity and successful teamwork. This is recognised by Ely and Thomas (2001) who say that diverse groups and organisations have performance advantages and the recurrent aspect among high performing groups or teams is the integration of that diversity. Diversity management also involves conscious efforts to actively recruit members from ethnic minorities (Cleland, Pajo, & Toulson, 2000). Demographic trends in NZ clearly indicate that diversity is here to stay; HR practitioners need to recognise the uniqueness of each individual and the varied perspective and approach to work that they bring to the organisation (Rijamampianina & Carmichael, 2005). Strategic role of HR practitioners The current normative view of a strategic HR practitioner is depicted as a professional who is able to develop, plan and implement a wide range of organisational activities which are directly linked to organisational performance (Murphy & Southey, 2003). HR practices and policies have strategic implications on organisational performance and in making decisions about any employment related structures HR practitioners must be able to make strategic choices (Boxall & Purcell, 2000). To be seen as truly strategic, important decisions have to be made with a long term perspective (in contrast to day-to-day operational decisions) as changing business conditions, and the organisations response to those conditions, influence organisational success (Barney & Hesterly, 2006).


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This view fits well with the suggestion by Raich (2002) that there is a clear shift in HRM from a service provider to a business partner. Some companies have even re-titled their HR generalist as Business Partner (Jamrog & Overholt, 2004). As pointed out by Ulrich and Brockbank (2005) the capability of providing direct support and to add value to the organisation through the knowledge of the business, will allow the HR professional to join the management team. This increases expectations, new responsibilities, possibilities and opportunities for the HR function. Consequently if HR practitioners want to become key players in the management team they need to have the relevant capabilities to do so (Raich, 2006). Morley, Gunnigle, OSullivan and Collings (2006) refer to the HRM functions changing characteristics from that of the traditional operational role of personnel specialists, to the strategic role of the HR practitioner. This new approach to design HR practices which develop the strategic value of the organisations human capital is termed strategic human resource management (SHRM) (Stone 2008; Boxall, 1995; Kane, Crawford, & Grant, 1999). In this role HR practitioners must be able to provide the expertise on how to leverage human capital to create true marketplace differentiation and able to determine how the companys current culture, competencies, and structure must change in order to support the organisations strategy (Cabrera, 2003). ANALYSIS OF THE RESULTS Comparison of the profile of the respondents with a previous study (2000) in NZ An HRM questionnaire covering 358 items to identify HRM and management trends was jointly compiled in New Zealand and Australia in 1994; the same questionnaire was modified and refined and used again in 2000 by Burchell (2001) in association with HRINZ to determine a future perspective on HR in 2010 in NZ. Results were recorded to reflect the percentage of all respondents selecting a particular alternative for a particular organisation size or occupation. The profile of the respondents is spread over a wide spectrum (refer Table 1 below) and each respondent has some relation to HR. The profile of the respondents is important to add value to their opinions. In the current (being 2008) study in NZ, the most frequent title was HR Manager (37%), and the next most common title was HR Advisor (27%). Those two titles accounted for 64% of the reported titles. The remaining titles were HR Director (9%), HR Generalist (6%), HR Consultant (3%), and Employment Relations Manager (3%). The category others (15%) included titles such as HR Coordinator, HR Administrator, Recruitment Consultant, Research Officer, People Development Manager, Chief Human Resources Officer, Sales & Marketing Capability Leader, Talent Management Consultant and Senior Lecturer HRM (Table 1, below).

Table 1: Profile of respondents by profession in New Zealand in 2000 and 2008 Profession New Zealand

profile 2000 New Zealand profile 2008

HR (officer to director) 72,00% 73.00% Business (line managers to CEO) 10,00% 9.00% Consultants 14,00% 3.00% Academic (all tertiary institutions) 4,00% (see other) Other 0% 15.00% TOTAL 100% 100%

It is significant that there is not much difference between the respondents profile of the 2000 study and the 2008 in this regard in Table 1 above


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Table 2: Profile of respondents by organisation size in New Zealand in 2000 and 2008 Number of employees in

organization New Zealand profile

2000 New Zealand profile 2008

Fewer than 10 1,00% _ 10 49 4,00% _ 50 99 9,00% 13.2% 100 499 40% 34.5% 500 or more 46% 52.3% TOTAL 100% 100%

In NZ most organisations (83%) have fewer than 10 employees. In this study, the participants are from different sized organisations (Table 2 above); the following groupings were compiled for analysis: small organisations with fewer than 100 employees (0-99); medium 100 to 499 employees, large is 500 or more employees. It should be noted that NZ is predominantly a country of small businesses, with 93.3% of enterprises employing 19 or fewer people ("SMEs in New Zealand: Structure and Dynamics," 2006)In Table 2 above, the profile of the respondents organisation size for 2008 is very similar to the 2000 study. Change management In question five of the survey questionnaire, respondents were asked to give an overview of their self-identified capabilities in the area of change management. A total of 86.1% of respondents are capable of anticipating the effect of internal/external changes. Only 2.5% disagreed and 11.3% gave a neutral response. Similar positive results were received for the other statements for which respondents were asked to hypothesize whether they are equipped with the capabilities that can improve HR effectiveness in change management. A total of 84.7% have the capability to facilitate support to those affected by the changes, 87.4% have the ability to have a proactive role in change management initiatives, 80.1% have the ability to align HR systems with the expected reorganisation and 86.5% have the ability to motivate others through the application of professional credibility & reciprocal trust respectively. Neutral responses were almost identical in the statements referring to capacity to facilitate support (13.2%), proactive role in change management initiatives (11.2%) and the ability to motivate others (10.6%), thus, 16.5% giving a neutral response for the ability to align HR systems with the expected reorganisation. Negative responses were very low (1.9%, 1.2%, 3.3%, and 2.6%). It can be deduced that HR practitioners regard themselves to be able to live up to the expectations and challenges in the change management area.

Table 3: Self-identified capabilities in the area of Change Management

Please hypothesize on the following statements indicating the extent to which YOU are currently equipped with the capabilities that can imprGEMENT

Strongly agree

Agree Neither agree nor disagree

Disagree Strongly disagree

Capable of anticipating the effect of internal/external changes

29.1% 57.0% 11.3% 1.9% 0.6%

Capacity to facilitate support to those affected by the changes

37.0% 47.7% 13.2% 1.9% 0.0%

Ability to have a proactive role in change-management initiatives

47.0% 40.4% 11.2% 0.6% 0.6%

Ability to align HR systems with the expected reorganisation

35.7% 44.4% 16.5% 3.3% 0.0%

Ability to motivate others through the application of professional credibility & reciprocal trust

31.9% 54.6% 10.6% 2.6% 0.0%


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In comparison to a similar study in South Africa, executed in 2002, only 12% of the respondents indicated that HR is capable of anticipating the effect of internal and external changes on the organisation. This figure grew to 71% who agreed that HR should require this capability for 2010, which is close to the current figure in NZ of 86.1% (Du Plessis, Beaver, Nel, 2006).It is one thing to recognise the need for change, however it is quite another thing to have the ability and discipline to implement and communicate changes in the organisation in such a way that they meet the expectations and challenges of the organisation and support all the employees through the change process. The radical changes in the contemporary business environment increase the need for HR practitioners to support the change process. Nevertheless, managing organisational and cultural change requires HR practitioners to have distinct capabilities in order to address expectations and challenges in both operational and organisational changes. The focus on the behaviour of employees is vital in the change process as they are predominantly affected by the changes. HR practitioners may get into difficulties if they try to project their own perceptions of the desirability of change to others because a change perceived desirable by some participants or set of stakeholders is often perceived as undesirable by others. Essentially anyone who views change as undesirable is unlikely to help bring it about, or worse may even sabotage the effort of those trying to do so. HR practitioners therefore should posses the capabilities to manage or shape participants perceptions because as established by Dibella (2007) participants perceptions of change are more critical to successful change implementation than the nature of the change itself. For the purpose of this study the researchers established that the following capabilities are expected with successful achievement and implementation of change initiatives and for the HR practitioner to be a key driver for the change: Capable of anticipating the effect of internal/external changes Capacity to facilitate support to those affected by change Ability to have proactive role in change management initiatives Ability to align HR systems with the expected reorganisation Ability to motivate others through the application of professional credibility & reciprocal trust

The results of the survey showed that the majority of the respondents reported their level of capabilities in the area of change management at a positive level. In addition, correlations were done among all of the demographic data and each of the HR capabilities used as measures to increase HR effectiveness in the area of change management. Based on these correlations, the ability to manage change had the most significant relationship with the number of years of experience in the profession. This result is not surprising as experience has long been considered as a possible determinant of the level of technical and professional skills an individual holds, the level of understanding of organisational context or industry characteristics, as well as the level of business related capabilities (Murphy & Southey, 2003). The level of experience possessed by HR practitioners will also influence their choices on which HR activities are to be adopted. It can therefore be deduced that the extent and quality of a HR practitioners experience, combined with a belief to have high levels of capabilities to achieve set objectives has a significant impact on their ability to increase HR effectiveness in the area of change management. Recruitment and Retention A total of 63.6% of the respondents viewed their ability to align recruitment and retention practices to support the sustainability of the organisation as strength/major strength. In contrast 8.6% considered themselves as needing improvement/significant need of improvement in the area of recruitment and retention practices and 23.8% were not sure and gave a neutral response. For 46.9% of the respondents,


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identifying, analysing, forecasting and interpreting trends for organisational HR needs in the recruitment and retention area were seen as strength/major strength. At the other end of the spectrum, 20.4% viewed this capability in need of improvement. Almost a third (32.4%) of the respondents indicated neither a need for improvement nor strength. The last statement had almost identical results in the neutral answer option (33.1%). Nevertheless a higher percentage of respondents (54.9%) identified the ability to ensure that the organisation has the skilled and engaged workforce it needs as a strength/major strength and 11.9% indicated a need for improvement/major need for improvement. It can be deduced that the majority of the respondents (63.6%) regard themselves as well prepared and capable to retain their skilled employees and to recruit the right people should they need to recruit. In comparison, the South African study of 2002, the respondents were asked what are their view on retaining skilled employees and 61.9% regarded it as important and interestingly a downwards trend to 2010 was recorded to 53.9%. A similar trend was recorded for attracting skilled people. A total of 55.1% for 2002 and only 44.4% for 2010 were forecasted by the respondents.

Table 4: Self-identified capabilities in the area of Recruitment & Retention

RECRUITMENT & RETENTION 1 2 3 4 5

Align recruitment & retention practices to support sustainability of the organisation

3.9% 8.6% 23.8% 52.3% 11.3%

Identify, analyse, forecast & interpret trends in organisational needs for human resources

5.2% 15.2% 32.4% 39.0% 7.9%

Ensures that the organisation has the skilled, committed and engaged workforce it needs

2.6% 9.3% 33.1% 45.0% 9.9%

The most commonly cited priority in the HR function was to recruit and retain key staff (91.6%). Clearly, HR practitioners in this survey (being 2008) are preoccupied with this activity. The intensifying competition for talent makes recruitment and retention a key priority for organisations and it is imperative for HR practitioners to rethink their organisations plan to attract and retain employees. While it is not clear from this survey whether routine HR activities in the recruitment process are being automated by for example self-service technology, it can be presumed that HR practitioners are using a range of methods to align planning needs, to market the employer and to handle hiring and integration processes effectively and efficiently to address skill gaps. A precise understanding of recruiting needs and a strong monitoring programme also helps HR practitioners to identify areas requiring further improvement. Some of the capabilities were identified as being associated with increasing HR effectiveness in the area of recruitment and retention and they are challenges for the HR practitioner: Align recruitment and retention practices to support sustainability of the organisation Identify, analyse, forecast and interpret trends in organisational needs for HR Ensures that the organisation has the skilled, committed and engaged workforce it needs

The results of the survey showed that in all of the three areas participants viewed their capabilities to increase HR effectiveness in the area of recruitment and retention as strength or major strength. In addition, correlations were done among all of the demographic data and each of the HR capabilities and the most significant relationship was identified with the number of years of experience in the profession.


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The above results indicate that HR practitioners have the ability to attract, develop and retain individuals who can drive organisations that are responsive to both, their customers and future opportunities. Nevertheless in order to move forward HR practitioners need to ensure that organisations have fully automated and flexible systems in place to improve the efficiency of both, their own function and the entire organisation. This will increase the quality of HR, reduce the cycle time for hiring new candidates, lower costs and generally facilitate them to move closer to becoming the organisations administrative expert in the area of recruitment and retention. Work-life Balance The respondents were asked to state what the developing and implementing policies are in response to changing demographic trends. A total of 54.9% of the respondents regarded it as a strength/ major strength. The next question was about the capability to be proactive in the approach to overcoming barriers to implement work-life initiatives and 53.6% of the respondents regarded it as a strength/ major strength. An unexpected high percentage (29.1%) gave a neutral response in each of the two statements and negative results were indicated by 15.9%. Statement three i.e. successful in benchmarking and measuring the effectiveness of work-life initiatives, was self-perceived as being a strength/ major strength by only 23.8% of respondents (see Table 5 below). Employees have changing needs and organisations are required to respond to these flexible work styles. Many employees are now looking for more than just remuneration and organisations need to understand this quest in order to assist their staff to have a better balance. Organisations responses to employees needs may range from providing flexible work arrangements to addressing employees growing desire to have more family-friendly working environments.

Table 5: Self- identified capabilities in the area of Work-Life Balance WORK/LIFE BALANCE 1 for 'significant need for improvement' 3 neutral - 5 for 'major strength'

1 2 3 4 5

Develop & implement policies in response to changing demographic trends

3.3% 12.6% 29.1% 41.0% 13.9%

Proactive in the approach to overcoming barriers to implement work-life initiatives

5.9% 11.2% 29.1% 39.7% 13.9%

Successful in benchmarking & measuring the effectiveness of work-life initiatives

7.2% 26.4% 42.4% 17.9% 5.9%

More flexible time-off arrangements can also encourage more education and training, which ultimately addresses the issue of skill shortages. If organisations accept that HR practices are potentially going to produce beneficial outcomes for the organisation and the employee, then the areas of practice that are more likely to contribute positively should be identified. HR practitioners need to be significantly more proactive in their approach towards improving work-life policies. Diversity Management Due to increasing diverse workforces in NZ, the last opinion was related to the area of diversity management. Results are illustrated in Table 6 below. When asked to self-identify the capacity to effectively implement diversity management programmes 28.4% gave a positive result and 28.5% gave a negative result. Almost half of the respondents (43%) indicated a neutral view regarding this capability. Competency in the ability to deal with the application of legislative issues of diversity management and the ability to effectively use the talents of people from various backgrounds were identified by 54.3% and 54.2% of respondents as strength/major strength.


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Valuing diversity is still not seen as a key priority for the HR function in NZ organisations. Managing diversity is the practice of understanding and embracing social differences for the mutual benefit of both employees and organisations (Wilson, Gahlout, Liu, & Mouly, 2005). Unquestionably, organisations need an action plan for moving diversity initiatives forward. HR practitioners need to be able to have the capabilities to articulate the changes required, make them explicit and to lead the process (Du Plessis, Beaver & Nel, 2006). It can be deduced that even though HR practitioners in NZ organisations have a moderate level of capabilities in diversity management they must invest time and effort to formally ingrain diversity into the culture if they want to maximise the potential of all available talent.

Table 6: Self-identified capabilities in the area of Diversity Management

DIVERSITY MANAGEMENT 1 for 'significant need for improvement' 3 neutral - 5 for 'major strength'

1 2 3 4 5

Capacity to effectively implement diversity management programmes

5.3% 23.2% 43.0% 23.8% 4.6%

Competent to deal with the application of legislative issues of diversity management

4.6% 12.6% 28.5% 38.4% 15.9%

Ability to effectively use the talents of people from various backgrounds, experiences and cultures

2.6% 13.9% 29.1% 41.0% 13.2%

Strategic role of HR practitioners This question was designed to establish the extent to which HR practitioners possess capabilities that can improve effectiveness in the area of strategic HRM. When queried on the ability to take part in framing business strategies and making key decisions, two thirds (66.2%) of respondents agreed, 17.8% showed a negative result. When asked to indicate their ability to implement coherent HR strategies which are aligned to the business strategy, 78.9% agreed. Developing an achievable vision for the future, whilst envisaging its probable consequences was positively agreed upon by well over half of the respondents (64.2%), and only 10.6% disagreed. The capability of providing direct support to the organisation via strategic input got the highest percentage of agreed responses, 81.4%. The last statement had 73.5% of respondents agreeing. It can be deduced that the respondents do understand the importance of being a strategic partner, to provide support via strategic input (81.4%), and to align HR strategies with the organisations strategies (see Table 7 below). The increasing global nature of competition requires that organisations use all of their available resources to survive and to succeed (Sheehan, 2005). The emphasis on the alignment of all functional activities of an organisation toward the achievement of strategic objectives calls for a strategic role of the HR function. Most discussions of a strategic role focus on two major aspects. Firstly, that the HR practitioner should be able to align people with strategies to enable strategy implementation and secondly the HR function needs to ensure that the HR activities and practices are in place to effectively implement the strategy.


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Table 7: Self- identified capabilities in the area of Strategic HRM

Indicate the extent to which YOU are currently equipped with the capabilities that can improve effectiveness in STRATEGIC HRM

Strongly agree

Agree Neither agree nor

disagree

Disagree Strongly disagree

Able to successfully take part in framing business strategies & making key business decisions

23.2% 43.0% 15.9% 17.2% 0.6%

Ability to develop & implement coherent HR strategies which are aligned to the business strategy

31.2% 47.7% 14.0% 6.6% 0.6%

Capacity to develop an achievable vision for the future and envisage its probable consequences

20.5% 43.7% 25.1% 9.3% 1.3%

Capable of providing direct support to the organisation via strategic HRM inputs

39.0% 42.4% 12.6% 4.6% 1.3%

Ability to develop the relevant portfolio of competencies in order to achieve business objectives

20.5% 53.0% 19.9% 6.0% 0.7%

Given this requirement, it is evident that HR practitioners must have the capabilities to be competent in strategy development, implementation and evaluation. Findings are inconclusive as several factors that emerged from this survey make the researchers question whether the perceived degree of strategic orientation actually reflects reality; HR practitioners only spent 24.2% of their time on strategic input. It can be deduced that HR practitioners lack of strategic input is not the result of their incompetence but more likely the result of having to spend most of their time on transactional activities. Respondents level of involvement To establish the degree of specialisation taking place in HR, question four asked participants to specify their level of involvement in a number of HR activities. A 5-point Likert scale was used to determine survey participants level of involvement. The ratings were converted to numerical values where one equals solely responsible and five equals no involvement. The mean scores identified (Table 8, below) ranged between 2.28 and 2.95 (where 2 equals great deal of involvement, 3 moderate level of involvement, 4 little involvement).The standard deviation in conjunction with the mean provides a more accurate picture of HR practitioners level of involvement. As the values in Table 8 reveal, responses in fact sit between 1.45 and 4.16, establishing that there was large disparity among responses.

Table 8: Level of involvement in HR activities

Respondents level* of involvement in the following HR activities: Mean StD Value1** Value2***

Change management 2.51 1.012 1.50 3.52 Strategic planning 2.71 1.087 1.62 3.80

Staffing & retention 2.28 0.836 1.45 3.12 Managing work-life balance 2.77 1.048 1.72 3.82

Managing diversity 2.95 1.202 1.75 4.16 * 1 = 'solely responsible', 5 = 'no involvement'

Value1**= Mean - Std, Value2***= Mean + StD


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Cross-tabulation with all of the demographic variables (gender, position classification, occupational category, number of years of experience, highest educational attainment, industry sector and size classification) and chi-square test results found that two of the variables i.e. position classification/job title (Test statistics A) and number of years of experience in profession/occupation (Test statistics B) show a significance level which is less than 0.05 (Test statistics A and B, Table 8). Findings therefore indicate that the variables are indeed related. All other test results showed values above the significant level of 5 percent (0.05) verifying that the level of involvement in specific HR activities is not associated with any other demographic variable. Test statistics A

Participants level of involvement in HR activities:

Cross-tabulation with position classification/job tile Pearson Chi-Square

Asymp. Sig. (2-sided) Change management 0.000

Strategic planning 0.000 Staffing & retention 0.003 Managing work-life balance 0.016 Managing diversity 0.024 Significant level p = < 0.05

Test statistics B

Participants level of involvement in HR activities:

Cross-tabulation with number of years experience in profession/occupation

Pearson Chi-Square Asymp. Sig. (2-sided)

Change management 0.000

Strategic planning 0.000 Staffing & retention 0.191 Managing work-life balance 0.059 Managing diversity 0.015 Significant level p = < 0.05

The data associated with the above cross tabulations also enabled the researcher to look at the representation

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