'Chainsaw Al' Gets His Due

Sanford M. Jacoby is a professor of management and policy studies at UCLA and author of "Modern Manors: Welfare Capitalism Since the New Deal" (Princeton University, 1997)

There is irony in the recent news that "Chainsaw Al" Dunlap was fired from his position as Sunbeam's chief executive officer. The man who eliminated 12,000 jobs at Sunbeam and an equal number at Scott Paper was finally hoist with his own petard.

Schadenfreude at Dunlap's misfortune does not mean an end to the downsizings and layoffs that started in the United States in the 1980s. Companies today operate in a turbulent environment of heightened competition, mergers and rapid technological change. It is a riskier world, and employees are bearing part of that increased risk.

But there are high and low roads to sharing risk with employees. The high road, associated with companies like IBM and Hewlett-Packard, recognizes that a company has moral obligations to employees and their families. These employers rely on layoffs only as a last resort, and those who are laid off receive career counseling and generous severance pay.

What seems the ethical thing to do also makes good business sense. At high-road companies, management recognizes that the company's human assets are an inimitable source of competitive advantage. This is especially true of knowledge-based companies like HP and IBM but not exclusive to them. Moreover, when high-road companies do turn to layoffs, they try to be fair because they know they're in business for the long haul. If and when business improves, companies with good reputations will have an easier time getting the best and brightest workers.

Dunlap, on the other hand, represents the low road. At Scott and later at Sunbeam, layoffs occurred before other alternatives were explored. And when layoffs came, there was little to cushion them; employees bore the brunt of efforts to improve corporate performance. In the short term, the approach can yield almost miraculous results: Costs drop precipitously while profits soar. Wall Street, fixated with quarterly performance, is quick to reward these ostensible "turnarounds."

But as time goes on, the liabilities of the low road become more apparent. Customers desert the company when they discover there's no one left who knows their needs. Instead of feeling grateful for being spared, employee-survivors are left angry and demoralized. If and when new hiring occurs, savvy prospects keep their distance. This is hardly a recipe for long-term business success.

Why, then, do some CEOs choose the low road, if the evidence suggests that there is a better path to long-term business success? One answer has to do with bargaining power. In situations where employees have a union, they can force a company to choose layoffs only as a policy of last resort.

Ownership also plays a role. Where a company is privately held or has core owners who control a significant minority stake, the company is inclined to pursue a long-term, high-road strategy. Conversely, where ownership is highly dispersed, a short-term approach is more likely.

Today, institutional investors own nearly two-thirds of the total equity in the U.S. stock markets. Institutional investors are fickle creatures who shift their capital around with breath-taking rapidity. Ultimately, it is these short-term owners who were the real villains at companies like Sunbeam; Dunlap was merely a toady to their interests.

While we cannot change the level of risk in today's economy, we can change the rules that govern how risk is shared among the participants to the economic game. For starters, the SEC should require companies to include on their balance sheets statements of how much they have invested in their employees, through formal and informal training programs. That would be a first step toward getting managers and investors to accurately recognize the value of a firm's human capital. Second, reform labor laws. Even employers admit that union organizing laws have become heavily biased in their favor. Third, we can change the incentives faced by investors. Pension funds should pay some amount of capital gains tax on the stock that they churn around, while mutual funds should do more to penalize short-term traders for the costs they incur.

Our economy operates according to a set of rules about how the game is to be played. Those rules develop haphazardly; our present rules are hardly the fairest or the most efficient we can devise. A better set of private and public policies will not eliminate layoffs, but they will produce fewer Al Dunlaps.

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