Apparently I've suddenly become the guy who writes about layoffs on LinkedIn. But someone needs to, and as someone (at least currently) outside the corporate world, I feel empowered to say what I think needs to be said. So I guess I'll just lean into it, because oh boy do I have some thoughts and feelings on this topic.
What I call the "cult of shareholder value" has become a toxic presence in our corporate world. The concept here is essentially that a company's top priority is delivering value to its shareholders and everything else comes behind that. While that might sound reasonable, the question becomes "how far behind do other priorities fall?" It's a fine line from "shareholder value is a high priority" to "shareholder value is the highest priority" to, finally, "shareholder value is the ONLY priority," and over time we've seen our corporate culture trend farther and farther in that direction.
A large part of this is driven by Wall Street and its explosion of popularity (and revenue). A few decades ago, Wall Street was pretty boring. There were no quarterly earnings estimates being touted on CNBC. No talking heads obsessing over what companies did over a very brief 3-month window. But with the dot-com boom and the rise of the Internet, that all changed. Now, analysts issue estimates for companies every quarter, and woe to the company that misses those estimates...even by a tiny amount. Sometimes even beating the estimate but not by "enough" (whatever that means) leads to a collapse in stock price.
This has coincided with a rise in stock-based compensation, especially at the executive levels. A 2017 MSCI study found that, on average, 60-70% of CEO pay of publicly traded companies came from equity (versus base salary and/or cash performance bonuses). With executive pay tied so closely to stock price, clearly executives are strongly incentivized to care about it and to take actions that will increase it.
And so, companies have started focusing ever more on the short-term. What will be good for the business over the next 5 years is no longer relevant - what matters is what lets you beat your numbers for the quarter or the year, which drives increases in the stock price. With a majority of Fortune 500 CEOs staying in their role for only 10 years (and roughly 40% for just 1-5 years), who cares about the long-term health of the company? Let's bump the stock price, cash out those shares, and move on to the next thing.
This short-term thinking has empowered what I think of as "layoff culture." To be clear, this isn't just about any company that has layoffs. Sometimes companies have a real need to do this. Maybe a company decides to exit a line of business that isn't working, and they no longer need those employees (though I sure hope they at least try to see if they have other roles for which they would be a good fit before letting them go). Maybe a company is just struggling overall and needs to cut costs in order to survive. That isn't layoff culture. That's business necessity.
Layoff culture is part of the cult of shareholder value. It's short-term thinking that says "we've decided to reduce headcount in order to cut costs and make our quarterly numbers look better." Companies do this to please Wall Street, to meet or beat those all-important quarterly analyst estimates. They don't do this because they need to cut costs - we're talking about thriving businesses that are just trying to squeeze out a tiny extra bit of margin.
As this has played over the last couple of decades, we in the workforce have to some extent become used to it. It's almost like Stockholm Syndrome. I've been a senior leader in organizations that have done this - lots of conversations about "tough decisions" that are "for the good of the business." And in some cases the business has been struggling, and so that has been true. In other cases, it's just been to lower headcount a bit in order to meet quarterly numbers. And there are good people in those conversations who have just been brainwashed into thinking it's just normal, even necessary, to do this - to throw a massive wrench in peoples' lives who were doing valuable work for the company - we made those "tough business decisions" and felt like we were doing the right thing, even though it was hard.
But that was bullshit. We were just enriching shareholders at the expense of employees. And, as I'll get to in the next post, we weren't doing the right thing for the business at all...we were actively harming it and making it harder to succeed.
It's time to break this cycle of short-term profit and stock price above all else. It's time to stop hurting people to help bottom lines.
We can, and must, do better.
I admire your courage in expressing this! It's refreshing to see someone boldly share the true reality of corporate America. Thank you.
There is a lot of this I strongly disagree with and a lot that is just not accurate.