

In Tough Times, Abandon Your Employees - rdudekul
http://www.linkedin.com/today/post/article/20130807135334-36792-in-tough-times-abandon-your-employees

======
jbooth
The thing I really don't understand is the persistent meme that companies have
some obligation to their shareholders above and beyond their obligation to
their employees, common ethics or the spirit of the law.

It's practically an article of faith in the business community that you
deserve an 'attaboy' for laying a bunch of people off if it increases profit.
But stiff the shareholders? Oh, the humanity! We're developing morals all of a
sudden!

If all's fair in business, why don't we treat the shareholders as suckers,
too? If enough of them get together, they can vote to fire you, but short of
that, why do they deserve additional respect?

~~~
ChuckMcM
In the case of publicly traded companies It isn't a meme, its a rule. And it
is enforced (or not) by the SEC and the shareholders themselves.

This is how it works, in order to sell securities in your company to people
who aren't part of the company (stock), you have to pledge a 'fiduciary
responsibility' to those people. This is a pledge that you aren't going to
just take their money and burn it up in a bonfire or blow it on hookers and
cocaine in Vegas. If you violate your pledge the SEC can (and sometimes does)
come and put you into jail.

Now all bets are off if you tell those security buyers in your prospectus,
"Proceeds of this sale will be used to buy hookers and cocaine at a venue of
the director's choosing." then well, said what you were going to do with it so
the shareholders (people who gave you the money) really can't complain can
they?

Then there is another part of the equation is that the governance, or "how the
company is run" is controlled by the companies by-laws. And in those by-laws
there are things that are decided on by a shareholder 'vote'. Usually simple
majority but sometimes 2/3rds or some other number. Those things, one of which
is who sits on the board of directors, allow "influence" of other things (like
who the CEO is). But let's take a moment to look at that.

So the Board of Directors hires and fires the CEO and determines the CEO's
compensation (often all of the senior employees compensation but that is a
different story). Since _who_ is on the board is a function of nomination and
shareholder voting every 'n' years (where n is in the bylaws) If you have
enough stock in the company you can suggest who you are going to vote for (or
not vote for) in the board election and influence who is on the board. And you
tell people who want to be on the board and are courting your vote, what you
look for in a board member (like say "Someone who can help find a decent CEO
to run this place.") This is how 'activist' shareholders make trouble for the
company. And using that influence you influence the CEO and senior staff of
the company.

So it is very much true that you have to think about share holder value as
part of your fiduciary duty, and you have to insure that enough voting shares
support your current plans such that any attempt to derail then will be safely
voted down.

That is why it isn't a "meme" it is an actual thing.

~~~
jbooth
Ok, so add the phrase "I believed that I was enhancing shareholder value" to
whatever the thing is that you're doing.

People get fired all the time based on bullshit performance improvement plans
that come down to "pissed off the manager". I've personally been put on PIP
the day after saying some impolitic things because of, officially, a bunch of
2 year old tickets in the bug tracker that were never going to be fixed.

Fudging your justifications is a time-honored tradition. How come people are
so loathe to do it when 'the shareholders' are involved?

EDIT: Was googling and found this:

[http://truthonthemarket.com/2010/07/27/the-shareholder-
wealt...](http://truthonthemarket.com/2010/07/27/the-shareholder-wealth-
maximization-myth/)

There's apparently precedent for very wide latitude given to 'business
judgment'. You can do whatever you want as long as you say "I thought I was
enhancing shareholder value in the long term" afterwards.

This does not explain the meme I referenced above which seems to go way beyond
legal CYA into actual moral beliefs in business culture.

~~~
ChuckMcM
Interesting link, I think the author missed out the part that created
Sarbanes-Oxley (SOX) which is where officers of the company have to sign off,
on threat of imprisonment, what strategy the company is pursuing.

There was a reason it was called : "Public Company Accounting Reform and
_Investor Protection Act_ " you see protecting the Investors was another way
of saying "protecting the shareholders" and the only protection they care
about is that the securities they hold in a company don't lose value.

My experience when I rolled over my 401k into a self managed IRA, one where my
financial advisor is buying / selling securities to maintain a specific mix
but actually holding the securities in my name, was that I got to see just how
many lawsuits were being filed on behalf of shareholders who felt they weren't
being protected enough.

That said, the fact that you were poorly managed has more to do with your
management than with the concept of shareholder value. Management is hard, its
different than a job where you design/build/program things, and peoples
ability to do it varies widely. I can certainly understand the idea that a
poor manager had developed a crutch of using 'shareholder value' as an excuse
for their actions, just like some use 'because I'm the boss' for theirs.

My goal was to point out that there are rules and regulations in place that
put officers and executives at a company at risk of sanction, either financial
or criminal, if they do not actively protect the interests of the people who
have invested in their company, their shareholders.

~~~
jbooth
My point was more about justifications on paper for things you want to do for
other reasons rather than being butthurt about a bad manager in ancient
history.

And I see your points. I'm just taking issue with the fact that business
culture seems to value protecting shareholders as a moral imperative to the
extent that you're obligated to be a sociopath towards your employees,
customers and society at large. It seems to me that this moral imperative goes
beyond legal issues and into the actual ethical system of the business
community.

------
socrates1998
Yeah, it sucks to be fired. But, if you were worth more to your company than
you are being paid, then they wouldn't have fired you.

This is tough to hear, but it is the truth.

Some might say that the company was wrong, and that may be true, but if the
company is wrong about who it fires and hires, it will no longer be a company.

Your company is extracting value from you, that is how they make money.

If you are not looking for a way out or up, then you are going to lose.

Managing your career is something people just don't think about enough.

They like to think, "If I am loyal and work hard, then I will always have a
job."

That's bullshit. I have known lots of people who worked hard and were loyal,
but still got axed because they didn't create enough value.

This article has a "it's not fair" quality to it.

Well, no shit it's not fair.

Because we spend so much time at work, we project loyalty and security onto
our company. We are fooled into thinking they are loyal to us.

~~~
JoeAltmaier
Not the whole storey. E.g. I plant 4 tomato plants. When they are half-grown,
I pull up 2. Not because they each aren't worth more than the cost to me; but
because I have water, soil, light, room enough for only 2.

So Its also naïve to think you're fired because you're not a profitable
employee. Sometimes you get fired because it makes a large equation work out
better.

------
Millennium
Companies and employees don't "owe" each other loyalty, but the only way to
earn loyalty from someone is to show it in return. If a company decides to
throw its employees under the bus during tough times, that is its prerogative,
but then it should not turn around and expect employees to stick by it during
tough times either.

~~~
coldtea
> _but then it should not turn around and expect employees to stick by it
> during tough times either._

Only they (companies) do expect it, and even get it. Because the employees are
dependent on them, and not vice versa.

Those that say: just quit and get another job (mostly white, upper-middle
class), have never been in the situation of having to keep a job to feed a
family and/or mortage while not being someone coveted by recruiters.

~~~
peacemaker
But that just speaks of a bigger problem, that of people who have children and
buy houses they can't afford. Most people, minority or otherwise, can find a
job if they had none of these ties they can't afford. I realize that's a
simplistic view but I think that's what it boils down to.

If people spent even just a few moments thinking about their own future and
prospects they might decide against purchasing a home, having kids, getting a
new car and so on.

~~~
salemh
Determinate on said employee's skills being mobile across industries and
companies, which may not be the norm outside of IT/software currently.

"Why don't they just leave?" is not a valid argument.

~~~
nickff
One should be aware of the risks of developing a dependence on a job which may
become redundant, because of corporate layoffs or technological progress. One
example of this is that if you were a biochemist who got a PhD in genome
sequencing, machines put you out of a job.

A consequence of reducing your long term career risk may be that you will have
lower income (at least in the short term). You may believe that individuals
have the right to maximize their short term income; but does this desire
impose a responsibility on their employer not to fire the profit maximizing
individual?

------
creature
> If this is an intelligent and proper strategy, why shouldn't companies
> formally declare that they follow it?

Because it's a way more effective strategy if you practice the cut-throat
approach while portraying a fuzzy, caring public image. To some extent, you
can have your cake and eat it too.

------
michaelochurch
My biggest issue with corporate layoffs is that not that they happen-- they're
inevitable and necessary-- but that they're often done in an incompetent way
that fails to account for the real problems. Everything that grows will
eventually experience contraction; the problem is that companies don't know
how to contract in a decent way. If you do a layoff wrong, the company ends up
more fucked-up and future layoffs are inevitable.

1\. Reducing headcount without reducing complexity will fail. Reducing
operational complexity is hard because it requires that the top executives get
access to information that the mere process of looking for will tip people
off, and because it gets political rapidly. Layoffs need to happen quickly,
the theory goes, so it's easier and better to just cut away 10% of the people
in one fell swoop and, later on, reduce complexity. However, the complexity
reduction often never occurs. According to typical executive thinking, it
can't happen before the layoff-- it'd tip people that something's going on--
but after the layoff, people tend to see the first-order immediate problem
(high costs) as solved and therefore don't handle the deeper issue (high
complexity) that got the company in trouble in the first place. Thus, fewer
people have to do more work; they do a worse job of it, and the higher defect
rate leads to even more complexity, and everything goes to hell.

2\. Plenty of companies are dishonest about layoffs and dress them up as
aggressive "performance" reviews. I won't list names, but there are plenty of
dishonest technology companies that claim to have never had a layoff because
what the psychopaths in charge actually did was dress one up as performance-
based firings, with kangaroo courts ("performance improvement plans") and all.
At least banks are honest; they say, "business was shitty this year and we let
people go". But there are so many tech companies that don't want the press of
an honest layoff (they even pretend to be constantly hiring, to present an
image of unyielding growth) so they lie and call it "performance". An existing
stack-ranking regime helps. What these companies are really doing is throwing
their own people under the bus to preserve their own reputations, and they
shouldn't be surprised when people fuck them right back for it.

~~~
xradionut
Stop bagging on Microsoft!

;)

------
7Figures2Commas
> But it strikes me as horribly short-sighted for a company to simultaneously
> report record profits and fire loyal employees.

This is an incredibly naive conclusion, one that I would argue could only be
reached without any critical analysis whatsoever.

For one, record profits can be ephemeral. Many companies thrive and dive based
on the business cycle. As we saw in 2008, the dynamics of a company can change
relatively quickly, so record profits today don't guarantee record profits, or
even a profit at all, tomorrow. Building a strong cash position and/or
returning capital to investors in one form or another often prove crucial to a
company's long-term ability to survive and grow.

More importantly, it's critical to recognize that a loyal employee isn't
necessarily a good employee, or a necessary employee. At large companies,
particularly outside of technology, you can often find plenty of "loyal"
employees: workers who have been on the job for more than a decade who would
love nothing more than to stay in that job for decades to come. _Some_
percentage of these employees, however, are better at doing what it takes to
secure their jobs than they are contributing to the ongoing success of the
company. Others, while dedicated and hard-working, may simply lack the skills
required to contribute as the company evolves. Companies are not static; as
they grow and market conditions change, it may be necessary to hire in some
areas, and fire in others.

The author of this post might as well have used the title, "In tough times,
abandon tough decisions."

~~~
nickff
I would also like to add that it is in the interest of the valuable employees
to lay off the low value employees for three reasons: 1) Low value employees
reduce net cash flow (profits), which can cause the company to go under when
times get tough. This would cause difficulty to all employees, not just the
marginal ones. 2) All employees add organizational inertia; in the case of low
value employees, this is needless and prevents adaptation to changing market
conditions, which can doom any organization. 3) Every non-value creating
employee is consuming a salary which could be used to hire someone who might
create value, growth, and possibly additional hiring.

------
scottostler
The reason companies don't loudly proclaim this kind of thing seems pretty
simple to me. Companies must simultaneously communicate with many different
parties: employees, customers, investors, the board, governments, etc. An
effective message for one constituency is often horribly inappropriate for
another – layoffs are a great example of this.

So when companies do decide that cutting costs is more important than keeping
employees, they message that in one way to employees, and in another way to
analysts and investors. Employees and the general public who sympathizes with
them might call that duplicitous and slimy, but it's a response to the
balancing act the companies have to perform.

------
dominic_cocch
There must be some kind of study about businesses that are loyal to employees
and loud about that loyalty. How does that affect their bottom line?

Do customers/clients choose to do business with an ethical company over an
unethical one? If not, maybe the bigger problem is that the employees of the
world choose to do business with companies that are not good to employees.

If ethical behavior was an important factor in customer's choices I'm sure
we'd see less unethical behavior by businesses. However, Walmart, Goldman
Sachs, McDonalds, etc all continue to thrive after their unethical behavior is
made very public.

~~~
xradionut
In the case of many consumers and Walmart, the consumer doesn't have the money
to pay for the alternative. It's the only affordable market in their area.

In the case of Goldman Sachs, consumers are not involved, the company has so
much power, no one in government dares to strongly enforce the laws, short of
a slap on the wrist. In a utopian "ethical" world, GS would have been dead in
the 1930s...

------
temphn
This article fundamentally misunderstands what profits mean in a financial
statement. "Record profits" are recorded because companies are afraid to
expand. They expect a macroeconomic contraction.

Remember: profits aren't included in the salary number, as that's a cost. So
"record profits" aren't going to executives - that would be salary or options.
And they usually aren't distributed as dividends. They go into the corporate
bank account, namely the rainy day fund of the company. And the reason they
are going into the rainy day fund of the company is that businesses in general
expect many costs to come over the next few years, from the QE tapering to
Obamacare.

Otherwise businesses would spend those "record profits" on hiring and
expansion, or on salary increases to retain top talent, or on acquisitions. I
think the fundamental misunderstanding here is that "record profits" have
anything to do with executive salaries. Salaries are a cost.

Visual analogy: this is like reducing your marginal headcount and husbanding
your corn with the expectation of a massive storm on the horizon. It does NOT
mean you are feasting on your corn after kicking out marginal producers.

~~~
michaelochurch
_I think the fundamental misunderstanding here is that "record profits" have
anything to do with executive salaries. Salaries are a cost._

There's an association and correlation, though. It's easier for executives to
ramp up their compensation if the company is profitable. So if an executive
can do something short-sighted that improves profits in the short term, or
even something degenerately risky that may turn a huge profit.

Principal and agent usually break (that is, their interests diverge) at the
second moment (risk/variance). Everyone wants profit/expectancy (first
moment). There's no tension there; who doesn't want to make money? Risk is a
nother matter. Principal usually wants as little risk per unit upside as
possible; agent typically wants _more_ risk because upside leads to higher
compensation but the difference between a small down year and a big one is
minimal.

For example, a hedge fund manager collects 2% of assets managed and 20% of
profits. (If profits are below zero, redemptions happen and that often kills
the fund.) So a return of -30 and -10 have the same effect-- shit year, no
bonus, everyone gets fired-- but the difference between +10 and +30 is huge.
That's why a lot of these firms take degenerate bets. Someone else eats most
of their losses, but they get a lot if they win.

Executives work the same way. They push for huge initiatives that add risk to
the business. Big wins makes them rich, little wins make them comfortable; the
difference between little losses and big losses, for them, is zero. They have
no reason not to take big risks with the company.

Large-scale cost-cutting is especially good from an executive perspective
because the benefits are immediate but the problems it causes tend to show up
in the long term, giving the executive time to flee if the results are bad.

~~~
sseveran
Your analogy to hedge funds is utterly inaccurate for most large funds.
Smaller funds tend to take more bets but most large funds and fund groups
attempt not to take on too much risk. If you got to a conference for large
asset managers you will hear almost nothing about how to make returns, instead
on how to gather and retain assets. 2% on $2B (smaller end of medium size) is
$40M per year.

------
venomsnake
Mass unemployment is one of the greatest plagues of a modern country. This is
just one of the (many) sad side effects.

Too bad the lesson was forgotten globally by the ruling class.

~~~
consonants
Mass unemployment ensures that there is always someone who will trade their
labor for the lowest possible price so that they don't starve.

It's built into the system, less of a plague and more of necessary requisite
for capitalism.

~~~
venomsnake
Nope. Inflation and unemployment are built in. Hyperinflation and big
unemployment are tumors. They should be kept in a goldilocks range preferably
around 3-4%.

If you have labor shortage the economy cannot grow as fast as possible. If you
have big surplus - then you have big demand slump that moves you to a
deflation spiral.

~~~
consonants
Thanks for the correction.

------
rdudekul
OP is the author of "Smart Customers, Stupid Companies: Why Only Intelligent
Firms Will Thrive, and How to Be One of Them" has some good free ebooks to
download at [http://kasanoff.com/free-stuff/](http://kasanoff.com/free-stuff/)

------
300bps
This ignores the fact that many downturn layoffs are merely excuses to rid a
company of dead weight.

It's expensive and risky to let someone go for cause. It's cheap and virtually
risk free to do a mass layoff due to a decline in business.

------
fnordfnordfnord
In tough times, in good times, anytime it becomes advantageous to do so. Isn't
that what the "Lean" discipline boils down to?

------
beefxq
The future is contracting/consulting. There will be no more full time
employees.

