The New Social Compact (1993)
Charting the future of public relations
Holmes Report

The New Social Compact (1993)

Companies that once promised tal­ented, hard-working employees a job for life are suddenly reneging on that bargain. The old social contract between business and society has been replaced by a new pact.

Paul Holmes


It is less than ten years since Buck Rogers, the former head of marketing for IBM, published The IBM Way, a book which begins with the comment that "the only sacred cow in an organization is its principles" and goes on to discuss what was at that time among the most hallowed of those principles: full employment.

IBM weathered the Great Depression without laying off a single employee. During the economically troubled years from 1969 to 1972, it moved more than 12,000 employees to new assignments rather than cut employment. In 1975, during severe recession, 3,000 workers were retrained for new positions. Said Rogers: "It cost a lot of money, but it was important. When people enjoy their work and know the company cares about them, they want to contribute to its growth."

Indeed, the relationship Rogers describes between IBM and its employees is the same one upon which most American enterprises were, until recently, based: "An employee who produces always has an assign­ment, preferably a meaningful one. In nearly 50 years, no person employed on a regular basis has lost as much as an hour of working time because of a lay off."

In his remarks in the company's 1990 annual report, then CEO John Akers declared that IBM's people were what gave the company its com­petitive edge, and assured employees it was "reasonable to assume" the full employment principle would be upheld. By the end of the year, Akers had announced that the company would cut 20,000 jobs. Ultimately, he slashed the IBM workforce from 400,000 to around 300,000. His succes­sor, Lou Gerstner, has already announced plans for additional lay-offs.

The IBM story is a microcosm of what has happened in all of corporate America over the past five years. Companies that once promised tal­ented, hard-working employees a job for life are suddenly reneging on that bargain. The old social contract between business and society has been replaced by a new pact, one that employees may have some difficulty adjusting to.

"The old unwritten contact was that as long as you did your job well and the company was stable and profitable you had a job," says Elliot Schreiber, senior vp of corporate communications at Miles, the Pittsburgh pharmaceutical and chemical company which has itself restructured and shed employees in recent years. "The new contract is that if you do your job well and there is recognized value by your man­agement in the job you do, you will have a job."

Downsizing, restructuring, rightsizing, delayering and a dozen other euphemisms for what used to be called firing people, have resulted in approximately half a million lost jobs so far this year. In addition to the toll at IBM, Sears is shedding 50,000 jobs; Boeing 28,000; Procter & Gamble 13,000; Eastman Kodak 12,000. Perhaps more important, for the long term, this trend has resulted in a reassessment by employees (and, incidentally, by whole communities) of their relationships with corporate America.

This is an issue that most if not all corporate communications pro­fessionals will be forced to face over the next few years, and communi­cations must be a vital part of the downsizing process, not only in its most obvious role of helping an organization rebuild the morale of those employees who are left, but in assessing the impact of any changes before they are made, and in redefining the relationship between the company and its stakeholders.

The first challenge is to ensure the company understands all the implications of downsizing: not only the financial, operational and legal implications, which are routinely considered, but also the reputational implications. The impact of downsizing on the way an organization is viewed by employees, communities and even consumers can be devas­tating and long-felt, and to make a decision without considering that impact is clearly foolish.

During the planning stages, communications professionals should employ research and analysis to determine the opinions and attitudes of the people who will have to buy into the concept, says Gary Grates, president of New York PR firm Brown Boxenbaum and an expert on employee communications.

"Most CEOs are quantitative people, and they look at the numbers first, not the human side of the equation," says Grates. "They are also likely to be closer to Wall Street and the financial community than they are to their own employees, and they are going to be feeling the pres­sure from the Street, which is almost certain to be demanding job cuts.

"If you look at a company like Eastman Kodak, which is a profitable company, the Street was not going to be satisfied until it heard that 10,000 people were being let go, and then the first question from many analysts was why wasn't it 20,000 people. But Wall Street is notoriously short-term, and it doesn't necessarily care about the long term impact on employee loyalty and morale, which doesn't show up on the balance sheet."

 Nevertheless, there are a few dissidents who believe that the nega­tive long-term impact of downsizing on employee morale and corporate culture outweighs the short-term ben­efit in terms of Wall Street's reaction and shareholder optimism. They point to the devastating impact of mass lay­offs on the company's relationship with its employees.

The unwritten compact between companies and their employees encouraged employees to see their own long-term interests as inextrica­bly bound up with the fortunes of the company, and made it possible - and logical - for workers to invest time and effort educating themselves about their firm's specific products, technologies and consumers: education which made them more valu­able to the company for which they worked but was of much less use to other prospective employers.

So powerful can these psychic benefits be that many Japanese com­panies continue to cling to their policies of lifetime employment despite economic pressures at least as powerful as those felt in this country. In those instances in which U.S. companies have followed the Japanese model - GM's Saturn plant, for example - productivity outstrips that at more conventional plants.

By contrast, few downsizings result in significant increases in produc­tivity or in value relative to competitor companies. In Rethinking the Corporation, consultant Robert Tomasko says: "Many - possibly most - downsizings fail." He cites a study by the University of Michigan which found that of 1,000 companies which had downsized during the '80s:

  • 90% wanted to reduce expenses, but fewer than half actually did; 
  • 75% hoped for productivity improvements, but only 22% achieved them; 
  • more than half wanted to improve cash flow or increase return on investment, but fewer than 25% were able to do so; and 
  • more than half expected to reduce bureaucracy, but only 15% suc­ceeded.

"Corporations commonly streamline operations to improve their competi­tive position," says Tomasko. "But only 191 of these 1,000 businesses reported increases in competitive advantage resulting from their downsizings."

One reason for this failure, Tomasko says, is that companies cut muscle instead of fat (this is particularly true when companies downsize through early retirement programs, which mean that individual employees, rather than management, decide who leaves); the other is that the human cost of downsizing is underestimated.

"A manager of a major New York bank became very cynical about the results of the bank's continual reduc­tions of staff," says Tomasko, by way of an example. "He observed that while too many good employees were thrown out on the street, the same top management team that got the bank into all its problems was still in place. He felt that the post-downsizing atmosphere was one in which, instead of trying to get work done, people are constantly covering their ass.”

A recent National Study of the Changing Workforce by the Families and Work Institute - a group funded by Sears Roebuck, American Express, AT&T, Du Pont and others - found declining employee loyalty, and more than 65% saying they considered open conununication in choosing their current job - more than any other cri­teria, including job security or compensation.

Itomasko also contrasts western-style thinking with that of the Japanese, pointing out that differences in accounting practices mean that U.S. companies are likely to view employees as an expense, while the Japanese are more likely to regard them as an invest­ment. He also points to U.S. companies that have adopted. a more Japanese view, including 3M, which managed to avoid layoffs among its 90,000 employees worldwide while reducing labor and manufacturing costs by 35%, largely through improvements in process efficiency.

All of which is not to say that public relations and employee relations considerations should be allowed to override financial considerations when a company considers restructuring, merely that they should be part of the equation. Ultimately, reflecting upon all the consequences of a decision - financial, operational, legal and reputational - leads to more efficient decision-making.

Once a decision to downsize has been taken, PR professionals should also be involved in deciding what form that downsizing should take. Elliot Schreiber says that offering early retirement has sometimes been seen as "the good PR way" of downsizing, since any departures are voluntary and the company thus avoids the guilt that goes with firing people. However, Schreiber and other PR advisors have counseled management against offering early retirement because it allows execu­tives no control over who goes.

"Often a lot of good people leave and these are the very people you want to stay," Schreiber says. "They leave because they are the ones who are most confident that they can find another position. Often what ends up happening is that companies find themselves hiring the very people who left back as consultants. It's much better to bite the bullet and eliminate a certain number of jobs and do it on merit."

Early retirement programs, Schreiber says, can be expensive, and they are an abdication of management's responsibility. They also contribute to the impression that people are commodities, interchangeable parts, rather than individuals.

"One of the priorities for the com­mittee is to make sure that no business unit manager handles things in such a way that the company's reputation is damaged," Schreiber says.

George McGrath, a counselor with Osgood Global Group in New York and past president of the International Association of Business Communi­cators, says that another mistake com­panies make is "the death of a thou­sand cuts" approach, in which the company announces and executes lay­offs over a four or five month period.

"People feel the axe hanging over their heads," says McGrath. "It can paralyze the entire organization. Companies should act swiftly and decisively, and preempt the kind of informal communications channels - the rumor mill, leaks from management, stories that circulate via the secretaries' network - that create an atmosphere of uncertainty."

Aetna Life & Casualty has had two major downsizings in recent years. The first time the company got it wrong, says senior vp Elizabeth Krupnick; the second time it did it right.

"In the second instance we were much more candid with employees and with the press," she says. "We were very specific about how many people were being cut and in what areas, and we were much more forthcoming about why we were doing it. We absolutely insisted that middle management talk with every employee within 48 hours of the corporate announcement to answer their questions."

McDonnell Douglas is another company that has gone out of its way to communicate with survivors, even offering psychological coun­seling to help them deal with the complex feelings of relief, guilt and fear that often result. Chairman John McDonnell has held a series of "town meetings" to address employee concerns on a personal level, as well as sending a videotaped message to the homes of all 112,000 employees explaining the reasons for the downsizing.

Says Michael Becker, vp of human resources: "You have to commu­nicate, communicate, communicate."

Jeff Taufield, executive vp at Kekst & Co. in New York, says that communication should start long before a restructuring takes effect, with companies taking greater steps to educate their employees about the impact the national economy has on the organization and other financial matters, on the principle that the more they understand about the external influences on a company the better able they are to under­stand management decisions.

Taufield also urges companies that are restructuring to be more open with customers, suppliers, the media and local community officials. "Understand where employees obtain information they consider credible and ensure that those sources are fully informed. Rumor and speculation are heightened at these times."

However, it is clear that many companies do not communicate effec­tively during downsizings. A recent survey of 1,020 personnel chiefs by Right Associates of Philadelphia found that only 44% of companies that had downsized in the previous five years shared details of their plans with employees and only 34% told survivors how they would fit into the company's new strategy.

These same personnel chiefs appeared to recognize that this lack of communication created problems: two thirds said that since restructuring employees had lost trust in the company, while only 55% thought survivors were prepared for their roles in the restructured organization. "Many of these new initiatives are typically doomed because very few executives understand the role and impact communications has on the ultimate success of the process," says Gary Grates. "In times of turmoil and change and shrinking budgets, communications is often seen as expendable. But it is during these difficult times that executive commu­nication is needed the most."

Grates says that concepts of change are often sold at the top of the organization and then pushed down through the organi­zation. "Those charged with making it happen, long-term, rarely fully understand or appreciate their roles, or the objectives of the process. Management overlooks the need to explain these ideas or, worse yet, believe they have explained things because the mechanical tools of communications - letters, memos, videos - have been used."

It is important for PR people not only to understand these mechan­ics, but also to understand the psychological factors at work.

"Any manager who tells people they don't have to worry, that they will not be affected, is just being insensitive," Schreiber says. "People are affected whether they are let go or kept on. They are disturbed, they are fearful, they are angry, sometimes they even feel guilty that they still have a job when their friends are out of work, particularly if they don't understand how the decision was reached."

Employees are not, of course, the only audience that communicators need to consider. McGrath says balancing the needs of the various stakeholder groups, which may have very different reactions to the news, is one of the greatest communications challenges.

"The analysts will be dancing in the street," says McGrath. "Employees will be wailing and gnashing their teeth. A PR person should be able to give an honest, accurate assessment of all of these groups and how they are likely to respond, and what the barriers may be to acceptance of the company's message."

The reaction of communities is particularly important. General Motors, for example, has run into legal problems in Ypsilanti, where it plans to close its Willow Run plant, throwing 2,300 employees out of work. The town has accused GM of breaking promises to provide long-term employment. Clearly, from a public relations standpoint, making such promises in today's uncertain economic climate can be extremely damaging. Companies need to deal candidly with all audiences.

Not everyone agrees that the impact of downsizing upon morale is necessarily negative, however. Al Geduldig, president of Geduldig Communications Management and a consultant to many major corporations, says restructurings are so routine nowadays that they are not necessarily damaging to an organization's external reputation. "It's an unfortunate occur­rence, but it is expected," he says. "If it is done right people don't feel more vulnerable, they feel less vulnerable, because they see the company taking steps to protect their future and they are grateful."

George McGrath agrees. "You have to ask whether restructuring can be turned into an opportunity," he says. "Presumably it is being done for a reason, to make the company stronger and more competitive, and if you can explain that to employees you might be able to generate renewed enthusiasm and sweep employees along."

On the other hand, says Schrieber, it would be a mistake for manage­ment to assume that employees will see things in that light. Schreiber says there are managers who espouse the view that since many employ­ees are also shareholders they should be supportive when companies downsize. "In fact, if you talk to employee shareholders, what they are really investing in is the future and welfare of themselves and their col­leagues and friends," he says.

Perhaps most important, however, is making sure that those employ­ees who remain have a sense of the company's mission, and have common goals towards which they can work.

"Chief executives like Gerstner at IBM who dismiss things like vision don't understand what it's all about," says John Budd, former head of PR for Emhart Corporation and now president of his own consulting firm The Omega Group, in New York. "The attitude of survivors is shell-shocked, and they need to understand the purpose of the downsiz­ing: not the short-term financial reasons, but how it will make the com­pany stronger, how it fits into the vision of the CEO. The CEO has to be able to articulate that vision, and explain to the people who are left what their role in the new corporation will be."

Geoff Nightingale, president of the SynerGenics management con­sulting division of PR agency Burson-Marsteller, agrees. The most important role for public relations in restructurings, he says, is to help the CEO articulate a future that he or she is committed to, to explain what he or she is trying to create.

"Management has to recognize that it is going to change the nature of an organization when it downsizes," says Nightingale. "Public rela­tions people must force management to concentrate on what that new organizations is going to look like, what will its mission be, what will be its strategic intent, what will be the impact on customers and suppliers and employees and what needs to be said to those audiences to make sure they remain as allies."

Even so, it is clearly going to be difficult to construct a trust­ing relationship between the company and those employees who survive, however many platitudes about "empower ment" and "our people are our most valuable assets" emanate from senior management.

"If someone tells you that gold is his most precious resource, you might believe him - until you saw him throwing handfuls of gold into the gutter," says John Dodge, retired management consultant, writing in a recent issue of Whirlpool Management Journal. "What is happening in corporate America today is certainly analogous. General Motors plans to reduce its workforce by 74,000 people. AT&T has already `downsized' by well over 120,000 people. IBM has terminated more than 50,000 over the past four years.

"People are a resource, to be sure, but they are a commodity resource. Like factory floor footage or produc­tion capacity, they are expendable if and when the company encounters a scarcity in its truly precious resources - markets, customers and shareholders. People can be replaced. The whole purpose of a corporate organization is to maintain an infrastructure of systems and processes and methodologies capable of surviving the continuous replace­ment of people."

All of this may well create a long-term problem for U.S. cor­porations that management appears to have spent little time considering during its frenzied efforts to cut overhead and appease analysts.

IBM, among others, has seen a drain of major talent since it started restructuring, with star employees attracted to smaller, more entrepre­neurial companies where they feel they have more control over their own destiny. To try to staunch the hemorrhaging, chairman Gerstner has met with many key employees personally, and the company is offering more performance bonuses to employees at all levels, although it is doubtful whether the solution to this problem is purely financial.

"When the recession ends, western firms will find that retaining good employees and motivating mediocre ones is far more difficult," opined The Economist in a recent editorial. "Worried about their next job or career-switch, workers will not care much about any firm's long-term fortunes unless given good reason to do so. To succeed bosses will need to reach a new understanding with employees."

John Budd warns that few CEOs who are brought in to cut costs and pander to shareholders will be able to transform themselves into popular nor will they have credibility as leaders once the restructurings are over, when they talk about rebuilding if they are seen as the people who tore down the old structure.

"I don't know whether even Jack Welch at GE will be able to turn that image around," says Budd. "That's a company that has invested in retraining and education and communications and yet, even now, people there don't entirely trust Welch and his frustration at that is evident in interviews.

"The most difficult time is not during the changes but immediately afterward. In the initial phase, targets are tangible - a bloated workforce, high costs. But the old bureaucracy is remarkably resilient. It is the rehabilita­tion phase that is fraught with danger."

Schreiber admits that there is an apparent contradiction between the current management enthusiasm for "employee empowerment" and continuing downsizing. It is difficult to empower people who fear that they may not have a job tomorrow, just as it is difficult to convince them that the organization believes people are its most valuable resource. But employees must be given an opportu­nity to help lead the organization back to profitability.

Ron Rhody, former head of corporate communications for Bank of America and now president of his own California-based consulting firm, Rhody & Co., believes motivating employees in the wake of the recent wave of restructurings may be the single most crucial challenge facing American managers today.

"The old pact between management and its workers is dead," Rhody says. "But if you assume that in order for an organization to be effective it has to have teamwork, it has to have people working together towards a common vision, towards common goals, then I think a new pact needs to take its place."

Instead of assuring employees that their jobs will be safe as long as they work hard and the company remains profitable, there is a need for a new contract between companies and the people who work for them, and a need for organizations to articulate that new contract.

"I think companies have to say: `Come and work for us, and as long as we have a place for you we will treat you decently and honestly, we will pay you well and respect you, we will give you a job that is challeng­ing and we will empower you to do that job to the best of your ability, and we will train you, but the truth is we might not need you tomorrow morning.' If everyone understands that situation I think you have a basis upon which to move forward. Its very similar to the model upon which pro football operates."

Rhody admits that it will be easier for the younger generation to understand this new pact than for many of their older colleagues. Indeed, many of them showed an implicit understanding of the situation for several years, and have taken advantage of the "free agency" it offers by selling their services to the highest bidder, changing jobs far more frequently than was the case in the past.

In this view, firms will be forced to experiment with new patterns of employment, patterns that accommodate the needs of highly­, skilled workers as well as those of the company: job-sharing, flexi­ble hours, lengthy sabbaticals, consulting arrangements, telecommuting, subsidized education. In lieu of lifetime employment, companies will be forced to offer greater flexibility.

"There will still be loyalty, but it won't be loyalty in the old sense," says Aetna's Elizabeth Krupnick. "Employees won't expect a promotion every 18 months in return for good behavior, and all the things that corpo­rations used to promise. There will be a lot of morale issues to manage. But a new deal will be struck."

It may also involve management admitting that in an atmosphere of constant, unpredictable change it does not know from month to month whether jobs and plants will be there tomorrow.

"I think it is incumbent upon the company to make it clear that things have changed, to be honest with its employees and its communities, to define the new contract," Krupnick says. "Employees are not stupid. They know things have changed. They don't really expect a job for life. What they expect is honesty, and they have a right to expect that."

Krupnick too counsels candor. She says there is no need for compa­nies to be defensive about the changes they are going through, because virtually every company in America, regardless of the quality of manage­ment, is facing the same challenges.

The same goes for local communities, Schreiber adds. Management should sit down with the leaders of cities in which plants are located and be honest about the prospects for the future. It should explain what its current needs are in terms of people, but also that it cannot guarantee those same jobs will be there in six months or a year. In Elkhart, Ind., Miles did just that, meeting with the Mayor and with a Congressional delegation to explain its decision to lay people off and to present the company's analysis of the likely economic impact upon the area.

Challenges such as that created by downsizing are helping to redefine corporate America and the profession of public relations, Schreiber says. "Making people feel good is old style PR. Putting a positive spin on a story about the company eliminating 100 jobs is old-style PR. Sitting down with those who are affected and explaining to them that you can't look into the future and predict with any certainty what it holds, being honest about the changes affecting your business, that's the new PR."
Ultimately such an approach - born from a major crisis - could help reverse the loss of confidence in American business that began in the '50s and has been escalating since.

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