Avoiding the Mistakes of the Past: Downsizing and Corporate Reputations

I've been asked to address an audience of executives on Tuesday in Glasgow on dealing with the recession and people management, so I've turned to the lessons of history and, increasingly on these occasions to CV Harquail's blog, Authentic Organizations, for some lessons from the present and excellent insights into all thing organizational. On her blog there is an excellent threaded discussion on the layoff/alternative to layoffs debate and references to an old (1999) but recently updated study of Downsizing the company without downsizing morale,which has recently appeared in the Sloan Management Review by Aneil Mishra, Karen Mishra and Gretchen Spreitzer. I won't repeat their findings because you can get easy access to them by clicking on the above discussion ( (hello to the CEED group in Glasgow in anticipation you'll read this blog and apologies to those fortunate enough not to be present to hear my second-hand account of this line of argument).

I'll also be drawing on another recent study that appeared in the recent edition of the august Academy of Management Journal (not the kind of thing that many practitioners would read; nor, it seems, do many academics, but this article has caused some interest since it was reviewed in last week's Economist). In the article, by Geoffrey Love and Mathew Kraatz on '...how and why downsizing affected corporate reputations' (AMJ, 2009, Vol 52, No. 2, 314-335 for those interested), the authors draw on three sources of literature to explain why an audience attributes positive and negative reputations and why these attributions may change over time.

The first is the corporate character explanation that explains why people value organizational personality traits such as trustworthiness and reliability (my colleague Gary Davies has written extensively about this). These traits essentially explain how and why firms can create differentiation and novel EVPs. The second explanation begins from a different place in that it explains why firms tend to become similar (for the initiated, institutional isomorphism). Audiences tend to value actions that show conformity to cultural norms - of society, industries, professions etc. The third is more basic, at least in its simplest version, and is rooted in exchange theory - people assign reputations based on the answer to the question: what does it do for me in relation to my material and emotional needs (and, as we argue, valued expectations of psychological contracts)?

One of the novel aspects of their study is that is was carried out on financial analysts' assignment of reputations and those of peer firm executives to a sample of Fortune 500 companies that had downsized over the period 1985-94. The conclusions were complex but to summarise:

• Downsizing resulted in a signifcant negative effect on reputational change, even among financial analysts,


• But only early on in the study time frame, because planned downsizing fitted well with the analysts' and executives' perceptions of legitimate actions, especially if it led to valued results for them.


• Thus, the conclusions the authors draw, is that it seems that violating commitments to employees and the community is more permissable when there is a 'clear and present danger', but that reputational assignment changes over time

A similar argument is made by previous study in the Sloan article in that the layoff/alternative to layoff decisions may be less important to employees than being active participators in the decisions - see the outcomes of the process as fair (procedural justice) and feel empowered to address the additional problems created by the solutions. However, these positive outcomes are contingent on them trusting management to draw on higher values and long term interests rather than use recession as an exercise in opportunistic cost-cutting or to get rid of people they see as poor performers (often those who speak truth to power but who may be seen as destructive actives in the language of the Sloan diagram?).

These are US studies, and I've made the point on CVs blog that the Employment Protection legislation introduced in the UK many years ago when I had to deal with layoffs for real, more or less instiutionalised the notion of firms seeking to avoid layoffs asa first port of call and widespread consultation over alternatives to redundancy with staff. Nowadays, there is certainly current evidence of firms embodying spirit not just the letter of this legislation in the UK, which is contained in a recent CIPD survey on talent management and in article in People Management. But is this the norm, or do firms still privilege analysts' attributions of reputations in the long run, regardless of the clear and present danger?