Are Layoffs a Crime Against the Shareholders?


Where does the most vital and irreplaceable company information reside? In the head of the CEO, or in the heads of the workers? The answer seems obvious—da big man, of course!—but in a time when major American companies are going out of business, it’s worth taking a closer look.

Here’s a real-life business story.

Once upon a time, the head of the West Coast office of a multinational company (“Mr. Big”) needed to cut expenses by laying off some people. Who should go? The Interwebs Department of this office had recently shrunk down to just a few people, so he decided to lay off the manager of this department, (“Mr. Medium.”)
In searching for more layoff targets, Mr. Big came across the programmer who worked in the department, (“Mr. Small”).  Was he a good candidate? Since the programmer’s boss, Mr. Medium, was being laid off, no one could ask him what the programmer did.

Since the work programmers do is largely incomprehensible, it was easy to decide that Mr. Small was doing nothing of value.

As is often done, one day Mr. Medium and Mr. Small were called into HR, told they were laid off, and requested to leave the office immediately and never return.

The next day, my department, which depended heavily on the now-vanquished Interwebs department, came to work and discovered that we did not know the passwords to get into our own servers. A large portion of our business depended on those servers interacting with our office systems and working perfectly—with zero downtime.  One bungle would draw serious ire from a client. Two bungles would cause a client to move their business elsewhere.Fail

As you can imagine, there was a flurry of hysterical phone calls and emails that swept through our office. Who could tell us these passwords? It turned out that Mr. Small knew them. The head of my department was forced to call Mr. Small and beg for the information. Mr. Small was extraordinarily decent about it, and immediately told us what we needed to know.

The next day, this frenzy was re-enacted, only this time it wasn’t about passwords, it was “Where are the XYZ files?” Another call to Mr. Small yielded more answers. The next day it was “How did we create this thing? We need to make modifications and now one knows how it works.” Mr. Small knew. Then it was “Who knows how to rejeeb a glurfinator? Who always does that for us?” Why, Mr. Small always handled that. And so on, literally for weeks. Finally, even the generous Mr. Small’s patience ran out, and he stopped helping—for free—the company which had summarily dismissed him.

By that time, we had worked through a dozen existential crises, and were no longer in danger bungling our product, losing a client, and damaging our reputation.

Now imagine this story writ large.

Multiply this incident by a thousand, and you can see what happens when a corporation has major layoffs:

“Who knows our workaround for the metric conversion bolt-rethreading problem?”

“Who knows where the email goes when you accidentally press control/alt/fuckme?”

“Who knows how to repair the open-heart surgery machine?”

Compare this kind of critical company process damage with the pound-for-pound value of the information that resides in the CEO’s head. For a CEO who makes $50 million a year, taking a pay cut of just $1 million a year will pay the salaries of twenty workers.  Cost to the CEO: In real terms, zip. Value to the company? Huge.  (“Who knows how to jiggle the power switch to restart the assembly line after it overloads and does an auto-shutoff?”)

A $10 million dollar CEO pay cut would retain two hundred workers, and all the information that they know—that nobody knows they know. That’s just talking about a single pay cut for a single extraordinarily-well-compensated-employee.  What if the CEO is not satisfied with his new $40 million a year salary and leaves? What does he know? What is it worth? The answer may surprise you.moneyburn

As opposed to the most valuable information held by workers, which is largely informal, undocumented, and hence irreplaceable, the knowledge in the mind of a CEO is largely documented and known by many other people in the company. Why? Because companies make a point of operating this way. Consider the alternative: A company without extensive redundancy at the top end would risk extinction based on what happens to the individual in the CEO seat. Da big man gets a cold or a better offer and a company worth billions of dollars annually would shut down.

What is the unique thing that a CEO brings to the table? Plans. Dreams. Connections. How many whip-smart, Harvard-educated, highly-connected MBAs are out there who would be happy to work as a CEO for “only” $10 million a year? Let’s go out on a limb and say…a lot.

The conclusions are obvious: By maintaining the inflated salaries of CEOs—and other C-level executives—at the cost of laying off thousands of workers, a company’s productivity and value are damaged.

This means that any Board of Directors that allows layoffs to balance the books when other options are available is damaging the value of every shareholder’s investment.

Does that make them guilty of mismanagement? Without a doubt. Does that make them guilty of a crime? My fellow Americans, investors, and workers, that is for you to decide.



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