Managers Uphold Fiduciary Responsibility with Alternatives to Layoffs—Expanding the Cost/Benefit Analysis

(Tune in to Public Radio's The Takeaway on Monday morning 3/9 between 6:00-6:30 am in NYC, I will be talking about presenting a flex plan to your employer if you think layoffs are coming.)  

Is a manager who pursues flexible alternatives to layoffs exercising his or her fiduciary responsibility to act in the best interest shareholders?  This is an important question because it gets at the core of what drives the decision-making that leads to job cuts as the primary way to control labor costs in the recession (Update: quote from today's NYTimes, "With the economy weakening, chief executives want Wall Street to see them as tough cost-cutters who are not afraid to lay off workers.")

Shareholder profit is indeed a manager’s fiduciary responsibility in a publicly-traded company.  As a commenter noted on CV Harquail’s Authentic Organizations blog,

“When managers go beyond the business case for alternatives to layoffs, they sacrifice shareholder profits for the greater good. For many this proposal is a non-starter because it is inconsistent with managers’ fiduciary duties.”

Do flexible alternatives to layoffs in the form of reduced schedules and salaries, job sharing, furloughs/sabbaticals, and contract based employees, really sacrifice shareholder profits and therefore, challenge a manager’s fiduciary duty?  You tell me…Let’s expand the cost/benefit analysis and look at it from three different perspectives—the individual company, the U.S. domestic economy, and the global economy. 

The Individual Company

Part of what strikes me about the comment above is that it articulates the belief that, on some level, companies are islands unto themselves.  And actions taken in the name of fiduciary responsibility to shareholders don’t have any impact beyond that isolated entity.  Assume for a minute this is true, and let’s start by expanding a cost/benefit analysis of flexible downsizing within the individual company. 

In my interview with Wharton's Dr. Peter Capelli (1/22/09 post), he compared a 5% across the board reduction in salary/schedule to a 5% layoff.  Market analysts would primarily focus on direct costs, or hard dollars savings and expenses, when comparing these two options. And on a direct cost/savings basis, it could be argued that alternatives to layoffs do not uphold the fiduciary responsibility to shareholders, and job cuts do:

5% Layoff Savings: Salary and benefit savings

5% Layoff Expenses: Severance, legal costs, outplacement (one time, non-recurring costs)

5% Salary/Schedule Reduction Savings: Salary savings, no severance, legal costs, or outplacement

5% Salary/Schedule Reduction Expenses: Benefit expense (recurring)

According to a 2005 Market Innovators International, Inc’s article, The Effects of Employee Satisfaction on Company Financial Performance, “Unfortunately, many stock analysts, business pundits and other arbiters of ‘all things ROI’ tend to dismiss issues pertaining to human capital as the ‘soft stuff’ of business.  Quite the contrary: the connection between employees and profits is a very real one.” 

Okay, let’s add the “soft stuff” back into the analysis and see how the picture changes:

5% Layoff Savings: Salary and benefit savings

5% Layoff Expenses:
One time, non-recurring costs--Severance, legal costs, outplacement
Ongoing, indirect, “soft stuff” costs—increased legal liability, lower employee engagement, lost productivity, lost talent, compromised ability to respond when the economy recovers (see Ready for the Recovery?).

5% Salary/Schedule Reduction Savings: Salary savings; no legal liability; no severance, legal costs, or outplacement; sense of shared sacrifice; productivity, engagement maintained or increased; talent retained; ability to respond to recovery sustained.*  

5% Salary/Schedule Cut Expenses: Benefit expense (recurring)

*Could also include simultaneous uses of the same work flexibility to reduce real estate costs, expand customer service hours, share resources more efficiently across organization, etc. 

Now which option fulfills a manager’s fiduciary responsibility to shareholders?  The case for alternatives that minimize job cuts gets stronger.  The “softer stuff” such as morale, employee engagement, and productivity matters.  How much? 

I recently co-presented a “Cutting Labor Costs Beyond Layoffs” teleconference with Richard Axelrod of The Axelrod Group, Inc. for CCM.  Among other points, he illustrated the importance of employee engagement on productivity and profits with an amazing mind map depicting the supporting research created by Joe Lafferty of Lifetree.co.uk. (click here for map on page 10 of presentation).  The negative impact on employee engagement, motivation and productivity is one of the hidden costs of layoffs that offset direct cost savings. 

The bottom line is that at the individual corporate level, using flexibility to minimize layoffs (again, some job cuts may be necessary) does maintain a manager’s fiduciary responsibility to shareholders if the analysis goes beyond the traditional, narrow focus on direct cost and savings. 

The U.S. Domestic Economy

As we have seen with difficulties in the auto industry, AIG, Citigroup, and the collapse of Lehman
Brothers, the actions of one company do affect us all.  The analysis above shows that alternatives to layoffs fulfill a manager’s fiduciary responsibility to shareholders, but it goes beyond that isolated entity, especially in the current economic crisis.  The bottom line here is people who either don’t have a job or are afraid they won’t have a job, aren’t going to buy the product and/or service you are selling.  And according to recent economic charts, few people are buying anything.

Let’s look at CV Harquail’s 7 Reasons Why Alternatives to Layoffs are not Patriotic” blog post:

1. Every employee who is not laid off is an employee who remains an active contributor to our national economy.

2. Every employee who is not laid off is another employee who can continue to pay taxes.

3. Every employee who is not laid off is an employee who will not need to receive unemployment
benefits

4. Every employee who is not laid off is an employee who can continue to believe in the American Dream. 

5. Every employee who is not laid off is another employee who can contribute to your business, and through your business contribute to the larger economic recovery.

6. Every employee who is not laid off is another employee who will appreciate his or her importance to the organization, and to his or her coworkers. Another employee who will feel like part of the solution.

7. Every organization that chooses alternatives to layoffs demonstrates, in one way or another, that it has chosen to remain fully committed to its business. Every organization that chooses alternatives to layoffs demonstrates the ‘can do’ attitude that has built and will rebuild this country.

The New York Times published a poignant article this past weekend about the 5,000+ out-of-work, baby boomer, white collar professionals who attended a career fair planned for 2,000.  Think of how different their individual, and our collective, realities would be if at least some of their employers had instituted furloughs, and/or cut salaries and schedules to reduce labor costs. 

Layoffs, whether they happen to you or someone else, impact consumer confidence, which in turn reduces the amount of goods and services purchased, which further weakens the economy—and the “paradox of thrift” spiral continues.  If managers reduce layoffs by pursuing flexible alternatives, they are fulfilling their shareholder fiduciary responsibility by doing their part to boost confidence, which ultimately allows their businesses to sell more. 

As Barry Diller, CEO of IAC, said in a recent interview with Andrew Sorkin on PBS’s “It’s the Economy, NY,” :

“If a company is restructuring and laying people off because they are in terrible trouble, can’t meet bank debt, that’s one thing, but if healthy companies that don’t have structural issues and are not reorganizing and then literally, just to improve their earnings, cut (their workforce) by 5% to 10% across the board so that the quarter or year can look better…I think in this environment is just a terrible thing to do…You have to take it for what the nature of the company is and what the current status is.  But if revenue is going to come back when the economy comes back, and everything else is fine—and in many cases this is really true—then simply to cut your workforce for the sole purpose of making your earnings greater in this particular year, or in the next year—when as we know, no one is really counting—I think it’s anti-social…”

The Global Economy

Last week, I posted “Flexible Downsizing—A Matter of Global Stability, Not Just an Interesting ‘Option.’”  By using flexibility to manage labor costs and minimize layoffs, leaders are exercising their fiduciary responsibility to shareholders because the international community is following our lead, whether we like it or not.  And right now they are following our lead with layoffs, which many believe is impacting global stability and security.  Taking the lead to encourage a creative, more flexible approach to reducing labor costs is exercising your fiduciary responsibility to shareholders, because global instability and insecurity will affect your organizations ability to tap in to world markets.

So, what do you think?  Given the analysis outlined above, is a manager who pursues alternatives to layoffs ignoring or fulfilling his or her fiduciary responsibility to shareholders?  As the same Authentic Organizations blog commenter quoted above noted,

“But if your post sparked a shareholder movement instructing managers to pursue layoff alternatives, there would be no fiduciary conflict.”  

Whether its shareholders or greater public awareness, how do we get managers making the decisions to reduce labor costs, and the markets that evaluate those decisions, to expand their point of view?  It's a matter of fiduciary responsibility, organizationally, domestically and globally. 

(Be sure to check out the updated Downsizing Flexibility Champions honor roll)  

 

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