October 2002

Socially Responsible Enterprise Restructuring

Telecoms-equipment makers such as Lucent now have a new 'core-competency' downsizing!.

[The Economist, p.78, Oct 12th 2002]


Can companies downsize in a socially responsible manner? Restructuring is necessary and, unfortunately, management too often turns first to reduction of labor costs. As a result, restructuring has become almost synonymous with downsizing. But, does restructuring have to result in downsizing? Why do many downsizing projects not result in improvement in profits? Are there hidden costs in downsizing that have escaped managementís attention? or impacts on human and social capital that are ignored? And when downsizing is essential to remain competitive, how can it be achieved without layoffs?

On Socially Responsible Restructuring

The expression socially responsible restructuring has yet to find its place in management literature and practice. In fact, many executives told us it is an oxymoron. The purpose of this short article is to demonstrate that restructuring is most effective when it balances the interests of all the stakeholders in the business. The concept of socially responsible enterprise restructuring means restructuring part or all of an enterprise in a manner that balances and consciously takes into consideration the interests and concerns of all the stakeholders who are affected by the changes and decisions. In practice, the change process is often as important as the substance to the success of restructuring. This means, for example, respecting the values of the enterprise during restructuring, seeking the participation and involvement of those affected, practicing open communication, and treating all employees with respect and dignity. The emphasis must be on enhancing the overall 'stakeholder value' and not be limited to short term shareholder gains. For example, a strategic restructuring decision to merge with another company must consider not only the financial returns and risks for shareholders but also the short- and longer-term impact on the other stakeholders. So the issue is often not whether to downsize but rather how to do it responsibly, that is, in a way that takes the interests of employees, their families, local communities, and other concerned stakeholders into account.

Hidden costs of downsizing

Many companies downsize but fail to achieve the improvements in productivity and profits that they had expected. Several surveys have concluded that fewer than half of companies that downsize actually improve shareholder value. They often discover that the longer-term costs of their actions are greater than the short-term savings. The reasons for such widespread failure is that there are often very significant hidden costs of downsizing. These costs include the loss of key talent and valuable corporate memory, loss of customers due to a decline in quality and service, lower productivity, decline in innovation and risk taking, and not infrequently, erosion in external reputation and brand image. They usually stem from the effects of job insecurity, increased resistance to change, decreased motivation, stress, and erosion in trust and loyalty, all of which often accompany downsizing. Peter Drucker captured the effect of these hidden costs well when he said : " In many, if not most cases, downsizing has turned out to be something that surgeons for centuries have warned against : amputation before diagnosis. The result is always a casualty. "

Four downsizing strategies

To a large extent, these important hidden costs result from ineffective strategies of downsizing. More specifically, the first strategy that companies often use is to conduct arbitrary across-the-board percentage reductions in personnel, which focus on eliminating people quickly. This strategy can experience heavy hidden costs. Therefore, if the circumstances dictate such a strategy, as in a crisis situation where survival may be at stake, it is even more important to be conscious of the risks being incurred and to adopt measures to minimize these risks. The next three strategies tend to be more successful and lend themselves to more responsible practices and more positive results.

The first of these is plant or site closings which may be necessary because of overcapacity, sharp market declines, post-merger consolidation, or going out of a line of business. Responsible practices which contribute to improved profitability include excellent communications, top management support and presence, minimizing layoffs, outplacement assistance, partnerships with communities and workersí representatives, generous benefit packages and allowances, reasonable notice, job creation, community ì'afety nets' and site rehabilitation.

The second is a systemic strategy of 'continuous downsizing' with a no layoff policy and a lean management philosophy and culture. Because of unfavourable past experience, more and more European companies are finding that continually seeking productivity improvements without layoffs has a higher payoff in the long run than periodic downsizing exercises with massive layoffs. Japanese companies discovered this long ago.

A third downsizing strategy is an intermediary process which focuses on streamlining and eliminating work as a basis for reducing the number of jobs. These opportunities may result from investment in labour-saving technology, reengineering business processes, project team profit improvement programmes, restructuring of logistics systems, rationalisation of manufacturing, or outsourcing.

Best downsizing practices

What can we learn from companies that have downsized successfully?

1. Corporate social responsibility is engrained in the corporate ethic and code of conduct. To a large extent, success is assured or compromised before the issue of downsizing even comes up. Companies which seek to meet the needs of all stakeholders on an ongoing basis usually apply this same philosophy to downsizing. For example, the extent to which human resources are recognized and managed as important assets or simply as costs, and the role and importance of the human resource function -- strategic or administrative -- will also determine how an enterprise approaches the human dimension of downsizing. The French group, Danone, for example, states in a recent Social Report, 'No employee should be left alone to deal with a job problem and jobs must be created wherever they are destroyed.''

2.They adopt a philosophy of continuous improvement. Whether volume is going up or down, they continuously seek opportunities to streamline processes and to eliminate work. They avoid overstaffing. Two key aspects of continuous downsizing are, first, anticipation of imbalances between skill needs and resources as various businesses grow and decline as well as the necessary reconversion and retraining for employability. The second aspect is the use of temporary personnel to meet peak needs and to perform work that is likely to be eliminated.

3.Their decision to downsize is well prepared. This involves carrying out the upstream approaches to restructuring discussed above before deciding to dictate immediate reductions in personnel. It also involves identifying major risks, calculating all the costs, both direct and indirect, associated with alternative strategies and policies for downsizing, and evaluating the alternatives which would reduce the need for layoffs. Examples would include retraining and transferring redundant employees to other units in the company, using attrition to absorb redundancies, work sharing, laying off temporary employees, freezing or reducing hiring, and changing pay and working hours to eliminate part of the need to downsize.

4.They plan the downsizing process very carefully. Some research has shown that almost half of the effort to implement downsizing should be done before the downsizing announcement is made. In the case of plant closings in regions with limited alternative employment, this planning phase may last for years and include finding alternative uses for the site as well as jobs for the employees. The plan must identify and respond to the needs of all the stakeholders concerned, including employees whether being separated or survivors, managers, community leaders, local businesses, politicians, media, and government agencies that might be involved as partners or regulators. Responsible companies may create full-time reemployment units which provide maximum support to each employee who will be directly affected either through transfer or outside employment. They may also play a role in external job creation and provide support for small and medium-size enterprise development.

5.Their announcement strategy and communications are well prepared. In major downsizing efforts, announcements and communications should become a highly orchestrated event and one which convinces all stakeholders that immediate and dramatic change is necessary. Decisions about the message and the business rationale for downsizing, about who should inform whom and when, and about the vision of the business and what employees can expect in the future, must all be carefully managed. Prepared announcements are needed as well for the media, local community officials, and other concerned parties.

6. The implementation is well managed. This final phase is the real moment of truth when management demonstrates whether its people really are its most important assets or simply another item of costs. How many times have we heard about, read about, or been part of a Friday morning downsizing announcement inviting those being dismissed to clear out their desks or lockers and turn in their badges before noon? Contrast this with mandatory social plans in countries like France and Germany which must demonstrate to government labour inspectors that careful attention has been given to finding a satisfactory solution for each employee being dismissed. The outstanding characteristics of responsible companies are that they treat employees affected by downsizing with respect and dignity, that their policies are perceived to be fair to surviving as well as departing employees, that they overcommunicate throughout the implementation process, that there is continuous top management presence and support for the effort, and that the time span for realizing reductions is sufficiently long to minimize layoffs or render them unnecessary. Obviously, increases in salaries and large bonuses for top executives during a painful downsizing operation do not earn the respect of survivors or supervisors directly involved in these efforts. While the above discussions have focused on responsible treatment for employees, it is clear that the needs of other stakeholders affected by downsizing must also be met. Communities in which one company is a dominant employer can be decimated by a plant closing unless considerable effort and investment is made in partnering with community officials, appropriate government authorities, and even suppliers, to create alternative employment and use of office and plant facilities to be closed. Some companies also offer safety nets to certain non-profit organizations in the community which are severely affected by a site closing. Reconversion of isolated sites may take five years or more to plan and implement. Loyal suppliers may also be vulnerable and need support

The Business Case for Responsible Restructuring

There are a number of convincing ways in which socially responsible practices contribute to enterprise competitiveness and sustainability. These include the following: Enhancing the ability to attract, retain and motivate a highly skilled work force. The importance of this source of differentiation in today's 'war for talent' is underscored in various surveys of 'best companies to work for' and from interviews with business school graduates. Fifty per cent of MBAs in the United States say they would accept lower pay to work for a responsible company. It is interesting that the share prices of these best companies to work for consistently outperform general stock market indices by wide margins.

Building the company's external reputation and brand image. Interviews with the executives from such leading companies as Shell, BP-Amoco, Diageo, Levi Strauss and Danone, to name a few, have emphasized the importance of building their reputation with consumers, employees, investors, partners, governments and communities through socially responsible practices. When product and service differences are slight, stakeholder perceptions of a company can be an important source of differentiation. Furthermore, reputation is a strategic asset and source of shareholder value.

Reducing costs. There are a number of ways in which responsible actions can reduce costs. One example is minimizing the hidden costs of downsizing. These include reduced productivity, higher turnover and absenteeism, decline in quality, loss of key talent and erosion of reputation. Another is eco-efficiency practices to reduce consumption of energy and materials.

Increasing revenues. The development and maintenance of positive relationships with all stakeholders has a positive effect on revenues. For example, loyal employees contribute to loyal customers. Customers favour products and services of responsible companies. Revitalization and growth strategies have many advantages over time-worn practices of cost cutting and downsizing. All stakeholders benefit from this more responsible approach.

Protecting the 'license to operate.' This concept is a real concern to companies facing consumer boycotts, increasing regulation or taxation by governments, or loss of key personnel because of their actions.

Conclusion To summarize, the management of relationships with all stakeholders has become a determining factor in being competitive and sustainable in many markets. Resources devoted to building these relationships should be considered just as other investments with medium and longer term payout such as research and development, continuing education and plant modernization.

[Contributed by George Starcher, Secretary General, European Bahá'í Business Forum. His full report with the ILO can be found on the EBBF website ]