Lay off the layoffs

When CEOs order layoffs, invariably arguing, “We have no alternative,” they’re seldom able to justify exactly how those layoffs will help their company recover. That’s because downsizing generally creates little financial benefit, depresses stock prices, and exposes employees to financial ruin.

The majority of senior executives have no idea if slashing large numbers of employees is a good strategy, argues Peter Cappelli from the Wharton School at the University of Pennsylvania, widely regarded as a leading expert on layoffs.

“They have no systematic way to calculate the net present-value of a layoff decision,” he says. What’s worse, layoff decisions are driven “by rules of thumb, and the most important one is, ‘what is everyone else doing?'”

More troubling still, the track record for layoffs as a recovery strategy simply can’t justify the extraordinary pain inflicted on workers, their families, and society. Many financial post-mortems on layoffs confirm this. “The larger the layoff, the less the chance of any resulting financial benefit,” says the Journal of Managerial Issues. Or this blunt assessment by the University of Paris-Sorbonne: “Layoff announcements have an overall negative effect on stock prices, regardless of country, period of time or type of firm in question.”

Are there options besides terminating a company’s most valuable assets? Consider this little-known example of a firm that formally rejects the idea of layoffs. Since the 1930s, Cleveland’s Lincoln Electric has remained the dominant global player in the rapidly expanding, highly competitive market for arc welding technology. A regular on Forbes 400 and Fortune 1000 lists, Lincoln keeps investors exceedingly happy. For decades, wages have been 20 to 30 per cent above industry averages. Yet this nearly $3-billion company has defied conventional wisdom by honouring a corporate promise to its American employees to never lay them off for economic reasons—not even in the recent recession.

Lincoln Electric’s “guaranteed continuous employment policy” isn’t driven by altruism. The firm believes a stable workforce generates an unbeatable long-term competitive advantage. In tough times, hours are reduced, people are reassigned and white-collar salaries are cut. In good times, everyone works long hours. But as long as workers meet the firm’s performance standards, no one worries about losing a home or ending up on welfare. History confirms their trust is justified.

“I don’t think of how we operate as a social responsibility,” says CEO John M. Stropki. “I think my philosophy and that of my predecessors is that we can perform in an economically challenging environment, and we can spread the pain in a way that long term will better represent our shareholders’ interests without crucifying our employee base. We think that is good business.”

By any criterion that a modern capitalist economy uses to measure success, Lincoln Electric is a winner. By any criterion ordinary citizens use to measure success for society, it’s also a winner.

That’s the gold standard for an updated definition of corporate sustainability—and shooting for gold is what good leadership is all about.

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