would appease workers in order to prevent them from exercising their newly created rights.
This attempt at appeasement was embodied in the human relations ap- proach to management. By focusing on such areas as the needs and feelings of workers, managers could hopefully avoid any costly confrontations (Bendix 1956; Braverman 1974) and stabilize firm output (Gillespie 1991).
This would have the effect of reducing labors’ power, decreasing investors’
scrutiny of managerial actions, and restoring managerial autonomy.
FROM HUMAN RELATIONS TO HUMAN RESOURCE
ILMs altered the firm-specific dependence of employees in a dramatic fashion. An employee joins the organization at a particular point-of-entry and moves up the organization by way of a highly defined job ladder. As workers progress through the organization, they acquire skills that tend to be highly firm-specific (Pfeffer and Cohen 1984). Workers are tied to their current organization because movement to new organizations would result in decreased wages because the skills accrued at the old firm would not be transferable to the new one. The development of ILMs throughout the 1960s caused the welfare of many employees to become highly dependent on the success of their current workplace.
One could also argue that ILMs increase the dependence of managers and investors on firm-specific human capital. It is true that ILMs do increase the reliability and predictability of relationships between investors, managers and employees. But ILMs do not keep investors from moving their financial capital to other locations and ILMs give managers a stable labor pool to draw from.
The Rise of Portfolio Investment Strategies
Concurrent with the growth of ILMs, other events were unfolding that would dramatically affect investors’ exposure to firm-specific uncertainties.
Post-depression regulations made the stock market much more efficient in terms of access to information, reducing the risk associated with stock ownership. The expansion in the number of stocks traded and the number of companies available for purchase further reduced the firm-specific depend- ence of investors by increasing capital mobility.
An important event in decreasing the dependence of investors came in 1952, when Harry Markowitz published his work on portfolio selection.
Markowitz (1952)hypothesized that by focusing on the standard deviations of stocks, as well as the covariance between them and the market, investors could diversify away nearly all the firm-specific risk inherent in any one stock, exposing themselves only to the risk of the overall market. With portfolio investment tools, investors could now exercise control over a number of firms without being exposed to the risk of any one.
Shifts in the Backgrounds of Top Corporate Executives
By the 1970s, managerial autonomy was increasing as workers became immersed in firm-specific ILMs and investors were shedding firm-specific
uncertainties by diversifying their portfolios. These changes were accompa- nied by a shift in the backgrounds of top executives. Prior to the 1970s, the ranks of top management were filled with individuals whose training and corporate background involved marketing, sales, and engineering. Begin- ning in the 1970s, a growing number of top executives with finance back- grounds were being selected for key positions in organizations (Fligstein 1990). As this cadre of managers grew, portfolio investment theory began to emerge as the organizing mechanism for large firms (seeFligstein 1990).
This change in organizing principles and backgrounds of top executives produced a major split within the managerial ranks. The human relations paradigm was built from a different set of principles that were not isomor- phic with the new financial tools of top management. The human relations paradigm was designed to pacify employees in response to newly created union power. But decreasing union ranks and ILMs were making this pac- ification unnecessary. These occurrences, along with the conflict in ideology between top executives and mid-level personnel managers, led to the rise of human resource management.
Enter the Human Resource Management Paradigm
Human resource management reflects the underlying tenets of portfolio theory as practiced by top managers. The decision by top managers to diversify was based on the notion that the whole was more important than the individual parts of the organization. Top managers would add and discard firms based on their financial contribution to the overall corpora- tion, while the welfare of the individual firms under the corporate umbrella was of secondary importance. Human resource management viewed em- ployees in a similar fashion. Workers were no longer seen as important in and of themselves (as in the human relations approach). Rather, the em- ployees were viewed in the context of their contribution to the specific firm with decisions to add or discard employees reflecting this heuristic (Sherman and Bohlander 1992;Wren 1994).
Though this is a far cry from the previous perspective where worker satisfaction was of paramount concern, this shift from human relations to human resource management was a reaction to environmental changes affecting the professional autonomy of managers. Managers, whose future was increasingly tied to the performance of the individual firms they man- aged (see Donaldson 1963), sought to reduce their dependence on speci- fic employees and make the employment relationship more predictable
Management Paradigm Change in the United States 137
(Monsen and Downs 1965). They further sought to align their mana- gerial paradigm with the dominant paradigm of portfolio investment theory as articulated by the new cadre of top managers. The increase in the use of ILMs and the decrease in the strength of unions made this possible. Most of the changes involved in the shift from human relations to human resource management were invisible to non-supervisory emplo- yees on a day-to-day basis. What did change slowly was the implied contract between managers and employees regarding their place within the larger corporation.
When viewed in historical context, the paradigmatic shift from human relations to human resource management was an attempt by firm-level managers to enhance their professional autonomy. As top managers in conglomerate corporations continued to manage using the ‘‘corporation-as- portfolio’’ model, the productivity of the workforce at the firm level became of paramount importance to firm level managers. If the productivity of a particular firm within the conglomerate began to decline, the inclination on the part of top-level managers would be either divestiture or liquidation. In order to remain in the conglomerate, firm-level managers needed a contin- ually productive workforce; this constraint affected the autonomy of firm- level managers. Human resource management supplied the analytical tool necessary for firm-level managers to obviate much of this impact and regain their autonomy. However, this new paradigm would make the employment relationship much more dynamic.