If you owned a house and rented it out, would you applaud if the tenant decided to save on electric bills by razing one-third of the building without so much as asking you? In effect, U.S. corporate boards are behaving like the lodger when they slash staff without consulting shareholders. The neighbors - in this case the American public - understandably are upset, too.
But rather than expect government to take responsibility for protecting jobs, Americans might consider a novel, Bill Clinton-meets-Bob Dole approach to downsizing that satisfies both calls for action and desires to leave the market alone.
Ponder this idea: Any publicly owned corporation bigger than a specific size that wants to cut more than, say, 15% of its workforce should first get the approval of its stockholders. Had this practice been in effect, owners might have had a say at the nation's biggest recent downsizings: AT&T Corp. (originally 30%), IBM Corp. (35%) and General Motors Corp. (29%).
Of course many believe shareholders are the demon behind the downsizing. They drive stock prices up in the immediate aftermath of most job-cut announcements. But Wall Street money managers buy and sell stock on behalf of the owners. They are rarely the ultimate shareholders themselves. With trading time horizons measured in minutes, they have no scope to evaluate the merits of each downsizing initiative. Moreover, they have no guidance from the investors whose money they manage on how to judge broad layoffs. So most follow a simple dictum: If downsizing slashes a company's expenses, cheer. That behavior translates into ownership without oversight.
The fact is, not all downsizing is the best medicine for ailing companies. Just as the homeowner might OK tearing down a crumbling part of a house if it helps preserve what remains, shareholders might approve big staff cuts to save a firm hit by surging competition or sudden changes in technology. But they would rightly object if layoffs are a symptom of management failing to mobilize employee skills in pursuit of long-term growth.
Today, owners have no chance to make that judgment. Stockholders annually elect directors and vote on other issues. But as long as often-sleepy boards give the nod, management can downsize as much as it likes without a word from shareholders. Yet a wholesale downsizing operation can have a greater long-term impact on the company's value than almost any other issue appearing on ballots. Shouldn't management be accountable to a company's owners when it proposes such major course changes?
Institutional investors could press boards to adopt a voluntary "downsizing accountability code," committing them in advance to consultation. Or, Congress could boost market oversight by barring companies from claiming certain tax benefits flowing from large-scale layoffs if they did not first obtain a green light from their owners. This approach tracks 1993 legislation designed to tie ballooning executive salaries to the pace of company growth. To deduct executive pay exceeding $1 million, a company now needs to submit a performance-based package for stockholder approval.
Owner oversight could brake downsizing by forcing managements to make a convincing case that wide layoffs are in the long-term best interests of the firm. Knowing plans face shareholder scrutiny and judgment, boards would be more motivated to police their executives to ensure big-scale cuts are justified, not just excuses for poor strategy. The result would be better-run, more competitive companies.
At the same time, institutional investors would have to develop guidelines to decide such votes. Shareholders would not suddenly have to become experts in personnel management, however. A pension fund might simply declare that it would support downsizing only if a board clearly demonstrated that job cuts would generate more shareholder value over time than retraining and redeploying workers. Meeting just this bare test would represent a powerful new standard of accountability for corporate boards.
But who are these owners? Are they capable of exercising effective oversight? About half of the stock in American companies is now held by investing institutions that administer the savings of millions of workers and retirees. Indeed, AT&T, IBM, and the other big downsizers wind up firing some of their own owners, because employees often hold shares in the companies for which they work.
Since 1988, the Reagan, Bush and Clinton administrations have pressed these institutions to monitor the competence of boards and management at companies they own. Many do so, and studies confirm that company performance benefits. Now the institutions should extend the same duty of care to ratify layoffs that are necessary, and stop those that are not.
Critics will complain that asking stockholders to rule on downsizing is luring them into micromanagement. They will call the responsibility a bother for which shareholders are unqualified to make sound judgments. But the nation can no longer afford absentee ownership. Indeed, the market might discover in the discipline of ownership the key to earning back the confidence of America.
Stephen M. Davis, president of Davis Global Advisors Inc., Newton, Mass., is author of the forthcoming "Owners: Making Way for the Shareholder Revolution."
