See, in 1976, capitalism changed forever. Two researchers published a paper titled ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’ in the Journal of Financial Economics. The authors believed that professional managers who ran companies were only concerned about themselves. They didn’t care about the real owners — the shareholders. (View Highlight)
People took notice of this paper. Especially CEOs who were just starting to stamp their authority. All of them swore up and down that the most important thing a business could do was to maximise shareholder wealth. And two people who lived and breathed this credo were Roberto Goizueta of Coca-Cola and Jack Welch of General Electric. Both of them took the over in 1981 and flipped things around. They focused on shareholder wealth — The era of ‘shareholder capitalism’ had begun. (View Highlight)
Anyway, since a large part of CEO compensation is tied to stock prices, they too make choices that focus on this one metric. Ones that are invariably short-sighted. Like layoffs which create an optical illusion of efficiency but don’t seem to actually help in the long run. And when shareholders celebrate and stock prices jump on such announcements, they believe that it’s the correct decision. Even if hard data says otherwise. (View Highlight)
Stanford professor Jeffrey Pfeffer calls it social contagion**.**
And it’s a fairly provocative idea because he’s essentially saying, “Look, companies have a massive amount of data on their hands when it comes to hiring. And firing. But, when it comes to actually making decisions, they just copy what peers are doing.” (View Highlight)
So there you go. The dirty secret behind these layoffs could simply include — shareholder capitalism and social contagion! (View Highlight)
Full Title: What Tech Companies Don’t Want You to Know About Layoffs
Highlights
Well, there are multiple theories. One theory is that these companies are bracing for the worst. A recession, so to speak. And when that day comes, they want to be as nimble as possible. Trim the fat, cut the excess and run a lean organisation to survive the winter. But there’s also another theory. A theory that argues that tech companies are simply doing this because they can. After all, some of these companies are sitting on piles of cash and they could easily weather the recession if it came to that. But they’re still going ahead with the layoffs because it’s okay to let go of a few employees and pad the bottom line some more. Everybody is doing it. So the damage is limited. (View Highlight)
Note: Possible reasons behind the layoffs in 2013
And finally, there’s the long-term impact. Or the domino effect. Visier , a human-resources analytics company, found that when employees are let go, the chance that their teammates will also leave increases by nearly 8%. When attrition increases, companies have to find replacements for these folks. And it can cost nearly 2 times the employee’s annual salary. It could be because they have to pay a higher salary for a new recruit. It could be the training costs involved. A myriad of things. (View Highlight)
Even the survivors go through a 20% decline in their productivity and performance. They become disenchanted with their jobs. And this could hurt innovation and new product development in tech companies. That’s what research tells us anyway. (View Highlight)
See, in 1976 , capitalism changed forever. Two researchers published a paper titled ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’ in the Journal of Financial Economics. The authors believed that professional managers who ran companies were only concerned about themselves. They didn’t care about the real owners — the shareholders. (View Highlight)
People took notice of this paper. Especially CEOs who were just starting to stamp their authority. All of them swore up and down that the most important thing a business could do was to maximise shareholder wealth. And two people who lived and breathed this credo were Roberto Goizueta of Coca-Cola and Jack Welch of General Electric . Both of them took the over in 1981 and flipped things around. They focused on shareholder wealth — The era of ‘shareholder capitalism’ had begun. (View Highlight)
And what do shareholders most care about?
Stock price performance! (View Highlight)
Anyway, since a large part of CEO compensation is tied to stock prices, they too make choices that focus on this one metric. Ones that are invariably short-sighted. Like layoffs which create an optical illusion of efficiency but don’t seem to actually help in the long run. And when shareholders celebrate and stock prices jump on such announcements, they believe that it’s the correct decision. Even if hard data says otherwise. (View Highlight)
In 1979, less than 5% of Fortune 100 companies announced layoffs despite the US heading straight into a recession. But in 1995, almost 45% of these companies handed out the pink slips. CEOs simply feared that a recession was on the cards. Even though it didn’t really materialize. (View Highlight)
Then there’s a psychological theory. Stanford professor Jeffrey Pfeffer calls it social contagion . (View Highlight)
And it’s a fairly provocative idea because he’s essentially saying, “Look, companies have a massive amount of data on their hands when it comes to hiring. And firing. But, when it comes to actually making decisions, they just copy what peers are doing.” (View Highlight)
Now that the tide has turned, everyone’s following the herd again. The future is ambiguous. You overhired and now you need to trim the excess. And you don’t really have hard data to tell you that if you fire x% of employees, you’ll be fine and dandy. So you look around and see your peers, the tech giants, laying off 5–7% of their workforce. You think that the ‘sweet spot’. So you do it too. (View Highlight)
