Downsizing: what makes a bitter recipe sweeter?

Prof. Aarti Ramaswami, Director of the ESSEC Global MBA programme, digs deep into the sensitive issue of downsizing to reveal the factors across countries that make it either indigestible for stakeholders – or easier to swallow. In Part 1 of her article, she focuses on CSR and ethics. 

From the paper Ethics Trumps Culture? A Cross-National study of Business Leader Responsibility for Downsizing and CSR Perceptions: C. Lakshman, Aarti Ramaswami, Ruth Atlas, Jean F. Kabongo, J. Rajendran Pandian. Journal name to add?

Downsizing – the conscious, planned effort to reduce employee numbers to achieve objectives – has been used since the 1980s to cope with the tough demands of a rapidly globalizing and increasingly technological economy. It can be a bitter pill to swallow – not only for employees but also for communities and, paradoxically, for the very leaders who make the decision to cut the workforce: they may ultimately end up carving themselves out of a job too. What makes the medicine – if indeed downsizing is medicine – easier to swallow? What is the effect on how both victims and survivors view the company’s responsibility? And is downsizing more easily accepted in America, western Europe, Asia, or Eastern Europe? These are the questions Prof. Aarti Ramaswami of ESSEC Business School and her fellow researchers sought to explore through their study. The results are revealing.

A recipe for alarm  

Downsizing a firm’s workforce is sometimes necessary. At other times it can be viewed with skepticism bordering on cynicism. Research in 2007 by Jeffrey Brookman of Idaho State University indeed seemed to demonstrate a positive relationship between the equity portfolio incentives of CEOs and their layoff decisions. Other research points to the commonly held beliefs among top execs that downsizing announcements are associated with positive stock returns. In any case, downsizing is a dirty job all told, that inevitably leads to generating victims, survivors, and perceived persecutors – each shouldered with their resulting psychological side effects. But not only are a firm’s employees and management concerned. In many cases, it is the wider community of stakeholders that is impacted – be they the stores next door which rely on the spending power of the firm’s workforce, local schools, and even the firm’s shareholders themselves. If the firm’s downsizing is perceived as unjust, then share price can plummet.

This is where the notion of CSR comes in – the commitment of businesses to contribute to sustainable economic development while acting as a good corporate citizen by balancing the interests of everyone – employees, the local community, and society at large. As seen on many occasions through media coverage of factory closures and business layoffs, public opinion is important. It can even, in certain cases, bring governments to intervene to broker emotions and attempt to quash wider unrest that may in turn damage their own credibility in the popularity polls. It is crucial then for management to show their internal and external stakeholders that the decision to downsize is justified. Moreover, it is necessary to be seen as ethical for it to be also seen as socially responsible.

Read Part 2 of the article that looks at downsizing in several countries and why employees view downsizing as either unjust…or justified.  

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