Downsizing: the backlash begins

Many Americans now see the corporate cure-all as 'slow-motion suicide'

"Thirty years ago the average CEO [chief executive officer] made about 35 or 40 times what the average worker did," Bill Clinton said last week. "Today that's up to 200 times, and it was only 120 times when I took office."

It is a sign of America's mood that Mr Clinton, facing re-election this year, should want to embarrass a sector of the population traditionally admired for achieving the American Dream. Unlike the British, Americans have tended to believe that in the land of opportunity those who made it deserved it. Today that is changing.

The US economy is stronger on paper than it has ever been, yet most people are working longer hours than ever and struggling to make ends meet. The pie is growing bigger, but the slices are not distributed fairly. Since 1974 the average chief executive's real income has risen by 300 per cent, the average worker's has fallen by 13 per cent.

The moral contract that once existed between employer and employee is perceived to have broken down. And the emerging "anxious class", in the phrase of the Labour Secretary, Robert Reich, is turning angry as the perception takes hold that while companies are doing well, employees are not.

The best boost to Pat Buchanan's run for the Republican presidential nomination was provided by the telecommunications giant, AT&T, when it announced plans at the start of the year to lay off 40,000 employees. Mr Buchanan, previously associated with right-wing, religious causes, turned his attention to beleaguered workers, urging them to pick up their pitchforks and storm the ramparts of the corporate barons. Newsweek labelled the heads of AT&T and IBM "corporate killers".

"There has been a severe backlash," says Professor Nitin Nohria of the Harvard Business School. "The AT&T announcement was the beginning of it. Companies are much more cautious about downsizing because of the political heat they are likely to invite."

A case in point was provided on 22 April when the two biggest telephone companies on the eastern seaboard, Bell Atlantic and Nynex, announced they were merging. The newly emboldened unions, fearing that many of the 137,000 workers employed by the two firms would be laid off, fired a warning shot across the corporate bows. "There simply is no stomach any more for more of these job cuts," one union leader declared. The very next day the chairman of the new conglomerate denied that the merger would slash jobs and promised: "We're going to take care of our employees".

Opponents of downsizing wonder whether this is genuine or whether US businesses are merely waiting for the fuss to die down before resuming the job-cutting. The answer will depend on whether they are persuaded by the likes of Stephen Roach, the chief economist at Morgan Stanley who dramatically switched sides this month, that while downsizing yields short- term shareholder gains (last year Wall Street stocks rose by 30 per cent), it hampers economic growth and competitiveness in the long run.

Prof Nohria, who has analysed the effects of downsizing on the top 100 US companies, believes the evidence supports Mr Roach's new conclusions. With two or three exceptions, the firms he studied had all downsized repeatedly since 1978, losing on average 20 per cent of their workforces. But most - and figures provided by the American Management Association back this - had not seen improved results.

"It's not that layoffs are good or bad, but that there are good layoffs and bad layoffs. There seem to be two approaches to downsizing. The first type, which we found among two-thirds of the companies we studied, was a simple, across-the-board cost-cutting approach. Most of those downsizings failed to produce productivity gains or profits over a three-year period subsequent to the layoffs.

"The second type, practised by the other third of the companies we looked at, was more discriminating, motivated by a strategic vision of how to regain competitiveness. On average those firms improved their performances in the medium term."

Delta Airlines, one of the companies that would fall into Prof Nohria's first category, has cut 10,000 jobs in recent years. The company's resources were strained to the limit this last winter and, short of baggage-handlers and maintenance staff, customer service declined and on-time performance fell to the bottom of the major airline rankings. Delta is now hiring.

The Wall Street Journal identified a number of companies that had similarly shot themselves in the feet in an article last week headlined: "Call it dumbsizing: Why some companies regret cost-cutting". Kodak, for example, had been laying off people for a decade until it found that in some cases it was paying sub-contractors four times what it would pay employees.

Bob Tomasko, the author of a recent book called Go for Growth and another in 1987 called Downsizing, has studied Kodak closely and observed that in the past year it had learnt from its mistakes and switched to a policy built on playing to company strengths, allocating resources to sectors which yield the most value. "Downsizings become addictive when corporations reward managers based on bottom-line results," Mr Tomasko said. "But cost- cutting without a plan for growth is slow-motion suicide."

Mr Clinton is hoping these arguments will prevail and that chief executives, who are increasingly portrayed in the media as Dickensian ogres, will heal the fractured bond with their employees - not out of a desire to be loved, but because it makes business sense. To that end he invited 100 business leaders to the White House last Thursday to hear from the executives of a dozen companies that, in his phrase, have been good corporate citizens.

One of the companies the President show-cased was Republic Engineered Steels, an Ohio firm that employs 4,600 people. The company has been in the black most of the time since its foundation six years ago but when a crisis hit the steel industry in 1991 there was no option but to cut costs. Harold Kelly, the executive vice-president, said that management, building on a company policy of "co-operative, collegial" labour relations, explained the situation to the employees and asked for suggestions to improve efficiency. "Through enacting the proposals from the workforce we managed to save $40m (pounds 26.5m)."

Now the company is again experiencing difficulties, but there are no plans to cut jobs, Mr Kelly said. "As the market pressures rise to reduce the workforce our strategy rather is to grow: to keep our workforce but reduce labour costs by producing more steel with the same people rather than the same steel with fewer people."

Evidence that such a strategy can work over the long haul is provided by another steel company, Nucor, which has its headquarters in North Carolina but has a number of its plants in Mr Clinton's home state of Arkansas. Nucor, which employs 6,200 people, has not laid off one worker or closed a single plant in 20 years. Every quarter since 1965 has been profitable. Last year revenue was $3.4bn and profits $275m.

"We have a very close relationship with our employees," says Kenneth Iverson, the chairman. "If any employee wants to call me he does it on the phone and usually I answer it. We have very strong incentive systems, so that the employees in the mills earn rates of $55,000 to $58,000 a year. And they earn every bit of it - more than half from productivity bonuses.

"We have an education programme paying $2,000 a year for four years of college, or four years of vocational school, for every child of every employee. Our employees are loyal, and this translates into high productivity and high-quality work. We also listen to what they say, and much of the investment we've made in new technology has been by their recommendation."

Mr Iverson has stood by his workers in the lean times too. "In 1982 we had to make some across-the-board reductions. Most of the staff took pay cuts, but the officers and the managers had their pay dropped more, percentage- wise, than the average worker. In 1981 I had a salary of about $450,000, and the next year my total pay was $109,000."

Circumstances differ from company to company, and Mr Iverson, citing the changes brought about by the computer revolution, was reluctant to criticise all companies that resorted to downsizing. One principle, though, held good always. "People sometimes forget that the wealth of the company comes mostly from its employees." He quoted Andrew Carnegie: "You can take all my steel mills away - you can burn them all down - and I can rebuild them. But if you take away my people I have nothing."

Patrick Hosking, page 21