Saw Off Workers And Business Falls

When President Clinton met with 100 business executives last week to honor corporate responsibility, he was underlining a slowly emerging consensus: Treating workers as numbers on a balance sheet does not add up.

On the heels of a wave of corporate downsizing that has left America’s work force uneasy, that message came last week from an unlikely place. Not from a union. Not from Labor Secretary Robert Reich. But from the 14th-floor office of the New York City investment house of Morgan Stanley & Co.

In a stunning reversal, Stephen S. Roach, chief economist at the investment house, cast aside his devotion to downsizing and wage-cutting in a May 9 article in U.S. Investment Perspectives, “Economics: Rethinking Productivity.”

“I’m having second thoughts about whether we have reached the promised land,” Roach wrote. “Tactics of open-ended downsizing and real wage compression are ultimately recipes for industrial extinction. Labor can’t be squeezed forever, and Corporate America can’t rely on the ‘hollowing’ tactics of downsizing to maintain market share in an expanding global economy.”

Roach’s candor, while too late for the 439,882 people whose positions were eliminated last year alone, is commendable. Few have the courage to say “I was wrong.”

He is not alone. A growing number of economists say corporations are mistaking efficiency, which can be increased by cutting costs, with productivity, which requires training workers so they can actually do more.

Corporate America’s romance with re-engineering recalls McGillicuddy’s famous experiment. McGillicuddy suspected that horses could survive on air alone. He tested the theory on his gray mare, Mazie, feeding her less and less every day. Everything went well for several weeks. Then, just as success was in sight, the experiment was cut short when, by chance, Mazie dropped dead.

Downsizing is McGillicuddy writ large. But it is also the logical end of an over-reliance on modern management techniques - the kind of strategic planning that has brought us ubiquitous technology and created the strongest economy the world has ever known.

In pursuing efficiency, however, we forgot the pre-modern side of the equation: human relationships. Management philosophies come and go, but people are still doing the work. And people work best where they can trust each other.

Renewed talk today of partnerships and team leaders shows we may be rediscovering what we already knew. No less an authority than W. Edwards Deming, the architect of the postwar Japanese economy and the guru of quality manufacturing, wrote that “trust is mandatory for optimization of a system. Without trust, there cannot be cooperation between people, teams, departments, divisions. … The object of a leader is to create an environment of trust.”

So trust is a resource, like capital. But when downsizing is a way of life, trust evaporates like water on a hot griddle. And that is why the “loyalty gap” is growing. Roper Starch polling data shows that 47 percent of Americans believe employees are loyal to their employer, but only 32 percent believe employers are loyal to employees.

Flat incomes for the middle class and spiraling incomes for the top do not help. The Wall Street Journal found that in the last 30 years among one group of companies, the difference between the pay of workers and chief executives rose fivefold: In 1965, CEOs made 44 times as much as an average worker; by 1995, the figure was 212.

With resentment growing and morale failing, no wonder downsizing fails to yield upsize profits. According to the American Management Association, fewer than half (47 percent) of companies reporting cuts in the work force since 1990 report that operating profits increased the year following; over five years, the figure was virtually the same.

So where do we go from here? In today’s intensely competitive world market - only 15 percent of U.S. firms in 1960 faced global competition compared to 80 percent today - corporations cannot promise lifetime employment. Nor can they ignore stock analysts whose vision extends only three months out.

But they can listen to Roach and Deming and “spin off” the still-fashionable belief that, like McGillicuddy’s horse, organizations and the nation as a whole can prosper through starvation.

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