Question

In recent years, it has been common for companies to experience significant stock price changes in reaction to announcements of massive layoffs. For example, in November 2018 General Motors (GM) announced plans to layoff more than 14,000 workers and close seven factories worldwide. When this announcement was made, GM's stock jumped 5 percent. Critics argue that such events encourage companies to fire longtime employees and that Wall Street is cheering them on.

What do you think? Is the criticism of these moves justified or are they unfounded? Does GM have a responsibility to their employees or was this simply the right move for their shareholders?

Answer 1

Layoffs are painful for everyone - the employer and the employee. Stock market sees it as the company's attempt at reducing expenses at keeping the profits intact. This is also assumed to be signs of proactive and responsible management atleast to the shareholders.

Let look at the bright side and dark side with respect the company.

Bright Points -

1. In light of falling sales and profits, companies have a responsibility towards shareholders to sustain growth and profits. However, if management believes that market conditions are likely to remain adverse and revenue growth may not happen, they will reduce costs. It starts with increasing operating efficiency, reducing marketing, advertising, sales promotion budgets, increasing prices, maintaining status quo in salaries, putting new projects in cold storage, etc.. However, if all this doesnt help, companies resort to layoffs, essentially reducing employee costs and trying to preserve profits.

2. Company can identify organisational roles that can be reduced, making a leaner long term operation and long term cost reduction.

3. It can also identify underperformers and use this opportunity to remove them.

4. Organisational restructuring and creating new incremental roles/responsibilities happen at this time

5. Layoffs makes the ones who are retained, more secured with additional responsibilities and real assets for the company.

6. Reducing loss making units helps in long term profits and cashflows could be directed in profitable ventures.

7. It helps management negotiate deals with labour unions and reduce long term drains.

Dark Side :

1. While profitability is maintained or checked, layoffs often come with a slower revenue growth rate as not just employees are laid off but manufacturing units and profit centers are shut.

2. Employee moral is low, across the levels, as everytone fears a layoff anytime. Distrust and lack of confidence among employees

3. Much of the brighter talent looks for other opportunities to overcome this fear.

4. Layoff disruption causes chaos in operations and sales and marketing, with many terriotories going unserviced.

5. Regaining market shares lost due to geographical shutdowns are difficult.

6. Difficult to attract talent after layoffs, as people are apprehensive of work culture

7. Loss of reputation and long term labour issues

However, management use Layoffs generally when they stare at a long term decline in sales and profits, and recovery is not seen in near future. They try other options of reducing cost or increasing sales,but if it doesnt help, they are pained to layoff people. It doesnt come easy for them, but with their responsibility towards shareholders, it is essential and can not be delayed. My view is it isnt always wrong, and most of the time it is a managemnt response to adverse conditions. Profit is what drives the share holder.   

Managements can reduce the pain of long term employees by trying to arrange alternative employments for them, trying to place them in other related/ unrealted organisations.