Principles of Management and Leadership in an

Lesson 1

Principles of Management and Leadership in an Organisational Context

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Defining Management and Leadership, Governance and Legal Status

Meaning of the terms

‘management’ and ‘leadership’

How an organisation’s context affects

these concepts in practice

How legal status affects governance

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Defining Management and LeadershipOne of the key areas we’ll look at in this lesson is organisational context, and why it is so important for management and leadership. But to dissect this point properly, we need to define what we actually mean when we talk about ‘management’ or ‘leadership’.

Historically, a number of academics have taken a great deal of effort to distinguish between management on the one hand, and leadership on the other.

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Defining Management and Leadership (cont.)Managers were seen purely as those guiding the day-to-day operations of teams and departments, coordinating resources and tasks to deliver strategic aims, and overseeing performance.

By contrast, leaders developed the organisation’s strategy and vision, and inspired others to follow it. They might also have decided how to structure the organisation to deliver the strategy, but making sure things were actually done was viewed as managerial territory.

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The Distinction Between Management and LeadershipManagement theorist Warren Bennis expressed the distinction almost poetically with such maxims as: ‘The manager administers; the leader innovates’ and ‘The manager maintains; the leader develops’.

The most famous of these summaries was ‘The manager does things right; the leader does the right thing’.

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The Distinction Between Management and Leadership (cont.)But the distinction between management and leadership has been challenged, as time has passed.

In practice, most managers have to display leadership, including inspiring their teams, to ensure day-to-day work and important projects are delivered. And most leaders need to be involved in so-called “management” activities in order to be effective – however senior they get, they will need to oversee their own direct reports.

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Overlapping RolesIn reality there is a lot of overlap between the two roles.

In the words of leadership specialist Dr Peter Northouse: ‘When managers are involved in influencing a group to meet its goals, they are involved in leadership. When leaders are involved in planning, organising, staffing and controlling, they are involved in management.’

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Overlapping Roles (cont.)Indeed, business scholars Daniel Simonet and Robert Tett have argued that the distinction between management and leadership is not only false, but could actually be damaging.

Their research illustrated that the two roles share a high number of competencies, such as goal setting and achieving high productivity. So, by creating an artificial distinction between management and leadership, individuals may limit themselves from utilising both skillsets – even though this is precisely what organisations need.

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Overlapping Roles (cont.)Simonet and Tett argued that leaders are required at all levels of the organisation, as are the competencies traditionally described as ‘managerial’.

They advocate that to succeed, organisations need to look for individuals who offer the best of both worlds.

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Organisational ContextWhether your job title contains ‘manager’ or ‘leader’, the requirements of your role will very likely require you to both manage and lead. But job titles aside, management and leadership don’t happen in a vacuum – so we need to study them with reference to the environment in which they take place.

Over our first three lessons, we’ll look at the following elements of organisational context:• Legal status• Organisational structure• Mission and vision• Values and ethics

As well as defining these concepts, we’ll look at how they can affect the type of management and leadership that is preferable, or even possible.

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GovernanceWe’ll now take a look at a key feature of how 21st-century organisations are run: governance.

Organisations can be described in a number of different ways, such as – By size – By sector - for example, private or public– By industry - for instance retail, manufacturing, education or healthcare

This includes how an organisation needs to be governed.

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AccountabilityGovernance concerns how managers are held to account for their actions, perhaps by those who own or fund the organisation, or by those for whom the organisation was designed to help.

For instance, shareholders and other owners will want to see a return on their investment, and expect managers to make decisions that will do this, rather than seek to benefit themselves personally.

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Accountability (cont.)The issue of governance extends to public and not-for-profit organisations too, since public sector organisations will need to be answerable to the taxpayer and service users.

Public or donated money needs to be spent sensibly, to benefit only those the organisation has been set up to serve, and to safeguard its long-term future.

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Accountability (cont.)The fact that managers might not always act in the interests of the owners they were recruited to serve was first highlighted in the 1930s, by lawyer Adolf Berle and economist Gardiner Means. They argued that governance systems and processes were needed to keep managers operating in the interests of others.

Effective governance can only take place if governance frameworks have been established. These are the rules, policies and procedures that govern the organisation, and that all employees and managers must abide by. They could cover, for instance, how money is spent and how spending is authorised.

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UK’s Corporate Governance Code 2018Such frameworks are informed by The UK’s Corporate Governance Code 2018 which sets out a number of recommendations for how Boards should oversee the management of an organisation. These governance standards cover: • Promoting long-term sustainability• Ensuring the organisation operates in support of achieving its purpose and strategy, including

having the necessary resources • Ensuring transparency in reporting on the organisation’s financial performance, position and

prospects• Ensuring the organisation manages risk to the extent agreed by the Board• Keeping stakeholders and shareholders engaged and up-to-date

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An Organisation’s BoardAn organisation’s Board is responsible for ensuring that governance aims are met, so it needs to design, set up and monitor the organisation’s governance framework. In doing so, the Board and Trustees need to ask themselves whether the rules and processes, values and customs that have been set up to govern operations are:

– Fit to honour the purpose of the organisation and its owners’ or funders’ interests– Honoured in practice

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Legal StatusThe form that governance actually takes can be affected by organisation type. But managers also need to understand the implications of a particular organisational identity that can shape governance more specifically – that is, its legal status.

Legal status defines an organisation in the eyes of the law, and shapes some of the obligations that must be honoured for good governance.

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Legal Status (cont.)It’s worth noting that governance goes beyond honouring the requirements of a given legal status – it involves following everything set out by a governing Board.

But legal status is a crucial part of governance, since it has a bearing on the transparency of actions and decisions, and of their results. It affects how closely the funders or service users can oversee the day-to-day running of the organisation, and who is liable if things go wrong.

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Incorporated CompaniesOne of the key ways to understand legal status is to look at how it applies in practice. We’ll start by looking at some key private sector examples.

Private sector companies can be set up on either an incorporated or unincorporated basis.

Incorporated companies exist as a separate legal entity – that is, the law views them as separate from the individuals who run or own them. So, if a company runs up debt, for instance, it is the company, not its owners, who are legally liable to repay it.

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PLCs and Private Limited CompaniesIncorporated companies can take the form of a public limited company, a PLC, or a private company limited by shares, often denoted by the abbreviation ‘LTD’ after its name.

The difference between these two types of incorporated company is ownership. Shares in a PLC can be bought by anyone, usually via the stock exchange – this is the reason for the word ‘public’. Examples of PLCs include Sainsbury’s, Unilever and media giant WPP.

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PLCs and Private Limited Companies (cont.) By contrast, shares in private limited companies are less easily available – any shares being sold in these businesses must first be offered to existing shareholders.

PLCs tend to be larger than private limited companies, because the public tend to be most interested in buying from the biggest, most successful firms, and because there are significant costs involved in trading on a stock exchange.

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Removing LiabilityIncorporating removes liability from individuals and places it within the organisation. This frees managers to take entrepreneurial risk, which can be a huge positive.

But it also means that rules are required to ensure managers don’t take irresponsible, damaging risks. This is especially the case for PLCs, which are traditionally much larger than private limited companies, meaning it can be harder for the owners to know everything that is taking place.

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Strict Reporting StandardsPartly because of this, and partly because investing in a business involves financial commitment, PLCs have strict reporting standards that they are legally obliged to meet.

This helps to ensure their owners are aware of how the company is performing and how it is being run.

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Unincorporated CompaniesHowever, many smaller companies choose not to incorporate. This enables the owners to keep financial information private, and to retain profits if they limit the sale of shares.

But they are also liable for any debts or claims resulting from the company’s operations. While it’s hard to generalise, this may act as an extra incentive for owners to keep a very tight rein on the activities of managers, so strict procedures and oversight systems might be in place, even if public transparency is limited.

As a manager, constant vigilance from the owners may feel suffocating, but if their life savings might be at risk, it’s understandable.

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Sole Traders and PartnershipsThe most common forms of unincorporated private company are sole traders and partnerships.

Sole traders run their business as an individual and are personally liable for any debts or errors. However, sole traders can employ others, so although they are self-employed, they don’t have to work alone.

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Sole Traders and Partnerships (cont.)In partnerships, two or more individuals are legally recognised as jointly liable for the debts of a business. Unless a partnership agreement states otherwise, they share equally in the profits and losses of the business, regardless of the exact share of work undertaken.

Partnerships are commonly formed by professionals, such as doctors and lawyers.

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Cooperative and Mutual Organisations You may hear cooperative or mutual organisations described as specific types of legal status. This isn’t actually the case.

Mutuals and cooperatives can choose between a private limited company status or partnership status. The difference is that they are run and owned by their shareholders – called ‘members’ – who share the profits. Members may include producers, employees or consumers.

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Cooperative and Mutual Organisations (cont.)Cooperatives must follow an established set of values and ethics set out by the International Co-operative Alliance, whereas mutuals don’t have to.

Cooperatives and mutuals are often confused with not-for-profit organisations. But, while profits from mutuals are shared, in a not-for-profit, all surpluses must be invested back into helping the organisation meet its aims.

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Not-for-profit OrganisationsWe’ll now take a look at the not-for-profit and public sectors.

‘Not-for-profit’ is an umbrella term that encompasses a range of legal structure types, such as ‘charity’ and ‘community interest company’.

We use the term ‘charity’ very loosely sometimes, but the legal definition is actually quite narrow. A charity must have an entirely ‘charitable purpose’, but the definition of this is limited to just 13 specific areas, such as ‘the advancement of education’ or ‘the prevention or relief of poverty’.

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Not-for-profit Organisations (cont.)Not-for-profits may also take other legal forms, such as ‘community interest company’.

This legal status was designed to address the fact that many organisations that aim to help others don’t meet the strict definition of a ‘charitable purpose’, but have altruistic aims and wouldn’t suit a private limited company structure.

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Not-for-profit Organisations (cont.)However, all not-for-profit organisations share a common characteristic: as the name suggests, they don’t seek to make a profit to pay shareholders.

A financial surplus is usually required to ensure the organisation’s long-term sustainability, but these funds are invested back into the organisation to help it pursue its aims. Funding may be received as donations and grants – from the public, private companies, government, and sometimes other not-for-profit organisations.

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The Board of TrusteesGovernance arrangements for not-for-profits usually involve oversight by a Board of Trustees. The Board will need to ensure that any profits are ploughed back into the organisation, and that it operates in line with both its core aims and the reporting requirements set out by the Charities Commission.

These trustees are important because donors can’t, practically speaking, have much direct oversight of how money is spent by managers. This is why not-for-profits must report on how funders’ money has been used. In addition, they need to publish a “governing document”, including the organisation’s purpose, how it seeks to achieve this, and how it will be run.

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Public Sector OrganisationsNow let’s turn to the public sector. This consists of a range of different legal entities such as:

• Local councils, including education authorities and schools • Central government departments• NHS Trusts• Public agencies, such as the Driving and Vehicle Licensing Agency

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Public Sector Organisations (cont.)The categories of legal status aren’t as clear cut in the public sector as in the private. Instead, each public sector organisation is defined in the eyes of the law by reference to the legal act that sets out its duties and purpose.

For instance, Local Education Authorities are defined in section 12 of the Education Act 1902, and NHS Trusts were established by the NHS and Community Care Act 1990.

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Public Sector Organisations (cont.)Even though their legal statuses are separate, public sector organisations share common characteristics that have implications for their governance.

Firstly, they are funded by the public, either by the taxpayer, or via government-authorised revenue raising. Secondly, they each exist to serve their beneficiaries or service users, as directed by democratically elected national or local politicians.

These characteristics mean that public sector organisations are answerable to government, the taxpayer, services users, or all three. In the case of an NHS Trust, for instance, it must be accountable to its patients, taxpayers and Government ministers.

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TrusteesThe sheer number of owners of public sector bodies – that is, taxpayers – makes it impractical for each of us to have direct oversight of these organisations. As such, most public sector organisations are governed by a Board of Trustees responsible for overseeing the activities of managers.

Trustees ensure managers are answerable for meeting objectives and operating within set budgets. The governance structures of public sector organisations often also include liaison services to help the public feed back on service delivery, and so improve accountability.

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Rules and RegulationsEach separate body will have its own set of governance rules and regulations, so every public sector manager needs to be fully aware of this, and abide by them.

As you can see, the way managers can and must operate within an organisation is highly influenced by its governance. These governance requirements are considerably affected by the organisation’s legal status.

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Rules and Regulations (cont.)Management and leadership-level positions require individuals not just to follow the rules of their organisation and to trust these are sufficient, but also ensure they understand the precise requirements determined by their organisation’s legal status.

Legal status and governance are just two of the many factors that shape an organisation’s internal environment. In the next lesson we’ll examine further aspects that help define context, starting with organisational structure.

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RecapIn this lesson, you have learned about:

• Meaning of the terms ‘management’ and ‘leadership’• How an organisation’s context affects these concepts in practice• How legal status affects governance

Principles of Management and Leadership in an

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