When Good Companies Do Bad Things

Managerial Priorities in the Age of Shareholder Capitalism

A remarkable example of the managerial arts that I used to mention in my MBA classroom comes from the Swiss company Victorinox, manufacturer of the famed Swiss Army knife.

The company suffered an exogenous shock after the 9-11 attacks, which led to rules banning the sale of knives at airport boutiques, and prohibiting passengers from taking pocket tools like the Swiss Army knife on board planes. In the space of just a few months, the company lost almost a third of its sales. While Victorinox scrambled to develop new product lines (e.g. luggage, watches), the company was stuck with more workforce than it needed, even as cash flows were tightening dangerously. At the same time, the company had long fostered an internal commitment to its workforce, rarely firing employees, and never in any numbers; to this end, it had long practiced a “counter-cyclical strategy” to weather the business cycles that inevitably affected its sales (mostly due to companies buying up knives as swag during good times). At the beginning of 2002, Victorinox was thus faced with a serious choice: jeopardize its financial health, or break with longstanding internal practice. In one of the most outstanding demonstrations of corporate commitment, the company doubled down on its cultural foundations. As a case study written about the company noted:

Victorinox stopped hiring, cancelled overtime and reduced shifts by 15 minutes. Employees were encouraged to take vacation, sometimes in advance of when it was due. Senior managers approached other companies in the Ibach region [where the company is based] to ask if they needed highly qualified workers temporarily. In this way, Victorinox kept all the employees on its own payroll while lending 80 or so to other companies for up to six months.

Times were lean, tense, and difficult for a while, but eventually the company not only survived, but came back bigger and better, with a diversified product base, increased revenues – and strongly loyal employees.

This somewhat extreme example of the importance of corporate cultural identity comes to mind in light of the recent and intense round of firings at Google this year, which has amounted to just over 6% of its global workforce, or about 12,000 people. Google is far from alone in the tech sector in letting go staff. But the scale of the cuts is rather greater: Amazon, for instance, has so far this year let go about 1,8% of its global workforce.

But this is not a numbers game of how many fired, etc…. Instead, it is a question of financials versus firm culture, that is the trade-offs between cost savings derived from downsizing personnel and the impact on the internal environment at the firm. It is certainly not unreasonable for companies to remove excess personnel. Companies are not charities: they need to be cost-conscious and employment is simply a contractual relationship that remunerates a labour input in exchange for value creation. And beyond the financial logic, there are operational considerations as well. Excess staff can bloat the firm and lead to impaired performance. So there’s no question that this can be the right thing to do to best serve the interests of the firm, the Victorinox example notwithstanding.

But, these arguments appear crass and shallow in the case of Google. Over the last three years (that is FY ‘20–‘22), the company has spent about $145 billion buying back its own shares. So let’s do the math. For each of the 12,000 employees the company has fired, it has spent about $12 million buying back its own shares. Oh, and lets look at a graph of the share price during this period:

Google share price over the last 5 years

As I read that graph, we’re not talking here about spending free cash to support a dangerously undervalued stock and protect the firm from a potentially hostile takeover (aka a good reason for share repurchase). No we’re talking about funnelling cash to support an overheated share price to kick back cash to shareholders who – spoiler alert – don’t give a shit about the actual company, and are just staking a position to maximize their own capital returns.

The idea of spending oodles of money to retire overpriced shares is generally a questionable strategy. But it appears simply absurd if, at the end of it, you reduce your workforce to practice operational economies, where the cost savings that those 12,000 fired staff (quite a number of whom had been working for many years at the company) represent is under $3 billion a year, or about 2% of the total capital committed to share buybacks over the last three years. Let me rephrase that to underline the true idiocy of the decision. Every one of those Xooglers could have been kept on for the next half century with the money the company spent on share repurchases which achieved exactly fuck-all for the company’s competitive market positioning. Where’s Laszlo Bock when you need him?

So my takeaway here is that the company spent very much money to achieve very little while opting to save not very much money at the expense of something very important. For any firm, staff reductions will have important ramifications for the internal culture. Companies that make efforts to retain their employees foster a strong working environment, create employee loyalty, and build up what Jay Barney famously identified as the “social complexity” resource inside the firm. While social complexity can mean lots of different things, more often than not it encapsulates the idea of a firm that can attract and keep top talent, promote internal cooperation, creativity and ideation, foster goodwill, and a raft of other positive outcomes. I don’t want to be overly cheery about what is, after all, just a place to work. But that’s kind of the point. For many Googlers, I suspect, Google was more than “just a job.” But if then you go fire 12,000 of them, apparently by email, after spending a fuckton of cash on share buybacks to make rich shareholders richer, you run the serious risk of turning working at Google into exactly that - just a job. And bang! – there goes the path-dependent social complexity that took over two decades to build up. Welcome to the Elon Musk School of the Managerial Arts (currently not hiring).

This is not to suggest that being hired at Google (or any company except, again, Victorinox apparently) means they can never be fired. But it would seem, at a minimum, that senior management would (1) seriously weigh the annual cost savings against the considerable erosion of trust that such moves can create, especially in light of the optics of its aggressive share buybacks of the last 36 months; (2) communicate effectively with its employee-base the who and why of staff reductions and open up the decision making process; (3) manage the downsizing in a measured and progressive fashion, rather than dumping everyone all at once; and (4) consider minimizing the overall impact by accepting a certain level of over-employment at the firm during a downturn of the business cycle, in the knowledge that the firm will again need people when business upticks in a year to two (or three, or really anytime over the next half century). This last point is particularly true in cases of longstanding employees, whose dismissal will have an outsized impact in creating a culture of suspicion or fear.

The CNN article I linked to above features a great quotation from my former student, fellow Canuck, current Xoogler, and Critical Management Thinking All-Star from way back in the day, Cameron Rout:

“The damage to the intangibles is so significant. It’s painfully obvious from the inside that there’s no way that whatever stock gain you’re going to gain [is worth] the damage to the culture when Google’s culture is its most important resource and everyone knows that.”

Exactly. I know for a fact that Cameron read Jay Barney, and knows his stuff. I certainly can’t say the same for Google’s senior management, which takes its dreary if predictable place alongside the many other examples of uninspired corporate leadership that pursues shareholder value at the expense of the firm itself. Just another case of good companies making bad decisions in the age of shareholder capitalism.