Downsizing: what makes a bitter recipe sweeter?

Downsizing: what makes a bitter recipe sweeter?

Professor 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. 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 of Business Ethics.


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 foralarm  

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.   

Cutting across cultures

Aarti Ramaswami’s research builds on previous work to include an interesting new angle: that of how downsizing is experienced not only through the layers of a firm and its outside stakeholders, but also across borders and cultures. She and her colleagues took populations from four countries – 626 working professionals and master’s students from the USA, France, India and Estonia – to see if the same effects were felt and whether the fact of having different cultures modified the feelings of either inacceptable injustice or justified acceptance at the downsizing decision.

The choice of culture was shrewd, the USA being where downsizing is perhaps most commonly used to turn around organisational performance; France using downsizing despite often largescale public outcry and a complex labour law; India in its traditions versus economic growth showing an increase in downsizing incidence and finally Estonia, sitting between Scandinavian and eastern European cultures, having undergone immense change from guaranteed jobs and passive business performance under the former soviet regime to a full market economy within EU membership – with all its vacuum of meaning this shift has left.   

The good, the bad, and the ugly

The effects of a botched downsizing strategy can be disastrous on a human level. Those that are laid off – the victims – may go through the typical range of psychological states when faced with shock or trauma: denial, anger, shame, sadness, depression. In the worst cases, this process may repeat itself in an infernal emotional loop that goes on for years after. We might also believe that those who keep their jobs – the survivors – come out of it happy. In fact, their lot can be almost as traumatic as the victim’s: anger, fear for the future, lack of motivation to continue the effort to work and interact harmoniously with their management, relief but also guilt. The degree of reaction – negative or positive – depends on two things.

The first is how those chosen to lose their jobs are selected. If individual employees are treated on the merit they each deserve and the criteria is considered fair – not simply sacking someone because they fail to wear a smile or because their skin colour is different, but measured by their level of work performance, commitment or skills sets – then the downsizing decision is likely to be seen as ethical and pragmatic. Organisations that do not use clearly specified criteria are seen by employees as socially irresponsible. Unsurprisingly, communities outside the firm will also take the same view.

The second factor is all about employee perceptions of procedural justice – use of improper procedures and lack of employee involvement leave the decision-makers wide open to claims of being unethical. Prof. Ramaswami suggests that when employees are kept in the dark with little communication and detail – and subject to having downsizing imposed on them – they are likely to find that unethical. This dimension is also an important area of assessment for CSR. Supervisory support, clearly defined lay off criteria, good procedure, the possibility for employees to express themselves and trust in management are therefore key to obtaining the notion that although tough, the decision to downsize is justified and fair.

Responsibility comes with a price

People tend to search for someone responsible for the plight of those who lose their jobs or faced by job insecurity and uncertainty. As such, the CEO’s decision to downsize is critical in influencing people’s reactions. As already stated, there might be a temptation to streamline in the belief that the firm’s stock price increases, though new evidence points to this being short-term in nature and only effective in periods of economic non-recession. In any case, a CEO’s prestige, power and influence are ultimately damaged through layoffs.

The arguments for reducing the workforce are many – globalization, and technological change among them – but it can also be the case that incompetent management has been the cause of poor results. And when the workforce and wider community get a whiff of this, any downsizing attempt will be seen as wholly unjustified. Here again, clarity and communication are capital in shaping stakeholder acceptance of downsizing. Naming the responsible cause – be it difficult times or fierce competition – means that both victims and survivors will consider downsizing as socially responsible and inevitable in order to save the firm. In contrast, when downsizing is due to management failures, workers do not see things in the same eye.   

Culture club

Do nationality and culture have a part in culling acceptance of a downsizing decision? Take Prof. Ramaswami’s club of 4 – the USA, France, India and Estonia. Anyone’s initial guestimate would tend to see US employees being more open to accepting downsizing – it happens more frequently there and Americans are more used to the dangers of an economic system that hinges on profit and growth. Some might also – given France’s image of strong unions and cultural penchant for refusal in the face of change – be tempted to say that workers in France would tend not to accept.

To put this to the test, Aarti Ramaswami and her fellow researchers used well-researched models of cross-cultural values. One of the dimensions used to measure cultural influence in approaches to work is that of ‘power distance’ – the nature and acceptance of inequality, hierarchical relationships, and decision-making in different cultures. The USA in a corporate context, for example, is seen as basically flat in terms of hierarchy with easy access to management and quick decision-making, while France is seen as pyramidal in nature with successive layers of subordination from the top down and lower scope for initiative and decision-making among employees.

Research showed that all four cultures (USA, France, India and Estonia) were equally sensitive to fairness in the selection criteria for lay-offs, the equity of procedures, and the opportunity for employees to communicate. If these are seen as just, ethical and justified, then employee acceptance of downsizing is likely to occur. In these three specific areas – criteria, procedures, and communication – it means that a universal set of ethics has greater leverage than one’s specific culture.

However, it was when tackling a fourth area – that of responsibility for the downsizing decision – that differences in culture were seen to have the edge over universal ethics. Survivors – those keeping their jobs – in low power distance cultures (USA and Estonia) seemed to react more negatively to downsizing than those in high power distance cultures (France and India) when downsizing was due to poor management. Whether this is due to closer relations and trust between employees and management in low power distance organisations – and therefore greater subsequent feelings of betrayal – remains to be studied. But the message here is that top management needs to be wary of culture when planning and rolling out their downsizing strategy. The motivation and performance of their employee survivors is at stake. So is their reputation. Shaping the blame of downsizing must be done carefully and responsibly. It takes a large spoonful of ethics and a sprinkling of cultural awareness to do so.

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