A Lesson for Layoff Lemmings

Ford, Whirlpool, NCR… and hundreds of other companies:  you’ve laid off thousands of people, tens of thousands of years of knowledge, experience, and creativity.  As Dr. Phil likes to say, "how’s that working for you?"  (for readers wondering why I know what Dr. Phil likes to say, click here)

An article in this month’s The New Yorker titled It’s the Workforce, Stupid may give you a clue to what your future holds.  You might have thought that layoffs would help your stock price and inancial performance, but perhaps you should think again.

Instead of rising sharply, the stock of companies that trim their workforces is likely to fall. A recent meta-study that surveyed research from several countries, covering thousands of layoff announcements, concluded that, on average, markets had “a significantly negative” reaction to job cuts.

Downsizing may make companies temporarily more productive, but the gains quickly erode, in part because of the predictably negative effect on morale. And numerous studies suggest that, despite the lower payroll costs, layoffs do not make firms more profitable; Wayne Cascio, a management professor at the University of Colorado at Denver, looked at more than three hundred firms that downsized in the nineteen-eighties and found that three years after the layoffs the companies’ returns on assets, costs, and profit margins had not improved.

But many CEO’s are just in the job for the short-term gain, not long-term growth. 

The increasingly short-term nature of C.E.O.s’ jobs, along with the pressure on them to deliver results quickly, doesn’t help matters. The average C.E.O.’s tenure today is just six years, long enough to see the benefits of downsizing (like a lower payroll) but not long enough to suffer costs that may appear in the long term. And the lack of job security means executives have to worry more about what analysts are saying.

And even in the face of contradicting financial data, analysts still believe that layoffs work.  And they can apply pressure.

While the market as a whole may be skeptical about downsizing, many powerful people on the Street aren’t. Before Citigroup announced its layoffs, for instance, it had to contend with a chorus of critics—including its biggest shareholder—insisting that the company was a bloated giant that needed to get its costs under control. Even if the job cuts didn’t move the stock price, they were at least a sign to those critics that the company was listening.

And that leads to a lemming effect… companies and executives believing that layoffs… err, downsizing… is an effective business strategy.

On top of all this, a C.E.O. is likely to look to layoffs as a solution because that’s what almost everyone else does, too.  Downsizing has become less a response to disaster than a default business strategy, part of an inexorable drive to cut costs. That’s why Circuit City can proclaim, “Our associates are our greatest assets,” and then lay off veteran salespeople because they earn fifty-one cents an hour too much.

But the fact that the market as a whole no longer rewards news of layoffs may be a good sign for the future.

This isn’t to say that Wall Street has gone soft—it still cares about profits, not people. But investors seem to understand that fewer people doesn’t always mean more profits. The problem is that too many companies today define workers solely in terms of how much they cost, rather than how much value they create. This is understandable: after downsizing, it’s easier to measure a lower wage bill than it is to see the business the company isn’t getting because it has too few salesmen, or the new products it isn’t inventing because its R. & D. staff is too small. These lost opportunities may be hard to measure, but over time they can have a huge impact on corporate performance. Judging from its reaction to layoff announcements, the stock market understands this. It’s time executives did, too.

Wow… can it be that The New Yorker actually understands the value of people?  The real value… not the traditional balance sheet and P&L value?  I would add "and analysts" to the very last line of the preceding quote, as they can be the kingmakers.  They hold the keys to capital market movement, and therefore control the pursestrings of many executives.  A few gutsy executives are starting to buck the trend by refusing to provide shorter term financial projects and insisting on focusing long term, but they are few and far between.

Look beyond your traditional financial statements and think about what your employees are really worth.