Layoffs by Profitable Companies

Is it ethically OK for a profitable company to lay people off? People tend to understand it as a necessary evil when managers of a beleaguered company, awash in red ink and heading for bankruptcy, resorts to layoffs as a way of salvaging the company. But what about layoffs when times are good?

Case in point: both Microsoft and Viacom — profitable companies — have recently announced layoffs. And at least one CEO has been harshly critical. Here’s the story from Yahoo! Finance: Mass Layoffs by Profitable Firms a ‘Horrible Act,’ Diller Says

This week has brought another round of big layoffs from companies in diverse industries, including Sony, Rio Tinto, and our parent, Yahoo.

The mass layoffs are obviously a response to a steep economic slowdown but are causing a rethinking of the very role of capitalism in society: Do businesses serve the greater good, or merely the bottom line?

At the Reuters Media Summit last week, Barry Diller, CEO of IAC/Interactive, slammed other media executives for their “preemptive” layoffs:

“The idea of a company that’s earning money, not losing money, that’s not, let’s say, ‘industrially endangered,’ to have just cutbacks so they can earn another $12 million or $20 million or $40 million in a year where no one’s counting is really a horrible act when you think about it on every level,”

Not surprisingly, Diller’s assessment was not shared by all. Another corporate exec, Gawker Media’s Nick Denton, thinks Viacom should have laid off more employees, in recognition of coming changes in the market; and stock analyst Walter Pritchard argued that Microsoft should have cut deeper, too.

A couple of comments:

1) Diligent pursuit of profits — within the limits of the law and morality — is a central principle of corporate governance in widely-held companies (i.e., in companies where shares are owned by lots of people). It’s generally seen as important to give CEOs a clear mandate, a mission to which they can be held accountable. This implies a presumption in favour of letting CEOs do whatever they think is necessary to generate profits in the long run.

2) When times are good, the interests of shareholders and employees very nearly line up. What’s good for one tends (imperfectly) to be good for the other. When times are tough, their interests can more easily diverge. It’s important to see the difference in how law & corporate governance structures protect those different interests. The interests of employees are protected by labour law, workplace health & safety laws, minimum wage law, etc., but they have no guarantee of permanent employment. The case is almost exactly the opposite for shareholders: shareholders can be “permanent” if they wish (they can hold onto stock as long as they want), but they have almost no other legal protections: for example, while employees are guaranteed at least minimum wage, there is no legal guarantee of any profits or dividends at all, for shareholders. All shareholders get is the promise of corporate executives to do their best to make a profit. The lack of other legal protections makes that promise pretty important.

3) Critics of profitable companies who lay off workers may well be guilty of precisely the kind of short-term thinking for which we so often (and rightly) criticize corporate executives. There’s a certain irony in criticizing CEO’s for thinking not just at current profitability, but also about the future of the company and its stakeholders.

4) The presumption noted above in favour of letting CEOs do what they think necessary (within the limits of law & morality) to generate profits is just that: a presumption. It’s not carte blanche. When layoffs are the mechanism chosen by a CEO in pursuit of profits, that CEO at very least owes us recognition of the fact that that mechanism implies some very significant human costs. So it’s reasonable to hold corporate executives accountable and to expect them at the very least to justify their regrettable decision to lay off employees.

7 comments so far

  1. Nandu on

    Nice post. Whether layoffs by profitable companies are ethical is a great question. Here are few facts we need to consider before we decide if its ethical or not:– Most of large companies build up lot of fluff over a period of time. When the company is doing well & under good market conditions these go unnoticed. Only when business conditions are bad they wake up and trim down this fluff.– Lot of these companies do anticipatory hiring – They hire people for presumed/projected growth. When that planned growth does not happen its only logical that they layoff.– The problem is more at a society level. We are in a capitalist society where material value/ profits are looked at as KPI’s and success factors. The CEO/Board’s main charter is to enhance shareholder value (a.k.a higher profits). Irrespective of current profitability if there are ways and means to improve profits companies go for it and markets also push them and applaud them for it. If they don’t do it the CEO will be replaced. This is the whole essence of capitalism – everything is market/profit driven.To sum up, while it may seem morally wrong I don’t think holding the Companies responsible is correct. Companies are driven to take these decisions by our society & by us. Unless we bring about a fundamental change in the society by moving away from a materialistic to a value based model these will keep occurring time and again. We as a society are too deeply entrenched into capitalism and i don’t see this change coming anytime soon.

  2. GoodNewsShar on

    It is the short-term, get-rich-quick thinking that has created our current problem, on ALL levels (including down to you and me, likely) Kudos to those companies who see the writing on the wall and take the pre-emptive steps to survive, whether or not they prosper. Just as the oil companies amass large reserves for ‘down the road’, all of our critical companies should be allowed and encouraged to do so. Stockholders need to be educated: money is made, longer term, if companies sustain. When they disappear, more than just employees lose. We are back to education: educating CEOs, employees, stockholders on the methods to achieve and value of sustainability, Ironic, we talk about ‘small business’ being the crux of capitalism. (I fully disagree that it should be.) Where is the accountability, to stockholdlers or employees or anyone at their level. Again, Kudos to the large corporate CEOs who are trying to build and protect their corporate world for the good of masses.

  3. Chris MacDonald on

    GoodNewsShar:Why do you think it’s “ironic” that we talk about small business being the crux of capitalism?And why do you disagree that it should be?I’m not necessarily disagreeing — I’m just curious why you think those things.Chris.

  4. GoodNewsShar on

    Thank you for asking, Chris. I’ll try to be brief and direct, though neither is easy in this arena.Ironic: Big companies are condemned, and often encumbered by regulations, unions, etc, when they fire, layoff, move, relocate, outsource, etc to stay ‘alive’. They pay people: provide insurance; often daycare; ‘backup’ personnel to allow family time, etc. Employees and employers normally pay taxes to the governmentSmall business, in general, do little to none of the above; more often receiving monies from the government, despite their often short-lives; ask employees to pay their own ‘way’ on many fronts and, as a result, create more people asking the government to compensate for their shortfall. IF we had a competent education system, much of the reality would be different. But we do not and should not pretend otherwise. As a result, we are sending undereducated, egotistical folks into ‘business’ with not only a lack of ‘skills’ but a lack of morals or ethics. (Long story, too!) As a result, if there is ANY real moral conscience going on, it is far more at the corporate level (whether by regulation or desire to sustain) than at the small business, day-to-day, unrealistic mode. From my vantage, the person most affected and upset when most small business close their doors (entrepreneurs, that is) is the person himself…not the community. And, I think other than his own ‘income’, he rarely cares who else is affected. It is this attitude that is making its way into our society and upwards, into the corporations. It is destructive and immoral. We need to refocus on building strong ‘teams’….schools, churches, communities, companies, etc. and get over ourselves and ‘rights’. We are the best at being capitalistic when we function as strong ‘units’ to achieve great things. Candor,respect,knowledge and purpose in the workplace, please. (My backgrond is extensive; please forgive me if I am not succinct in response. Offline, with a call or email, I can elaborate or expound if you would like.)

  5. Rational on

    So easily do people rationalize unethical behaviour when the subject is stock performance. Should Georgia Pacific be able to clearcut virgin forests in the Pacific Northwest? Should Peabody Energy be able to stripmine the entire state of Indiana? Should Exxon be able to run tankers aground in Alaska? Why not? It could be beneficial to their business and increase their bottom line. Anyone who has been responsible for hiring someone knows what it is like to tell them they no longer have a job. They know that when they do that there are others that are hurt, families, local business owners, friends, relatives. In bad economic times it is even worse when this happens. Sometimes it is inevitable, huge losses loom, everyone might lose their jobs if some are not cut now. But that is not what is happening in this downturn. Companies see the opportunity to jettison older workers who “cost too much” in favor of foreign or more junior people. Actions they could never take lawfully in other times. Some see this as a way to show “Wall Street” that they are responsible in controlling costs. Just the idea that “Wall Street” has any conception of what is “responsible” is laughable. Have any of these profitable companies seen their stock prices shoot up as a result of their “responsible” actions? No. It has become fashionable to layoff workers and take one-time charges to earnings that the analysts (a term used very loosely) ignore, only to hire different people back later with high recruitment and training costs. In the end the company spends more actual money, but some of that is ignored by Wall Street so that makes it all ok.

    The behaviour of profitable companies who jettison middle aged workers is beyond unethical, it is immoral. But, morality has not been a requirement in the the corporate boardroom or in the financial community for quite some time.

  6. GoodNewsShar on

    Dear rational,
    You certainly are and I applaud you. Everything you say is correct. I am WAY too close to the entire investing/trading arena which results in the ‘shareholder’ views you mention. And, candidly, I am a proponent of reducing or drastically changing the manner in which we encourage such shareholder payments in spite of the ‘longer range’ benefit of employees, company, community, etc. Again, there was never a separation made between capitalism and morality. The objective was they run hand-in-hand and achieve optimally when the morality is held in high regard. That is where we have lost our way, as a society, and border on mass immorality. (That is not a ‘judgemental statement, rather a factual one.)

    Our society is in for an overhaul, in more ways than we might like. But my personal hope is that we restore both accountability and responsibility to the corporations to build and be there, long term, for the good of the employees, community and customers. Investors should be compensated on a ‘loan’ basis, potentially, but NOT paid ‘incentives’ which detract from the overall longer term stability. A new paradigm shift needs to, and shall, arrive.

  7. […] corporations to do some hiring. Certainly, people are prone to call it socially irresponsible when profitable companies lay off employees. But then, employment for its own sake is unlikely to be good for a company. If employees […]

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