Why layoffs are for lazy corporate overseers

March 5, 2013: 12:47 PM ET

Layoffs are often a sign of failure by top executives to properly manage a business and forecast needs -- and failure of board members to ensure that the right management is in place.

Asian Office Worker Leaving His Job in Layoff for Recession.

FORTUNE -- Probably every worker today has experienced -- or known someone who has experienced -- at least one layoff. Layoffs are an abomination -- for the pain they cause innocent victims -- and the lack of accountability they often represent.

Before the great recession, in 2006, Lou Uchitelle sent out a warning about the terrible costs of layoffs in his book The Disposable American: Layoffs and their Consequences. The book traces the history of job security -- and layoffs -- in the U.S. and explores the psychic trauma created by corporations' overuse of this so-called right-sizing tool.

Soon after his book came out, Uchitelle explained to me that he "made a presentation at a meeting of the American Psychoanalytic Association, and at the end, there was a vote taken among more than 30 psychoanalysts. They were asked, 'Do you, from your experience, consider a layoff a traumatic experience?' And all of them put their hands up."

Many workers today don't know of a world without layoffs. But they haven't always been common. I was in New York attending a disaster recovery conference in 1992 when IBM (IBM) announced its very first layoff. I remember the shock among the IBMers attending that conference. The Big Blue rug had been pulled out from under them, and they told me they would never feel the same way about IBM again.

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Twenty years later, the Bureau of Labor Statistics reports that in 2012 alone there were over 17,000 U.S. mass layoff events. (The Bureau defines mass layoff events as 50 employees or more laid off at a single employer.)

Some layoff announcements are huge. HP (HPQ) recently said that they would dismiss 29,000 workers  -- more than the population of many U.S. towns. This would have been unthinkable in the 1950s, '60s, and '70s.

"We're sort of a 'we invent as we go along' nation," Uchitelle said, referring to the U.S. "And we've invented some wonderful things. And one of the things we invented was job security."

Large corporations, labor, and government all realized job security was in their mutual best interests, beginning in the late 1800s, he said. When layoffs did happen in the 1930s, the government stepped in. Politicians of all stripes agreed that job security was important -- and job security increased over time until the mid-1970s. Since then, "we've been going away from it."

The corporate movement away from job security coincided with the advent of big executive bonuses and the rise of global competition. Consulting firms seized the moment and devised practices to teach companies how to eliminate staff.

But the recommendations of the consulting firms are not agnostic. They rarely, if ever, recommend cutting the heads of those who hired them.

Compensation also insulates most executives from layoff shocks. Executive compensation has changed dramatically since the mid-1970s. Today, top executives receive huge bonuses that they can stash away, shielding them from any layoff distress should it strike them. In contrast, the workers most subject to cuts are unable, given their wage rates, to scrape together that level of financial freedom.

Layoffs often demolish an employee's social circle and identity -- and the same is true for family members of laid off workers. During the financial crisis, layoffs forced foreclosures, leaving families homeless, and many who lost their jobs then still struggle amid dim job prospects.

At a dinner table over the holidays, I sat next to a New York-based investment manager who told me that the CEOs who have come to visit him over the last couple of years told him that their recent layoffs were just "cutting out the dead wood" that they'd been reluctant to cut earlier.

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I had three problems with that explanation. One, management is responsible for telling individuals if their performances were not up to snuff, putting them on a program to fix it, and then removing them if corrections couldn't be made. If management was unwilling to do that simple job, they weren't managing. Two, while the CEOs might claim otherwise, often it's not the so-called dead wood who are chopped during layoffs. In fact, in small layoffs, it's the whistleblowers who spoke up (inconveniently) or anyone who made one of their bosses (or their egos) uncomfortable who are often the first to go. And three, large layoffs are like carpet-bombing, not surgical strikes. They are like clear-cutting a forest, not removing dead wood. You will lose people you wish you had not.

But just as the CEOs who spoke with the investment manager weren't concerned with employee hardship, layoffs don't bother board members much either. (In fact, some are happy advocates of the process.) They don't recognize layoffs for what they too often are: a failure by top executives to properly manage the business and forecast needs -- and a failure of the board to ensure the right management is in place.

But it's actually worse than just a lack of accountability, because rather than ding management for these failures, boards reward management for these missteps.

Take the recently reported case of J.P. Morgan (JPM). Documents in a mortgage backed security fraud case "reveal that J.P. Morgan, as well as … Washington Mutual and Bear Stearns, flouted quality controls and ignored problems, sometimes hiding them entirely, in a quest for profit," the New York Times reported. "In an initiative called Project Scarlett, Washington Mutual slashed its due diligence staff by 25% as part of an effort to bolster profit."

And yet what is the J.P. Morgan board's response? CEO Jamie Dimon lays off staff -- or fails to hire those his bank needs -- and the board, until the London Whale trading disaster last year, paid him record bonuses for record profits.

J.P. Morgan is in good company. Most boards continue to give huge bonuses to execs while they lay off workers.

HP's Meg Whitman has a net worth of $1.7 billion, according to Forbes (as of September 2012). And the company is in such bad shape, it seems, that it needs to cut nearly 30,000 employees. So the HP board used its own "pay for performance philosophy" to justify annual compensation of over $15 million for Whitman for 2012. While her 2012 office may have been small (you can see it here), the accounting showed she traveled in grand style last year. Her paycheck included $200,000 for personal aircraft use. (That alone is the equivalent of a job or two.)

What happened to the idea of shared pain? One of the most insincere signs I see hanging in some corporate offices is the poster that says, "TEAM – together everyone achieves more." Boards should make sure they live up to that sign -- or take it off the wall.

At Research in Motion, now Blackberry (BBRY), employees in Halifax complained last year that the company's layoffs were inhumane, according to the Chronicle Herald in Canada. But many workers don't speak out.

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According to Uchitelle, "the real solution isn't some silver bullet. It's a realization among workers, people, that … they can push back. They don't have to surrender."

Layoffs aren't inevitable. "When we started the layoffs in the late '70s, even the Catholic Church was putting out pastoral letters against layoffs and stopped doing so.  We, all of us, have pulled back," he said.

To reignite a valuable dialogue on the benefits of job security, shareholders need to rebuke bonus pay for corporate executives at companies like J.P. Morgan, which plans 17,000 in staff cuts and HP, which is chopping 29,000. No votes on pay would send a clear message that when executives determine they need to cut staff, boards should slash their bonuses too.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm.

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About This Author
Eleanor Bloxham
Eleanor Bloxham
Contributor, Fortune

Eleanor Bloxham, an authority on governance and valuation, is CEO of The Value Alliance and Corporate Governance Alliance, an independent board and executive educational and advisory firm she founded in 1999. She is author of the books Value Led Organizations and Economic Value Management: Applications and Techniques, and publisher of the Corporate Governance Alliance Digest and her blog The Bloxham Voice.

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