Biz leaders: There's no time for an economic pity partyAugust 11, 2011: 5:00 AM ET
CEOs are on the spot to respond to the latest spate of economic troubles, but slashing jobs and hoping for the best will just make matters worse for their companies.
By Shelley DuBois, writer-reporter
FORTUNE -- Starbucks CEO Howard Schultz has a can-do attitude about his recovery from neck surgery. In a letter to employees sent Monday, he thanked them for their support and assured them that he will heal soon. Schultz then outlined a similar narrative for Starbucks: the company is responding to a real but manageable threat -- the latest economic turmoil -- but everybody is in it together, and Starbucks will wind up on top.
The letter is one CEO's attempt to demonstrate control in the face of economic concerns, which have grown even more concerning since Standard & Poor's downgraded the U.S. credit rating on Friday. The stock market has been see-sawing since the announcement and it took a significant dive yesterday, as investors struggle to wrap their heads around gloomy economic conditions abroad and at home.
Times like these put CEOs like Schultz on the spot. Their decisions matter more during uncertain economic times than just about any other, says Sydney Finkelstein, a professor of management at Dartmouth's Tuck Executive Education school.
But the current malaise is more than just a test of management mettle. Especially for big companies, the decisions that leaders make could have an impact on the economy as a whole.
Just like the rest of us, big business leaders grow conservative and try to shrink spending during tough times, says Adam Galinsky, a professor of ethics and management at Northwestern's Kellogg School of Management. "We also tend to look towards what everyone else is doing to try to find our way. If I'm a company and one of my competitors is slashing jobs, I'm going to slash jobs too."
Job slashing was certainly common during the most recent recession, and some companies have restarted the process now, especially in the banking sector. Just last week, HSBC cut a tenth of its global workforce, about 30,000 jobs.
Sometimes, CEOs are forced to cut because they need to make big changes quickly, but most job cuts are more aggressive than they need to be.
"Business today has cut the workforce pretty much to the bone," says Alexander Horniman, a strategy professor at the University of Virginia's Darden School of Business. Even more cuts could put companies at risk when the economy eventually rebounds.
Managers also need to fight to keep their natural psychological reactions in check. Bad news looms disproportionately large in the mind, which encourages exaggerated reactions, Galinsky says. It's up to CEOs to curb that overreaction. And if they have the financial means, they should dodge the corporate pack mentality altogether.
For example, instead of cutting jobs, now may actually be one of the best times to hire, Galinsky says. "In the downturn, you go after star people in other organizations and steal them. Then, when the economy turns around, you're going to have better talent and capitalize on that."
It's a challenging balancing act. To buck the status quo, managers need to check their gut responses. But when they communicate internally, they have to appeal to their employees' emotions.
"Rational arguments do not convince people who have emotional biases about something. It doesn't happen in everyday life, and it doesn't happen in business," says Finkelstein.
Instead, a good message needs to make sense and transcend the sort of numbers that make the business case for decisions. CEOs need to strike a chord without appearing disingenuous. Citing the past is an effective way to do that, says Nicholas Hall, manager of the Stanford University Graduate School of Business behavioral lab. He says one of the most useful messages is, "We've gone through something like this before. This is different, this is tough, but we have these specific strengths that will handle it."
On the bright side, CEOs with solid strategies will have an opportunity to shine, since most of them will be adequately prepared for a downturn. The trick is to communicate that strategy effectively. "You ought to be more engaging and inclusive when things are going to hell than when things are going along smoothly," says Horniman.
Starbucks (SBUX) CEO Schultz's memo takes a page out of this playbook: "We've proven more than once that Starbucks can determine its own destiny, regardless of external circumstances. And I promise we will do it again," he wrote.
Only time will tell. But Schultz is using tactics that experts say should work: acknowledge the crisis, say it's surmountable, and tweak -- don't gut -- the company's core strategy. For now, he's taken a solid first step: getting the troops jazzed to sell some coffee.