On The Way To Socially Responsible Restructuring

Ethik-Zentrum der Universitt Zrich
"On the way to Socially Responsible Restructuring

An Ethical Investigation into some of the Moral Dimensions
of Corporate Downsizing
Diplomarbeit
Im Rahmen des Nachdiplomstudiengangs 2005 2007
Master of Advanced Studies in Applied Ethics (MAE)
von
Arturo Giovanoli
Josefstrasse 176
8005 Zurich
January 19, 2007
Erstgutachter: PD Dr. Stefan Grotefeld

Zweitgutachter: Prof. Dr. Peter Schaber
Tutor: lic. theol. Stefan Gruden
Table of contents
PREFACE .................................................................................................................................. 1
1. Downsizing in context............................................................................................................ 2
1.1 The Economic Environment - An Overview.................................................................... 2
1.2 On Restructuring .............................................................................................................. 2
1.3 On Downsizing................................................................................................................. 4
1.3.1 The Impact of Downsizing on Employees ............................................................ 6
1.3.2 Crisis Management and Downsizing..................................................................... 7
1.3.3 Downsizing Strategies........................................................................................... 8
1.3.3.1 Alternatives to Downsizing Strategies ...................................................... 9
1.4 Conclusion...................................................................................................................... 10
2. Ethical Considerations of Downsizing................................................................................. 12
2.1 Introduction .................................................................................................................... 12
2.2 Socially Responsible Restructuring ............................................................................... 12
2.2.1 Definitions of Corporate Social Responsibility .................................................. 13
2.3 The Theories of Social Responsibility ........................................................................... 14
2.3.1 The Stockholder Theory...................................................................................... 14
2.3.2 The Stakeholder Theory ...................................................................................... 16
2.3.3 Stockholder and Stakeholder Theories on Downsizing ...................................... 18
2.4 The Aspects of Corporate Downsizing .......................................................................... 19
2.4.1 Property Rights.................................................................................................... 19
2.4.2 Fiduciary Duties .................................................................................................. 21
2.4.3 Risk...................................................................................................................... 23
2.4.4 Contracts.............................................................................................................. 24
2.4.5 Other Peoples Money......................................................................................... 25
2.4.6 Private vs. Public................................................................................................. 25
2.4.7 The Utilitarian Argument .................................................................................... 26
2.5 Arguments Against Downsizing .................................................................................... 27
2.5.1 Rights and Duties ................................................................................................ 29
2.5.1.1 Introduction ............................................................................................. 29
2.5.1.2 The Rights of Employees ........................................................................ 30
2.5.1.3 The Rights to Job Security and due Process in Firing............................. 30
2.5.1.4 The Right to Information......................................................................... 30
2.5.1.5 The Right to Co-determination ............................................................... 31
2.5.2 Fairness................................................................................................................ 31
2.6 Conclusion...................................................................................................................... 36
3. Overall Conclusion............................................................................................................... 37
4. Bibilography......................................................................................................................... 38
5. Selbstndigkeitserklrung .................................................................................................... 40
PREFACE
Researchers and thinkers do not always agree that a company has economic, legal, moral and
social responsibilities. Some do not even believe that companies have a moral responsibility;
others believe that moral and social responsibilities come second to economic and legal
responsibilities. This paper sets out to analyze a topic that has received much attention in
recent years, and around which there has been much debate, dispute, and confusion. This
topic, that has direct relevance to the question of corporate social responsibility in the
developed world in general, is corporate downsizing.
Various researchers have proved empirically that downsizing very often does not achieve its
immediate objective, which is to increase the efficiency of the company. It also comes at a
price. At the top of the casualty list stand the employees. In a society where individuals are
what they do, downsizing implying layoffs can inflict irreversible harm to their self-esteem.
In addition to the personal emotional trauma for the employee, it is important to take account
of the negative impact on the families of employees who have experienced downsizing, not
forgetting the economic burden placed on the communities where layoffs have occurred.
Downsizing shatters the belief that good performance leads to reward and positive
recognition.
The first part of this paper will briefly summarize the forces at work. These are the changes in
the external environment which underlie such a dramatic increase in restructuring and the
need for downsizing. The paper will investigate some of the impacts of downsizing on the
human resource element, and will continue by presenting some of the concepts of downsizing
and the approaches most frequently encountered in its application as the most visible form of
restructuring.
The second part is a brief analysis of the concepts of socially responsible restructuring and of
the two theories commonly used in the context of corporate social responsibility. It goes on to
analyse the question of the moral justification of downsizing and also considers some of the
arguments advanced by Orlando1 who dismisses the moral permissibility of certain
downsizing actions, unless being performed in an attempt to prevent the collapse of the
company.
Cf. Orlando, J., (1999): The fourth wave: The ethics of corporate downsizing. Business Ethics Quarterly,
Volume 9, Issue 2, pp 295-314.
I will argue that downsizing is, very often, to be considered morally wrong except if it occurs
uniquely with the aim of safeguarding the survival of the company and escape bankruptcy. I
will make my case by examining the concepts of corporate social responsibility and
dismissing the arguments commonly advanced in justifying the various acts of downsizing as
an attempt to maximize short-term stockholder wealth.
1. Downsizing in context
1.1 The Economic Environment - An Overview
Business leaders throughout the world agree on at least one thing: the new millennium will
bring new challenges along with continuous and rapid change. Globalisation of markets, the
increasing intensity of competition, deregulation and trade liberalisation, a rapid proliferation
of new technology, as well as changing societal expectations and values are combining to
create a turbulent environment in perpetual movement which is becoming increasingly
complex across all sectors of the economy and in all regions of the world. It is hardly
surprising that an increasing number of paradoxes are emerging as countries move from
industrial economies to knowledge and information-based post-industrial economies. At the
same time, many companies working in developing countries or in emerging economies are
moving from being suppliers of basic commodities to being increasingly sophisticated
producers and marketers of products to the developed world.
1.2 On Restructuring
As a result of the volatile and chaotic changes in the external environment, few companies
have escaped the need to restructure. Organizations and their constituents must change in
order to compete and survive in a rapidly changing, globally competitive, dynamic world. In
fact, part of the dilemma which currently faces us is that, increasingly, organizations are
going through these changes, not out of choice, but through necessity. The triggering events
and reasons for restructuring include:
Survival of the enterprise: There are many reasons why a company may face
bankruptcy or a hostile takeover if immediate survival measures are not taken. Past
profits may have turned into losses, foreign competition may have seized a major
share of the market, or the cash flow (including lines of credit) may be inadequate to
finance cash requirements despite the companys profitability.
Temporary or permanent shrinking market demand or overcapacity: The

dramatic increase in supply and the drop in demand in the automotive industry have
created a crisis for many suppliers,2 as has overcapacity in certain sectors throughout
the world. Even Asia's huge electronics industry is beginning to react as major
semiconductor producers forge supranational alliances to stay in business. Others are
beginning to outsource, merge, seek out joint ventures and share research and
development costs and risks.
Competitiveness: Deregulation or a lowering of tariffs can confront many companies

which have benefited in the past from various forms of protection from foreign
competition. Dramatic changes may be required for them to remain viable under new
rules of competition. Such changes as these increasingly require constant adaptation of
company structure and resources to the economical environment.
Pressure from financial markets and stockholders: A great deal has been written
about the strong influence that financial institutions, analysts and markets bring to bear
on the management of listed companies to adopt very short-term perspectives in their
decision making, although this may be to the detriment of the longer-term
development and competitiveness of the enterprise.
Poor management: In some cases, the origin of the need to restructure is to be found
in the short-term focus, the poor strategic decisions, and the failure on the part of
management itself to reliably recognise and anticipate the consequences of the
changing environment.
Privatization: This is a further stimulus to restructuring in cases where companies can

no longer rely on subsidies and the favoured treatment that they once enjoyed as stateowned companies. In state-owned enterprises, the workforce is often inflated in
relation to market potential and to the competition. Restructuring programmes may be
part of pre-privatization preparation but may well continue once privatization has
occurred.
GMs November 2005 announcement that it would cut 30,000 blue-collar jobs by 2008 came as little surprise.
The company made a tremendous loss of several billion dollars US. It has been predicted that the US Big
Three and their suppliers could cut as many as 75,000 jobs before this latest round of restructuring is over.
Structural changes: A shift from an individual economy to a knowledge- and

information-based economy is taking place. Human capital is replacing financial
capital as the most important strategic resource. Traditional concepts of work, jobs,
and motivation are being seriously challenged.
Restructuring takes many forms and the term covers a wide variety of different actions3 but
unfortunately, management4 often turns first to the reduction of labour costs. As a result,
restructuring has become synonymous with downsizing, a euphemism for layoffs.
1.3 On Downsizing
Corporate downsizing is a concept that is somewhat elastic. In a general perspective,
however, it is used to describe different types of corporate renewal. In defining downsizing, I
will employ four attributes of downsizing: (1) downsizing is an activity that members of an
organization undertake in a purposeful manner; (2) downsizing typically involves a reduction
in personnel; (3) the focus of the downsizing activity is on improving effectiveness and/or
efficiency in the organization; and (4) downsizing affects the work processes (directly or
indirectly) within an organization.5
Although downsizing was largely associated with the restructuring of heavy industry, thereby
affecting blue-collar workforces, these cutbacks now affect the composition of virtually all
industries, regions, companies and employees at all levels of skill and education. Furthermore,
the practice of downsizing has swept through organizations across the board, both public and
private. Even organizations and companies which had formerly prided themselves on
maintaining employment security for their employees (e.g. Die Post, SBB Schweizerische
Bundesbahnen, Swisscom, Migros Genossenschaftsbund among others) have had to resort to
downsizing to improve efficiency and to change the course of organizational decline. 6
Sometimes, downsizing occurs because it is the proper thing to do in response to the natural
cycles of the economy. When markets shrink, companies and industries must consolidate and
3
4
5
For purposes of this paper, I will define restructuring as the deliberate modification of formal relationships
among organizational components. It may also include changing the portfolio of existing businesses
(rationalisation, selling off unproductive divisions or activities, entering new businesses either through
acquisition or internal growth). Restructuring can also involve and impact various stakeholders such as
employees, suppliers and other business partners.
For the purpose of this paper the term management includes both directors and officers of companies.
Cf. Freeman S. J., and Cameron K. S., (1993): Organizational Downsizing: A Convergence and
Reorientation Framework. Organization Science, vol. 4, no. 1, pp. 10 - 29.
For the purpose of this paper, when I speak of organizational decline, I am referring to a prolonged decrease in
the number of personnel in an organization. This term is closely affiliated with, and sometimes used
interchangeably with, downsizing.
streamline (though some companies can anticipate and do move into better markets) and
technological changes and globalization can add to the pressure to downsize. Such natural
economic forces have always existed and often led to layoffs, but they alone cannot explain
the magnitude and scope of the widespread downsizing practices today.
The rationale behind downsizing is complex. A thorough discussion of why companies should
downsize can be found in, Reengineering the Corporation7. The authors claim that the
payoffs for downsizing include reduced business-related costs in the short-term and increased
customer satisfaction. Downsizing, as a practice to improve organizational performance has
been widely debated. The positive effects suggested in the literature are that downsizing
reduces operating costs, enhance short-term financial performance, eliminates unnecessary
levels of management, enhances the overall effectiveness, make an organization more
competitive, enables management to eliminate redundancies, and may save the company from
continuing financial deterioration and possible bankruptcy.8 The bottom line is that
downsizing increases profits for companies in the short-term because it provides a mechanism
for suppressing wage costs associated with employees. This has led the management perceive
that downsizing is unavoidable and good for the economy. In some cases, the management
claims that mass layoffs are driven by factors beyond their control. For example, lost jobs are
often blamed on technological advances (e.g., machines are simply more efficient and more
cost effective than people) or by more efficient competitors.
However, Greenberg9 reported that 56 % of the more than 700 companies surveyed by the
American Management Association indicated that downsizing was an on-going strategy to
reduce corporate overhead costs in response to current or anticipated business problems. This
trend toward continuous corporate restructuring presents a fundamental, permanent change in
organizational strategy signalling a radical shift in many corporate philosophies and
strategies. Furthermore, he reveals that downsizing generally fails to improve performance,
productivity, or long-term profits. Approximately two-thirds of downsized companies have
not realized productivity gains, and most executives who cut back on personnel report
unanticipated negative side effects. Many reasons are cited for the failure of downsizing, such
7
8
Cf. Hammer, M., and J. Champy, (1994): Reengineering the Corporation, New York: Harper Business.
Cf. Cappelli, P., (2000): A Market-driven Approach to Retaining Talent, Harvard Business Review 78, pp.
103-104; and De Meuse, K.P., T.J. Bergmann, P.A. Vanderheiden and C.E. Roraff, (2004): New Evidence
Regarding Organizational Downsizing and a Firms Financial Performance: A Long-term Analysis, Journal
of Management Issues 16, pp. 155-161.
Cf. Greenberg, E., (1996): AMA Survey on Downsizing Job Elimination and Job Creation, American
Management Association, New York. (www.amanet.org/research/archives.com, January 5, 2007).
as a lowering of morale, an exodus of the best people, the loss of organizational memory and
increased conflict.
Furthermore, various studies show that (mostly in the long-term) downsizing affects rather
negatively the companies that have downsized.
10
In the short run, it creates the illusion that
decisions are being made and actions undertaken11 and in the long-term it does not yield any
performance gains 12 and may undermine the companys competitive advantage. 13
Concepts such as corporate loyalty and lifetime employment are being replaced by new
interpretations of employment-at-will as companies routinely dismiss employees in the name
of organizational survival or simply as a managerial prerogative. This raises many ethical
issues regarding the relationship between a company and its stakeholders, in particular the
relationship with its employees, one of the most important stakeholder groups.
1.3.1 The Impact of Downsizing on Employees
Most people in industrialized countries spend a large percentage of their adult years and
expend a major part of their energy at work. Work experience strongly shapes an individuals
identity, their sense of self-esteem and the extent to which they can contribute to community.
In other words, their employment not only supplies a livelihood, but structures their lives with
meaningful activity. However, downsizing has changed the ways in which companies and
their employees relate. Traditionally, loyalty was rewarded with security. Hence, as so many
companies downsize, they are no longer able or willing to guarantee lifelong employment.
When companies downsize they often discover that employees have become suspicious and
less productive. When employees feel less loyal, they focus on protecting their self-interests
rather than on working for the purpose of the company.
The many studies focusing on the impact of downsizing on the surviving workforce have
concluded that, depending on in-house and outside environmental conditions, downsizing
may impact a range of work behaviours and attitudes among the survivors. Survivors reactions to downsizing have potentially important implications on the survival of companies
10
Cf. Budros, A., (1999): A Conceptual Framework for Analysing Why Organizations Downsize,
Organization Science 10, pp. 69-83; and Vanderheiden, P.A., K.P., De Meuse, and T.J. Bergmann, (1999):
Response to Haars Comment- and the Beat Goes on: Corporate Downsizing in the Twenty First Century,
Human Resources Management 38, pp. 261-268.
11
Cf. Glebbeek, A.C. and E.H Bax, (2004): Is High Employee Turnover Really Harmful?An Empirical Test
Using Company Records, Academy of Management Journal 47, pp.277-286.
12
Cf. Casio, W.F., (2002): Strategies for Responsible Restructuring, The Academy of Management Executive
16, pp. 80-91.
13
Cf. Chadwick, C., L.W. Hunter and S.L. Walston, (2004): Effects of Downsizing Practices on the Performance
of Hospitals, Strategic Management Journal 25, pp. 405-427.
themselves.14 Empirical research dealing with organizational decline and downsizing has been
associated with low levels of morale15 (due to the loss of leader credibility,16 or increased
uncertainty and ambiguity17), heightened level of mistrust and insecurity,18 and a decrease in
participation and greater emphasis on control. 19 For the most part, the variables cited in these
research papers dealt with the emotional or attitudinal variables pertaining to employees
relationship to their company.
From this review of the extensive literature , both theoretical and practical, I conclude that, to
a large extent, companies can avoid the need to downsize by adopting more appropriate
strategies as described below in section 1.3.3.1 of this paper.
1.3.2 Crisis Management and Downsizing
Organizational responses to decline fall into two major categories, namely, the strategic
responses designed to cope with conditions of decline20 and the structural responses
consisting of the internal changes that occur within the company itself.21 Literature on
management deals mainly with the effective management of crises in order to minimize (1)
the potential loss to the company, and (2) the adverse impact on the well-being of the
members of the organization, since organizational crises produce individual crises which take
the form of stress.22 Consequently, organizational responses to a crisis23 will depend to a large
extent on how individuals respond to the stress engendered by the crisis, since it is these same
individuals who determine the organizations responses to the crisis.
14
Cf. Brockner, J., Grover S., O'Mally M., DeWitt R., Reed T., and Glynn M., (1992): "Layoffs, Job Insecurity
and Survivors' Work Effort, Academy of Management Journal, vol. 35, no. 2, pp. 413-426. The results of the
study showed that as job insecurity moved from low to moderate levels, work effort increased. However, as
job insecurity moved from moderate to high levels, work effort decreased.
15
Cf. Billings, R. S., Milburn T. W., and Schaalman M. L., (1980): A Model of Crisis Perception: A
Theoretical and Empirical Analysis, Administrative Science Quarterly, vol. 25, pp. 300-316.
16
Cf. Kantz, J., (1985): Group Processes under Conditions of Organizational Decline, Journal of Applied
Behavioral Science, vol. 21, pp. 1-17.
17
Cf. Hall, D. T., and Mansfield R.: (1971): Organizational and Individual Response to External Stress,
Administrative Science Quarterly, vol. 16, pp. 533-547.
18
Cf. Hardy, C., (1987): Investing in Retrenchment: Avoiding the Hidden Costs, California Management
Review, vol. 4, pp. 111-27.
19
Cf. Cameron, K., (1983): Strategic Responses to Conditions of Decline, Journal of Higher Education, vol.
54, no. 4, pp. 359-80.
20
Cf.Cameron: supra note 19.
21
Cf. McKinley, W., (1987): Complexity and Administrative Intensity: The Case of Declining Organizations,
Administrative Science Quarterly, vol. 32, pp. 87-105.
22
Cf. Hardy, C.: supra note 18.
23
Crises originate in either the external environment or the internal environment, that is, from within the
organization itself.
However, when management makes the strategic decision to downsize, two ethics-related
issues arise concerning (1) the moral obligation of the management to act in the best interests
of the company, and (2) the legal obligation of the management not to violate the legal and
moral rights of employees.
Therefore, in consideration of the above, and if we believe that the way an individual is
treated is important on a moral level, (quite aside from any effects that a companys attitude
may have on others), management has an obligation to take a moral standpoint towards their
employees. In other words, an individual is regarded as having moral status if, when morally
relevant decisions are made, his/her welfare is taken into account for his/her own sake and not
merely for the companys, or a third partys, benefit.
1.3.3 Downsizing Strategies
Companies typically respond to organizational decline by reducing the scale of their
operations, which usually implies cutting the workforce in some way.
The two most
commonly used techniques for adjusting the workforce are (1) offering early retirement and
(2) practising forced resignation or layoff, both of which will now be discussed.
All early retirement programs have one element in common: a financial stimulus to retire
before the normal age of retirement. The degree of incentive is determined by the company's
capability to fund the cash requirements, and the amount of personnel trimming needed. A
potential problem with early retirement programs is that valued employees with highly
desired skills may be motivated into leaving the company, which consequently impacts the
managements moral obligation to act in the best interests of the company.
Layoffs likewise reduce operating costs by trimming the workforce, although the strategies in
this case differ from those of early retirement in that the decision as to who will leave rests
with the company. Layoffs could be viewed as a reactive response to organizational decline,
whereby little regard is given for the human resource element in the company. This
diminished consideration for human resources, which represents a violation of the moral
rights of employees, tends to have a negative impact on individuals self-esteem.
Furthermore, Hardy
24
argues that there are numerous other methods (for instance, attrition,
severance pay to induce attrition, outplacement assistance, transfers to other locations,

retraining allowances, work sharing, and leaves of absence) of achieving downsizing that
take into consideration the needs of the company, as well as the well-being and self-esteem of
24
Cf. Hardy, C.,: supra note 18
employees, both those who leave and those who remain. As such, these methods may be
viewed as being more proactive and they could well reduce many of the uncertainties
associated with layoffs. In turn, the employees remaining in the company might be persuaded
that the actions taken were designed not only to increase efficiency and profitability, but also
in full moral respect of the rights of the employees.25
Outplacement programs afford a means for managers to express their concern for employees
whose employment contract has been terminated. It is common practice today for companies
to provide counselling, coaching, help and advice for job hunting, interview techniques,
career planning, and curriculum vitae writing for the employees they decide to fire. Upwards
of 84% of companies report offering outplacement services to workers displaced due to
downsizing.26 Services such as these can help the downsized employee cope with the
psychological issues surrounding job loss and facilitate an active search for
reemployment. By expediting the search for a new job, the length of unemployment may
be reduced.27 Such assistance may also foster the perception that the management of the
company is genuinely concerned and sincere in its efforts to assist displaced employees.
1.3.3.1 Alternatives to Downsizing Strategies
Other methods beside those described above may be applied in downsizing programs and
these help minimize, and may even eliminate, the negative impact of downsizing on the
employees. These alternative techniques are summarized under the following headings:
Rightsizing: A company, based on an in-depth assessment of mission-critical work and

its staffing requirements, develops a short- and long-term human resource plan, which is
communicated to the employees. Subsequently, training is given as needed; employees are
moved internally; and new hiring is tightly monitored.28 This type of disciplined human
resource management is a proactive way to restructure the company on an on-going basis.
Constant vigilance of this type helps ensure that the organization does not grow the layers
of "fat" which commonly leads to drastic downsizing activities.
25
Cf. Perry, L. T., (1986): Least-Cost Alternatives to Layoffs in Declining Industries, Organizational
Dynamics, vol. 14, no. 4, pp. 48-61.
26
Cf. Greenberg, E. R., (1994): AMA Survey on Downsizing and Assistance to Displaced Workers, American
Management Association, New York. (www.amanet.org/research/archives.com, January 5, 2007).
27
Cf. Latack, J. C., and H. G. Kaufman (1988): Termination and Outplacement Strategies, in M. London and
E. M. Mone (eds.), Career Growth and Human Resource Strategies (Quorum Books, New York), pp. 289313.
28
Cf. Morrall, A. Jr., (1998): A Human Resource Rightsizing Model for the Twenty-First Century, Human
Resource Development Quarterly, pp. 81-88.
Passive Downsizing: Reich claims that if downsizing is done passively through buyouts
and attrition, the company will end up far better positioned for long-term success. If
layoffs are inevitable, companies should provide outplacement services. Better yet, to
avoid laying off blue-collar workers, companies should re-train them for white-collar jobs,
which are more appropriate in this information age. The pay-off is in the extra effort
(higher productivity and performance) received as a result of the good will, employee
loyalty, and the trust the company has earned. Reich reminds us that the "employees are
closest to customers [. . .] to production processes [. . .] to technology." They are the
people who will make the process improvements and quality enhancements that will
improve productivity and customer satisfaction29 and thereby ultimately ensuring the
survival of the company.
Combination Approach: Generally, downsizing practices run counter to highperformance practices. Yet, more and more companies are combining these two
approaches as part of their restructuring programs. Downsizing helps break down the
traditional organization chart, facilitating the introduction of cross-functional teams,
empowerment, and broad job descriptions. This model provides a clear vision for the
employees who remain, tearing down the old system while at the same time erecting a
new, improved structure. Without a clear vision, the future can become rather uncertain
and bleak for the survivors of downsizing.
1.4 Conclusion
Downsizing is hard to resist because it is firmly implanted in business culture and mostly
justified by general beliefs about proper economic policies and norms of practice. The very
nature of a world economy embracing free markets and free enterprises implies constant
change and adaptation to the dynamics of the system. Although there are alternative strategies
and techniques (which take into consideration the interests of the stakeholders, both internal
and external) to restructure a company, management often turns first to reduction of labour
costs. As a result, restructuring has become synonymous with downsizing.
The review of the research on downsizing has proven that the impact of downsizing goes
beyond mere economic considerations. Companies are often caught in a powerful social
movement that compels management to eliminate jobs even when cuts are not fully justified
economically. The method chosen to downsize affects not only the companys economic
29
Cf. Reich, R., (1996): Performance Strategies: Q&A. Successful Meetings, pp.56-61.
10
status but also the self-esteem and well-being of the workforce, the success of current and
future business strategies, and the companys culture and image. Many reasons are cited for
the failure of downsizing, among which are the lowering of morale, and increased uncertainty,
and ambiguity heightened level of mistrust and insecurity, and a decrease in participation and
greater emphasis on control.
Restructuring implying downsizing is part of the current economic reality but this does not
mean it is morally justified. In my view, what is truly disturbing is first the shift in perception
of layoffs as a last resort to be used only in times of economic desperation, to a first resort
utilized in good times in an attempt to maximize short-term profit; and second the
disrespectful way the management of some companies are treating their employees when
circumstances require them to be let go. However, in no way do I wish to give the impression
that every company has handled downsizing poorly. It should be noted that several have
conducted highly ethical closings.
11
2. Ethical Considerations of Downsizing

2.1 Introduction
Orthodox neoclassical economic theory implies that it is managements job to employ
efficiency as a means of maximizing stockholder profit. They should optimize the allocation
of the companys scarce resources in such a way to reach Pareto Optimality.30 This position is
commonly considered to be morally correct in orthodox neoclassical economics. Although, in
my opinion, the principles of efficiency, competition, and profit making are not unethical
when prudently applied, they become quite problematic when a corporate culture ceases to be
morally responsible to its employees and to the community in general. This is specifically the
case when management downsizes for other reasons than purely to ensure the survival of the
company, and generally as a means of maximizing profit. More often than not, acts of
downsizing do not lead to improved performance and productivity, or any sustainable
increase in long-term profit.31
In evaluating whether downsizing that is not intended as a last resort to ensure the survival of
the company is ethically justifiable, I will elucidate the concept of socially responsible
restructuring and then shortly summarize the two theories commonly used in the context of
social responsibilities as a rationale for the moral justification, if any, of downsizing and,
finally, analyze some of the arguments advanced by Orlando32 in arguing the moral
impermissibility of downsizing.
2.2 Socially Responsible Restructuring
The concept of socially responsible enterprise restructuring as promulgated by the
Entrepreneurship and Management Development Branch of the International Labour
Organization (ILO) and the European Bah' Business Forum means restructuring part or all
of an enterprise in a manner that balances and consciously takes into consideration the
interests and concerns of all the stakeholders who are affected by the changes and decisions.
30
The Concept of Pareto Optimality refers to a situation in which nobody can be made better off without making
somebody else worse off. Named after V. Pareto (1843 1923), an Italian economist. If an economys
resources are being used inefficiently, it ought to be possible to make somebody better off without anybody
else becoming worse off. In reality, change often produces losers as well as winners. Pareto efficiency does
not help judge whether this sort of change is economically good or bad. (Source:
www.economist.com/research/Economics/alphabetic.cfm?term=pareto, January 7, 2007).
31
Greenberg, E.,: supra note 9.
32
Orlando, J.,: supra note 1.
12
In practice, the emphasis must be on enhancing the overall stakeholder value and not be
limited to short term shareholder gains.33
The concept clearly refers to restructuring, but considering that restructuring very often turns
out to be reduction of labour costs implying layoffs, it is in my opinion appropriate to apply it
to downsizing. So the key issue is often not whether to downsize, but rather how to do it
responsibly, i.e., in a way that takes into account the interests of the stakeholders involved.
Although the definition set out above refers to the stakeholder theory, it does not explicitly
define the concept of corporate social responsibility (CSR). Therefore, I will later provide a
definition of corporate social responsibility and then briefly elucidate the two commonly
referred to theoretical concepts of the social responsibility of the company.
2.2.1 Definitions of Corporate Social Responsibility
A comprehensive definition of corporate social responsibility was provided by Frederick, Post
and Davis. They state: Corporate social responsibility means that a corporation should be
held accountable for any of its actions that affect people, their communities, and their
environment. It implies that negative business impacts on people and society and should be
acknowledged and corrected if at all possible. 34
The review of literature on CSR did not identify any challenges to the status of profits in the
context of social responsibility. On the contrary, the notion of profit as the basic economic
mission of business has been a main assumption for almost all authors. The term socially
profitable business refers to all types of payoffs necessary to meet the expectations of those
interacting with business, including economic profit expectations.
Steiner and Steiner35 define CSR as follows: The major social responsibility of a company is
to operate profitably and utilize efficiently the resources at its disposal. While important,
other activities relating to the use of corporate resources to further national goals, employee
and community welfare, or other social interests, are today second to this purpose, and except
for a limited number of cases are pursued to contribute to the achievement of the first purpose
in the short and in the long run. They also concede that the maximization of profit is no
33
Source: www.ilo.org/dyn/empent/docs/F795877461/Starch_1.pdf, December 31, 2006.

Cf. Frederick W., Post J., and Davis K., (1992): Business and Society: Corporate Strategy, Public Policy,
Ethics, 7th ed. New York: McGraw-Hill, p. 30.
35
Cf. Steiner G. A., and Steiner J. F., (1994): Business, Government, and Society: A Managerial Perspective,
7th ed. New York: McGraw-Hill, pp. 162 -163.
34
13
longer a workable doctrine for business stating, "the economist's strict concept of profit
maximization is not an acceptable operational goal for today's larger corporation."
For the purpose of this paper, I will agree with the definition of CSR provided by Frederick,
Post, and Davis due to the fact it better considers the fact that companies reacts to prevailing
social norms, values, and performance expectation and therefore should be held accountable
for the ecological, environmental, and social costs directly incurred by their actions.
2.3 The Theories of Social Responsibility
This section contains a short examination of the two widely discussed theories of corporate
social responsibility. In presenting these, consideration will be given to the issue of how each
of the theories responds to the issue of maintaining a proper balance between the economic
and non-economic responsibilities of companies. The main theories that have emerged
regarding corporate social responsibility are the stockholder and the stakeholder theories.
2.3.1 The Stockholder Theory
The probably most famous statement of this theory has been given by Friedman who refers
ironically to this as a social responsibility. As he states, "There is one and only one social
responsibility of business to use its resources and engage in activities designed to increase its
profits so long as it stays within the rules of the game, which is to say, engages in open and
free competition, without deception or fraud.36
According to the stockholder theory, management is under a strict fiduciary duty to act for the
owners of the company, who advance capital to be utilized only to realize pre-specified
(contractual) goals, and for which they receive an ownership interest in the venture. The
existence of this fiduciary relationship imposes on the management (in their capacity as
officers of the business) the duty not to divert business resources away from the purposes
expressly authorized by the stockholders. Consequently, managements first obligation is to
the stockholders to protect and promote their economic interests.37 Fundamentally speaking,
the stockholder theory holds that managers are obligated to adhere to the (legal) directions of
the stockholders.
36
Cf. Friedman, M., (1970): The Social Responsibility of Business is to Increase its Profit, New York Times
Magazine, September 13, 1970.
37
Cf. Jones T., (1980): Corporate social responsibility revisited, redefined, California Management Review,
spring, pp. 59-67.
14
In my opinion it is essential to note that the stockholder theory (as a normative theory) states
that the management are obligated to pursue profit by all legal, non deceptive means, but does
not assert that they may ignore all ethical constraints in the pursuit of profits. According to the
theory, the nature of the business environment itself imposes a basic duty of honest dealing on
business people. However, the theory also claims that if there are to be any more extensive
restrictions on the management, it is the role of society as a whole to impose them through the
legislative process. This approach clearly defines managements' ethical obligations, partially
in terms of their legal obligations, and implies that their ethical obligations will change as the
legislation relevant to the business environment changes. At any particular point in time, the
theory can be understood as asserting that a business or business person must refrain from
engaging in deceptive practices and violating the laws of the land as they exist at that time.
The stockholder theory is often associated with the type of utilitarian argument frequently
advanced by free market economists. Thus, supporting arguments often begin with the claim
that when individual actors pursue private profit in a free market, they are led by Adam
Smith's invisible hand to promote (directly and/or indirectly) the general (social) interest as
well. Consequentially it can be concluded that there is no justification for claiming that
businesses or business persons have any social responsibilities other than to legally and
honestly maximize the profits of the venture. The Smithian view of the market system implies
that the system is allowed to operate according to its own laws and will align through the
stabilizing equilibration of supply and demand -- selfish interests with common interests.
However, the market system is not completely self-regulating; trade is possible only within a
framework of law and fair dealing and some of the feedback mechanisms (such as the
tendency for resource prices to reflect short-term supply) have destabilizing effects. However,
managing a company is a matter of applying controls in areas where they are needed, and
ethical behavior is one of these areas.
Yet even after rejecting a naive faith in a self-regulating economy and accepting the economic
importance of moral dispositions, one may doubt the need to professionalize business. The
business virtues of industry, honesty, trust, and so forth, are the same for humanity in general.
The key players in business, however, are the individual belonging to the management, and
considering that their decisions collectively make the difference between economic growth
and prosperity on the one hand, and decline and the social decay that inevitably follows on the
other, the reluctance to burden them with obligations beyond those of making a profit and
adhering to the traditional virtues cannot be fully justified.
15
However, Orlando,38 in challenging the assumption that the interests of stockholders take
priority over those of employees, argues for moral equality. This equality implies that, for
downsizing to be permissible, it must be justifiable from a utilitarian perspective, taking into
account the interests of both stockholders and workers. Yet, he argues that the utilitarian case
for downsizing is unproved and that there are at least three moral arguments against it, which
I will summarize in section 2.4 of this paper.
2.3.2 The Stakeholder Theory
According to Sethi, the stakeholder theory holds that there are other constituents than the
stockholders of the company to whom corporate managers are directly responsible.39 These
constituents are groups that are likely to be affected, either directly or indirectly, by the
decisions of the management, thus they are said to have a stake in the company. Therefore,
the theory requires the manager to give balanced consideration to the legitimate interests of all
those who have a stake in the company.
In its normative form, the stakeholder theory asserts that managers have the obligation to
manage the business understood as a vehicle for coordinating stakeholder interests, with a
management which has a fiduciary relationship to all stakeholders in the interests of all
stakeholders regardless of the impact on financial performance, and to ensure its survival by
balancing stakeholders conflicting claims. Hence, the theory does imply that businesses have
social responsibilities, namely in a richer sense than stated by Friedman.
In order to fulfil their obligations, the management must act in accordance with two distinct
principles of stakeholder management:
1. The principle of corporate legitimacy requiring that the company should be managed for
the benefit of its stakeholders. The rights of these groups must be ensured and, further, the
groups must participate, in some sense, in decisions that substantially affect their
welfare.40
2. The stakeholder fiduciary principle which, according to Goodpaster, states that the
management bears a fiduciary relationship to stakeholders and to the company as an
abstract entity. It must act in the interests of the stakeholders as their agent, and in the
38
Orlando J.: supra note 1.

Cf. Sethi P., (1997): Dimensions of Corporate Social Performance: An Analytical Framework., In A.
Carroll (ed.), Managing Corporate Social Responsibility Boston: Little, Brown & Company., pp. 69-75.
40
Cf. Evan W.E., and Freeman R.E., (1993): A Stakeholder Theory of the Firm: Kantian Capitalism, in
Ethical Theory and Business, ed. Tom L. Beauchamp and Norman E. Bowie (Englewood Cliffs, N.J.:
Prentice-Hall, 1993), p. 82.
39
16
interests of the company to ensure the survival of the firm, safeguarding the long-term
stakes of each group. 41
Two reasons are typically given for the inclusion of non-stockholders among the stakeholders.
Firstly, they have usually entered into an explicit and implicit contractual or contract-like
agreement with the company or its members, or secondly, they are directly affected by the
decisions of the management. There is, however, a difference of opinion among theorists
about who the actual or legitimate constituents of a company are, and this also affects the
definition of stakeholder. Ackoff
42
contends that only those who are directly or primarily
affected by the actions of a company are its stakeholders. Others, like Freeman,43 extend the
definition to anyone who may directly affect the company. The latter definition essentially
makes everyone a stakeholder of a company, even those who are actually non-members,
because nearly everyone can affect company directly or indirectly.44
The most commonly endorsed argument for the stakeholder theory is that concerning
performance, which is advanced by some strategic management theorists such as Ackoff,45
who emphasizes the advantages that company amass in applying the stakeholder approach.
He believes that the long-term survival of a company is improved when it responds to
stakeholder interests as a major part of corporate strategy. Furthermore, he argues that the
various elements of the overall social system function more efficiently and coherently when
management respects the interests of stakeholders.
A principal assumption of those stakeholder theorists who endorse the performance argument
is that corporate managers are only accountable for the direct effects of their corporate
decisions (as it is specifically the case when company downsize). It is agreed, however, that
they cannot be sufficiently informed about the indirect effects of their corporate actions.
41
Cf. Goodpaster K.E., (1991): Business Ethics and Stakeholder Analysis in Ethical Issues in Business, ed.
Thomas Donaldson, Patricia H. Werhane and Margaret Cording (Upper Saddle River,: N.J.: Patience Hall ,
2002), p. 49-60.
42
Cf. Ackoff R., (1981): Creating the Corporate Future, New York: John Wiley and Sons.
43
Cf. Freeman R. E., (1984): Business Management: A Stakeholder Approach. Boston: Ballinger.
44
For the purposes of this paper, I will use the term stockholders in its narrowest sense as those groups who are
vital to the survival and success of the corporation, a group which includes employees, customers, suppliers,
management, stockholders, and residents of the local community.
45
Cf. Ackoff R.,: supra note 42.
17
2.3.3 Stockholder and Stakeholder Theories on Downsizing

The two theories shortly summarized above approach the problem of downsizing and layoffs
differently. This is not surprising, since the basic premises and hypothetical foundations of the
theories differ sharply.
The stockholder theory states that social responsibility should not be a function of the
management process. Friedman,46 has always maintained that business operates best when it
sticks to its primary mission--ensuring profitability by producing goods and services within
society's legal restrictions. He further argues that the business's exclusive responsibility is to
attempt to maximize returns to shareholders. This principle is of fundamental consideration
when the question of downsizing is raised. In the real world it is the management who has the
final say in determining whether to downsize or not. Consequently, according to the theory
the management should not be under any set of legal requirements to consider the well-being
of the employees. The frequently raised argument of the stockholder theory regarding
downsizing and employee layoff is the efficiency one, and inherently to the theory it is
assumed that there will be more winners than losers as a result of downsizing, due to
efficiency. The winners include most of those who participate in a more efficient market
system and more profits and benefits to shareholders, which in turn might mean more jobs in
future through capital accumulation.
On the other side, stakeholder theory suggests that certain moral and legal conditions be
placed in the hands of the management in order to prevent downsizing and thus consider the
interests of the employees and of all other stakeholders. According to Drucker,47 it is
management's responsibility to lessen the impact of actions outside of its own specific
mission. The question raised here is, what is considered outside management's specific
purpose or mission? In a downsizing decision, undoubtedly the employees who lose their
jobs are directly affected by management's decision. One could also argue that even if the
management are justified in electing to downsize they have to take into consideration the
effect of the decision and to particularly consider the effects of the downsizing on the wellbeing and on the welfare of the employees as being the directly impacted stakeholder.
In accordance with the definition of CSR provided above it can be deducted that one of a
company's primary objectives is to operate in a socially responsible manner. Our society gives
considerable freedom to organizations, both public and private. In return, organizations are
46
47
Friedmann, M.: supra note 36

Cf. Drucker, P., (1974): Management: Tasks, Responsibilities, Practices, New York, Harper & Row, p 347.
18
expected to function in a manner consistent with society's interests. Social responsibility

refers to the expectation that business companies should act in the public's interest. As a
matter of fact, businesses have always been presumed to provide employment for individuals
and to offer goods and services for clients. Ideally, companies that are socially responsible are
those that are able to operate profitably while simultaneously benefiting society in adopting a
stakeholders' approach to its social responsibility mission.
2.4 The Aspects of Corporate Downsizing
In concluding that downsizing as a means to enhancing profit is often morally wrong,
Orlando48 presents six arguments that challenge the reasons advanced for privileging the
interest of stockholders above all other parties simply because they are who they are. He also
puts forward three arguments against the moral permissibility of (certain acts of) downsizing
and dismisses the utilitarian approach to justify downsizing. However, he does accept that
downsizing intended as a last resort, in order to safeguard the survival of the company, may
be justified.
According to Orlando the moral equality of workers and stockholders
49
implies that for
downsizing to be permissible it must be justifiable from a utilitarian perspective, which takes

into account the interests of both stockholders and workers. The arguments presented in order
to dismiss the assumption of the supremacy of the stockholders parties are summarized and
commented in the following section.
2.4.1 Property Rights
Orlando argues: First, it must be understood that one cannot justify the position that
shareholder concerns take precedence over all other groups simply by appeal to the fact that
the shareholders are the legal owners of the corporation,50 and continues referring to the
paradigm that a legal owner of the corporation has property rights that allow her to dispose
of her property in any manner she sees fit51, it cannot be asserted that privileging the
stockholder group is morally justified.
48
Orlando J.,: supra note 1

Orlando uses the term shareholder(s). However for the purposes of consistency within the context of this
paper, I will use the term stockholders.
50
Orlando J.,: supra note 1, p. 297.
51
49
19
Considerations on the stockholder as the legal owner of the company

Generally speaking, property rights refer to any sanctioned behavioural relations among
decision makers in the use of potential resources; such sanctioned behaviours allow people
the right to use resources in a non-prohibited way. The interplay of scale economies,
negotiating cost, externalities and the modification of property rights can be seen in the
exception to the assertion that ownership tends to be an individual affair: the publicly-held
company. Significant economies of scale and the large capital requirements for equity can be
satisfied more advantageously by acquiring the necessary capital from multiple purchasers of
equity shares. This is a fact. While economies of scale in operating a company do exist,
economies of scale in the provision of capital do not. But if all owners participate in every
single decision that needs to be made by such a company, the economies of scale regarding
operations will quickly be overtaken by the negotiating costs. Hence a delegation of authority
for most decisions takes place and, for most of these, a small management group becomes the
de facto owner. Hence, is not the company that stockholder of publicly-held companies really
own, but their shares. Therefore, I am of the opinion that the claim made by some company to
justify the reasons of certain acts of downsizing with the purpose to maximize the
shareholders wealth can not be well grounded on the property rights arguments.
Considerations on the stockholder supremacy over all other groups
Evan and Freeman declare, The reason for paying returns to owners is not that they own
the firm but that their support is necessary for the survival of the firm, and that they have a
legitimate claim on the firm."52 Therefore, the stockholders are simply one of a number of
groups that might make claims on company resources.
Considerations on the nexus of explicit and implicit contracts (1)
From a legal perspective stockholders are considered to be the only residual claimants. When
the company is considered as a nexus of contracts, the decisions of the management influence
the economic payoffs of the stakeholders of the nexus, sometimes to a greater extent even
than of the stockholders. The claim that stockholders are the companys only residual
claimants fails to fit economic facts in almost all real-world business circumstances.53 Firstly,
the employees are important residual claimants especially when company-specific human
capital is involved. Secondly, creditors can be important residual claimants and thirdly,
52
53
Evan, W.E., and Freeman R.E.,: supra note 40.

Cf. Pitelis, C.N., (2004): Corporate Governance, Shareholder Value and Sustainable Economic
Performance, Corporate Governance 12, pp. 210- 223.
20
complex network relationships among suppliers and customers produce interdependencies

leading to considerable residual gains and losses. The economic view of stockholder
supremacy is the conceptualization of the company as a nexus of explicit contracts in a world
of complete contracting. In such an agency model, there are by definition no residual rights of
control since the nexus of explicit contracts is designed to specify in advance all the future
economic payoff-relevant contingencies. However in the business world, contracts are
typically incomplete due to the fact that complete contracts are impossible to achieve. Hence,
the company has to be considered a nexus of explicit and implicit contracts or contract-like
agreements. This minor change in premise has considerable consequences on how we are to
understand the theory of the firm.54 More generally, from the perspective of the incomplete
contracting theory, there exist other contracting parties besides stockholders who are not fully
protected by explicit contracting, thereby undermining the foundational premise of
stockholders supremacy. However, the property rights theory of the firm from a stakeholder
perspective is still under development.55
2.4.2 Fiduciary Duties
According to the stockholder theory, the fiduciary duty of management obliges it to adhere to
the (legal) directions of the stockholders. Orlandos argument is that [t]he fiduciary duty (of
the manager toward the shareholders56) does not establish the obligations of the agent; it is
rather prior considerations pertaining to the nature of the relationship that determine the
parameters of that duty. He is of the opinion, that the term fiduciary duty only describes the
obligations of management. It does not create those duties and therefore, it cannot justify
them. Furthermore, he argues that the legal basis of fiduciary duty anchored in the
principles of corporate governance - has been drawn up to avoid advancing the self-interests
of management over those of stockholders. This means that, if management also considers the
interests of stakeholders (even at the expense of profits), this does not conflict with their
fiduciary duty to the stockholder.
54
Cf. Baker, G., R. Gibbons, and K.J. Murphy, (2002): Relational Contracts and the Theory of the Firm,
Quarterly Journal of Economics 117, pp. 39-83.
55
Cf. Mahoney, J., C.C. Asher, and J. Mahoney, (2004): Toward a Property Rights Foundation for a
Stakeholder Theory of the Firm, Academy of Management Policy Strategy (BPS) Division Symposium in
New Orleans.
56
Brackets added by A.G.
21
Considerations on fiduciary duties

In accordance with the definition on corporate social responsibility provided above, the most
important duty of the management is probably to be a representative of the company and its
stakeholders. One may define this duty as a combination of both integrity and competence.
Any member of the management must therefore be trustworthy enough to represent the
company with all due diligence, and must act in the best interests of the company.
Within the concept of explicit and implicit contractual or contract-like agreements, the
problem is that representing the company as a whole may put the management at the centre of
a conflict between different classes of stockholder, who expect different things from the
company, or sets it at the centre of a conflict between the different types of stakeholder both
inside and outside the firm. The fiduciary duty of the management toward the company, then,
means that maximization of stockholders' wealth should be less of a concern than
maximization of the companys value. As I mentioned above, this may cause conflicts within
the firm, and management may well feel their loyalty torn. As a result, management must be
able to aggregate the functions of all stakeholders in the firm using a utilitarian approach. In
smaller companies, where ownership is more concentrated, and where conflicts between
stockholders may be more personal, simply stating that the managements fiduciary duty is to
maximize stockholder wealth may miss the point completely.
Even in large companies, maximizing the firm's profits or the stockholders' wealth is a
concept that is still unclear. The simple notion of profit and its impact on stockholder wealth
is not clear because an accountants' notion of profit is a contemporaneous measure of the
firm's wealth, whereas for stockholders, wealth represents the present value of cash flows
generated by the firm against an uncertain future. In particular, investments in workforce or in
research and development do not generate profits in a current annual statement, but may
increase the stockholders' wealth.
The discrepancy between firm profit and stockholder wealth is much larger for companies
that operate in a very risky environment, such as high-tech and biotechnology industries. As a
result, the managements fiduciary duty in such companies may be even harder to define than
in firms operating in mature industries. The harder it is to define the managements fiduciary
duty to the firm and its stockholders, the harder it is to show that the management meets their
obligations.
As if defining profit and stockholder wealth were not difficult enough, the fiduciary duty of
the management also extends to other stakeholders, including employees, clients and to
22
society as a whole. For example, a firm may devote resources to social activities (typically
charities) that in no way directly increases the company's profits or the wealth of its
stockholders; but stockholders are part of society so they will benefit, albeit very indirectly,
from these social activities.
Furthermore, Drucker states that "Friedman's pure position to eschew all social responsibility
is not tenable. [. . .] Business and other institutions of our society [. . .] cannot be pure,
however desirable that may be. Their own self-interest alone forces them to be concerned
with society and community and to be predisposed to shoulder responsibility beyond their
own areas of task and responsibility".57 This statement shows that he acknowledges the
necessity of corporate social responsibility and the following statement tells us that he also
believes that there is a limit to this responsibility. He says, The first task is to make the
institution . . . perform the function and make the contribution for the sake of which it exists.
[. . .] Performance of its function is the institution's first social responsibility.58
2.4.3 Risk
Furthermore, Orlando dismisses Maitlands59 main arguments justifying the assertion that
management has duties to stockholders over those to other parties. Maitland, privileges
stockholders over other parties firstly, because of the risk shouldered by investing into the
company and secondly, for their absorption of any costs of mismanagement.
His argument is that employees, when downsized, also have to absorb the cost of
mismanagement. They risked something in accepting a job opportunity (such as bypassing a
possible better job opportunity, loss of the home purchased in the expectation of a steady
income, loss of societal status) and consequently the position of the employees is not
dissimilar to that of the stockholders. He concludes by pointing out that the only difference
between the risks taken by the two parties is that of degree. The degree of risk assumed will
depend upon the individual situation of each.
The aspect of the risk of the employees will be considered below.
57
Cf. Drucker, P., (1974): Management: Tasks, Responsibilities, Practices, New York: Harper & Row, p. 349.
Drucker, P.: supra note 47. p. 343.
59
Orlando, J,: supra note 1, p. 300.
58
23
2.4.4 Contracts
Maitlands argument to justify managements duties to stockholders over those of other
parties is that company-stakeholder rights and obligations are fundamentally established in a
freely chosen [. . .].nexus [. . .].of contracts. 60 Furthermore, he states that the terms of
these contracts have been determined under free, voluntary, and uncoerced bargaining
circumstances and that, when third parties tinker with an agreed arrangement, they violate the
rights to self-determination of the parties involved .
In questioning the veracity of these arguments, Orlando, firstly in reference to Sonderquist
and Vecchio, argues that most shareholders expect corporate managers to take into account
the interests of other constituencies when making decisions about the welfare of the
corporation; 61 and secondly to Boatrights, that stockholders have the tendency to think of
themselves not as owners of the corporation, but rather as investors in it62 and therefore
have multitudinous investment opportunities.
Additionally he questions how investors can act under the assumption of an unstated contract
between themselves, the management and the employees. On the other hand, citing Reich, he
adds employees have traditionally assumed that taking a job meant having it for life as long
as they perform their duties well.63 Therefore on the basis of the implicit contract and
expectations of the contracting parties the evidence is contrary to the arguments put forward
by Maitland.
Considerations on the nexus of explicit and implicit contracts (2)
The theory of explicit and implicit contractual or contract-like agreements suggests a complex
bargaining process. Stockholders and employees do not bargain directly, but only indirectly
through management. Once we recognize the existence of implicit contracts (and incomplete
contracting) then other stakeholders besides the stockholders are residual claimants and these
stakeholders may need to be protected. It is now not clear whether decision rights should
reside exclusively with stockholders, because the unfettered pursuit of stockholders value
maximization may lead to the breach of valuable implicit contracts as it would be the case
when downsizing is contemplated.
60

62
63
61
24
2.4.5 Other Peoples Money

Fiedman argues that "the corporation is an instrument of the stockholders who own it,64 and
thus says that to divert business financial resources for public interest away from the purposes
expressly authorized by the stockholders represents an impermissible use of those resources.
In answer to this point of view, Orlando replies that such an act, to be considered
impermissible, must be unauthorized and he adds (see above) that most stockholders expect
managers to take into account considerations beyond maximizing profits. He concludes that
it is a generally accepted principle that moral duties "transfer through" from principal to
agent, such that if it is morally forbidden for me to do something, then it is forbidden for me
to enlist an agent to act on my behalf.65 Thus, an act of downsizing, by virtue of the fact that
it is performed by the management as an agent of, and in the interests of, the stockholders,
must be considered wrong.
Considerations on other peoples money
At the heart of stakeholder theory lays the distribution of the benefits created by joint effort
(e.g. pooled contributions). As Boatright points out, there is nothing inherently special about
stakeholders in a joint effort situation and he states that whats special is who contributes
capital, given the economic value of that contribution.66 By the same logic, there is nothing
special about any class of stakeholders in that situation, and this includes employees. But if
employees exit, the company fails. The opposite is also true: if the company fails, employees
will suffer a loss impacting the own well-being. However, assuming that contributions are
variable but taking no account of relative power, two possibilities exist: either all stakeholders
should receive equal benefits, or each stakeholder should receive a share of benefits in
proportion to his/her own contribution.
2.4.6 Private vs. Public
Friedman states that, in requiring the company to perform supererogatory duties (e.g. advance
social goals that exceed the legal requirements) in ways that have not been authorized by the
stockholders, the management would not only break the moral obligation derived from
fiduciary duty and accordingly violate the autonomy of the stockholders, but also usurp the
political function and disrupt the private/public distinction which is at the heart of the free
64

66
Cf. Boatright, J., (1994): Fiduciary Duties and the Shareholder-management Relation: Or, Whats so Special
about Shareholders, Business Ethics Quarterly 4, pp. 393-407.
65
25
market system.67 Orlandos arguments against this are twofold. Firstly, the existence of a
company is an entity permitted by the state to serve the public good rather than to allow
individuals the right to self-enrichment. Secondly, Friedmans argument cannot be applied in
the case of downsizing due to the fact that there is no public sector analogous to the service
being demanded of companies.
Considerations on private vs. public
Furthermore it must be noted, that a company by virtue of its implantation in a community,
becomes a member of this community, implying a certain degree of social responsibility. That
means that its stockholders and management have an obligation to support the structure
needed by the community to promote the welfare of its members.
2.4.7 The Utilitarian Argument
Using the arguments presented above in order to demonstrate the moral equality of employees
and stockholders, and in the absence of any adequate defence of downsizing, Orlando
challenges the utilitarian arguments commonly used to justify downsizing performed with the
scope to maximize stockholders wealth.
Utilitarianism focuses on the consequences that actions and policies have on the well-being
(utility) of all persons directly and directly affected by those actions or policies. The moral
principle holds that the moral correct course of action in any situation is the one that produces
the greatest balance of benefits over harm for all those affected. Thus, it could be argued that
downsizing benefits the majority of the population and, although some individuals will
necessarily fall by the wayside, the benefit to the whole outweighs the harm done to the few.
Orlando doubts whether downsizing has generated a net gain in utility and refers to a study by
Cascio,68 which demonstrates that when downsizings are performed for the sole purpose of
lowering costs, and are not accompanied by a careful restructuring of the company, this has
always negatively impacted the productivity of the company. To corroborate his doubts he
refers again to Reich,69 who notes that employee loyalty in the United States has decreased as
a consequence of downsizing and that this will negatively impact the companys overall
performance. Considering the inconclusive evidence that downsizing improves net utility in
the long term, and dismissing the equation of well-being with financial gain, since the harm
67

69
68
26
caused by unemployment cannot be measured in term of pecuniary considerations, he

concludes that utilitarian considerations do not clearly support the rationale of downsizing.
Utilitarian considerations on downsizing as last resort to save the company
If the company, and with it the jobs of remaining employees, can only be saved be reducing
the workforce, then, from a utilitarian point of view, the benefits of employment for all those
who remain justifies the harm of those laid off. Further benefits can be found in the happiness
of other stakeholders, who otherwise would be harmed by the companys bankruptcy. Given
this situation, the utilitarian approach would, in my opinion, clearly condone layoffs as the
moral thing to do. However, the situation is intriguing because, when a company in serious
distress, there is usually a perceived need to act quickly. Considerations of other possible
alternatives are often not possible due to time constraints and to limited financial resources.
Layoffs can be organized quickly but will not guarantee the survival of the company unless
reorganization is properly carried out. The only way to know for sure whether a company is in
a downsizing situation, or whether it is actually in the process of going out of business, is to
wait and see. Yet this knowledge would be of very little comfort to management and
employees to find out, only afterwards, that layoffs had been required to escape bankruptcy
and that inaction would have resulted in the loss of all employment. However, the luxury of
waiting for the definite answer is, in reality, simply not a viable option.
2.5 Arguments Against Downsizing
The first argument presented by Orlando is based on the widely held intuition that is wrong
to subject individuals to certain type of harms in order to benefit others or, as he explains
later, that causing a great harm for a lesser benefit, even to the great number of people,
cannot be morally justified. Furthermore, he adds that there are some who believe that no
amount of harm to an individual can be justified on grounds that it will benefit others, since
harms and benefits are incommensurable commodities. 70
Applying the cited arguments to an example where the management of a company downsizes
with the unique purpose of maximizing the wealth of the stockholders, he concludes that the
negative consequences (harm) supported by the employees (unemployment) cannot justify the
benefits earned by the stockholders. This is because harm (as elucidated in the example
above) is not a simple by-product of an act which independently brings benefit, but rather is
the means to that benefit.
70
27
The second argument refers to the legitimate expectations of the individuals involved. In a
first step, Orlando enumerates the expectations of the employees, who have made plans for
their own as well for their familys well-being under the assumption of a steady source of
income. In a second step, he analyzes the expectations of the stockholders, who were aware of
the inherent risks when entering into the stock market, summarizing and concluding as
follows: (1) no reasonable investor would use his/her home or other important items to back
the future performance of a security; (2) expectations of a certain long-term rate of return; (3)
the premise that a company has obligations to parties other than themselves.
Comments on investor expectations
At the base of the various investment instruments is an expanding ethical investor group that
relies on the information presented in annual company reports in order to make investment
decisions. The ethical investor bases investment decisions not only on economic
considerations but also on social, ecological or ethical considerations. Many believe that
ethical investors form a clientele that responds to a demonstration of social concerns.
Investors of this type tend to avoid particular investments for entirely ethical reasons and
would prefer to favour socially responsible company in their portfolios. Those social investors
are not necessarily sacrificing their economic well-being. As a matter of fact, an emerging
theory of social investments proposes that social and economic values can be maximized
together, and that this creative synergy is the practical direction taken by social investors
today.71 This type of investor is assumed to contribute to the development of an economy
geared to promoting social values and companies as well as self-interests.
Comments on the legitimate expectations of the employees and community
A company that establishes an operation in a community, especially when not as a result of
political incentives, surely understands that its employees and the members of the community
have some legitimate long-term economic expectations. They expect to exercise their right to
access resources. The company cannot exist purely to generate profits for the stockholder; in
the wider social context it is a mechanism for people other than the stockholders to meet their
economic needs. The management of the company knows full well that the community will
incur long-term costs in terms of the infrastructure that will serve the operation. So, while a
company may not enter an explicit contract with the community that it will remain in a
location for a long period of time, it can be assumed that makes an implicit contract to stay
71
Cf. Bruyn, S. T., (1987): The Field of Social Investment, Cambridge, MA: Cambridge University Press.
28
there as long as it is profitable. Unless the company has explicitly declared from the
beginning that its operation will last for a limited time in a specific location, a company does
have some long-term commitment to its employees and the community in which it operates,
so long as it can sustain a reasonable level of profitability. It would be morally questionable,
therefore, for a company to close an operation just because it could benefit more in some
other location and could better maximize the profit of its stockholders as a result.
Stockholders, as one of the residual claimants do have a right to a profit, to access resources
for their benefit through their company, but that right is limited by the larger context of social
and distributive justice in a free-market economic system.
Employees may not be the legal owner of a company, but the full moral respect of their rights
and the respect for their dignity as people demands that they have some say in decisions
profoundly affecting their lives and well-being. That means that, in the case of a downsizing
as a last resort to save the company, they need, at the very least, sufficient advance notice of a
contemplated downsizing in order to be able to make plans to cope with it. The company
should, at least, listen to the employees objections, consider their economic needs and listen
to proposed alternatives. There may be some legal obligation to relocate employees willing to
move to other companies at the companys expense, to assist employees with losses caused
by a depressed real-estate market, and to offer retraining and re-employment services for
those employees who cannot move.
2.5.1 Rights and Duties
2.5.1.1 Introduction
Rights are entitlements, by virtue of which, one person justifiably lays claim to an object or
state of being against another person who has an obligation to respect that claim. One respects
a claim by providing the object claimed, assisting in the achievement of the state which is
being claimed, or, at the very least, not standing in the way of the obtainment of the object or
the achievement of the state of being.72 Therefore, a right can be defined as either a capacity,
possession, or condition of existence, which entitles either an individual or a group to the
enjoyment of some object or state of being. Of course, if one person has a right, another
person must necessarily have an obligation to respect that right. Hence, a right is a relational
entity.
72
Cf. Duska, R., (2002): Employee Rights , A Companion to Business Ethics, Blackwell Publishers 2002, pp.
257-268.
29
2.5.1.2 The Rights of Employees

The comments that I make concerning the moral rights of employees will be based on the
perception of the relationship between employee and company. From a moral perspective the
employee company relationship can be viewed as reciprocal, and it is a relationship in which
moral obligation exists by virtue of this relationship. Because the two parties will have
different views of what their relationship is, or ought to be, this will lead to their making
different claims as concerns their rights and obligations.
For the purpose of this paper I will summarize and analyse only those employee rights which
in my opinion are directly affected by downsizing as a last resort with the purpose to save the
company from bankruptcy.
2.5.1.3 The Rights to Job Security and due Process in Firing
Considering the inherent reciprocal relationship involving interdependencies between the
employee and the company, explicit or implicit agreements and promises are entered into
when employment is offered and accepted. Hence, it can be deducted that there is a right to
job security, which means the employee has the right to keep the job so long as there is no
good reason for terminating the agreement. Therefore, it is incumbent on the employer to
allow the employee the right to due process when making decisions concerning the latters
welfare. Such decisions involve a redefinition and a renegotiation of the original
understanding implied at the outset.
2.5.1.4 The Right to Information
The concept of rights suggests that employees have the right to as much information as
possible about the company they work for, their job, the possibilities of continued
employment, and any other information necessary for job enrichment and development. 73
In downsizing situations, particularly during the process of communicating to employees the
aspects of the downsizing that will personally affect them and their jobs, violations of this
concept often occur. Pompa states that deontologically, if withholding information constitutes
deception which limits employees informed choice about their work status, then it violates
73
Cf. Werhane, P. H., (1985): Persons, Rights and Corporation, Prentice-Hall, Englewood Cliffs, NJ.
30
the Kantian imperative to treat others as ends in themselves, not merely as means.74 With
respect to downsizing, the concept of rights means that it can be argued that employees have
rights (i.e. the right to be informed) that must not be violated during the formulation and
implementation of downsizing procedures. If employees are denied these rights, they are
likely to perceive that ethical violations have occurred.
Organizational downsizing demands that management communicate a great deal with
employees. The primary focus of this communication is downwards; specifically, explaining
the rationale for the changes that have to be made. But companies should ensure the
opportunity for upward communication to allow employees to vent their fears and
frustrations, and to receive answers to their questions.
2.5.1.5 The Right to Co-determination
If one recognizes that human beings are the source and the purpose of economics, and that
labour not only serves the production of goods and services but also the development of the
person, then the employee must have a say in the shaping of his activity. Accordingly, in
those matters which seriously affect employees, co-determination in deciding their own fate is
seen as a right.
Although the right to participate in matters affecting workers is controversial, the fact
becomes tenable if the asymmetry of power between the employee and the company and its
impact on the negotiation of employment agreements is recognised. This right can be seen as
a protection against the potential abuse of power that can develop from such asymmetry.
Furthermore, for both explicit and implicit contracts to be morally binding, they need to be
based on informed mutual consent and, if need be, they should be redefined accordingly.
2.5.2 Fairness
In Orlandos opinion, fairness is the fact that the arbitrary conditions of one's situation ought
not to count against one's life prospects. The idea here is that the individual does not deserve
the rewards or punishments that come via things for which she is not responsible.75
Excluding dismissals due to employee incompetence, and which should not be considered as
downsizing, he concludes that the cases of downsizing that are carried out with the aim of
overall profitability are most likely imputable to causes of mismanagement than to the fault of
74
Cf. Pompa, V., (1992): Managerial Secrecy. An Ethical Examination, Journal of Business Ethics 11, pp.
147 156.
75
31
the employees. Therefore, since the employees are not at fault for mismanagement but have to
absorb the adverse consequences, an act of downsizing must be considered unfair.
Furthermore, he adds that the stockholders cannot claim to deserve the increase in the value of
their investments due solely to laying off employees.
Comments on fairness
In certain cases, the psychological effects of downsizing are aggravated by excessive
management compensation. Theoretically, management compensation is neutral and should
not influence, or be influenced by, downsizing. Nevertheless, management tend to take all the
credit for profitability and blame employees for all the red ink. If downsizing is indeed the
best solution to a problem, it makes no sense to reward the management with undue
generosity for doing precisely what they were hired to do. Is one to presume that they were
hired to run their companies into the ground, and that they should get a bonus if they do not?
If it is the responsibility of the management to maintain an efficient organization, they should
be paid their regular salaries if they do so and punished if they do not. A bonus for doing the
ordinary makes no sense.
Downsizing as a last resort to save the company
In this specific case, when considering the fairness of downsizing, both distributive and
procedural justice are important.76 Distributive justice is related to what is decided, whereas
procedural justice is related to how decisions are made. With downsizing, both the end result
and the determining process need to be fair. It has been found that procedural justice is
closely related to attitudes toward the organization and its authorities (e.g. trust in supervision
and organizational commitment), whereas distributive justice is a better predictor of
satisfaction. Satisfaction with supervision strongly correlates with good citizenship. Both
distributive and procedural justice determined satisfaction, while organizational commitment
was determined by perception of procedural fairness. If employees can be guaranteed fair
procedural treatment, they are more likely to stay with the company and become loyal
members. If the events associated with allocation (the means) are just, it is more difficult to
question outcomes (the end). On the other hand, if procedural justice is determined to be
unfair, then employees are more likely to retaliate by using destructive tactics against the
management. This tactics may be harmful to other people, to the management and to the
public.
76
Cf. Cropanzano, R., and Folger R., (1991): Procedural Justice and Worker Motivation. R.M. Steers &
L.W.Porter (eds). Motivation and work behaviour New York, pp. 302-317.
32
A review of the literature relating to the effects of downsizing lead me to conclude that those
affected by a downsizing decision will likely perceive the decision to be unethical unless it is
communicated at an inappropriate time, in an inappropriate way, and the communication
about the downsizing contains no information perceived as critical. Each of these dimensions
(timing, method, and content) is discussed below.
Timing of the downsizing communiqu

The impact of providing advance warning of a reduction in the workforce has
received substantial attention among researchers. Numerous studies have shown that
advance warning can greatly benefit a person facing a job loss and translates into
fewer weeks of unemployment and less reported stress and anger toward the
organization,77 and less financial strain.78
Advance warning may also give an employee time to deal psychologically with the
event and to develop coping strategies to reduce the stress associated with job loss.79
Such active coping strategies appear to be very important in overcoming the
emotional trauma of job loss.80 Therefore, in addition to suffering less financially,
individuals who receive advance warning of dismissal may be more likely to report
emotional acceptance of the job loss, rather than reactions such as depression or
anger.
Method of communicating downsizing

The ethical dimension of downsizing takes into account the importance of the method
that a company uses to inform employees of an impending downsizing. The manner in
77
Cf. Feldman, D. C. and C. R. Leana, (1989): Managing Layoffs: Experiences at the Challenger Disaster Site
and the Pittsburgh Steel Mills, Organizational Dynamics 18, pp. 5264.; and Kinicki, A. J., (1985):
Personal Consequences of Plant Closings: A Model and Preliminary Test, Human Relations 38, pp, 197
212.
78
Cf. Love, D. O. and W. D. Torrence, (1989): The Value of Advance Notice of Worker Displacement
Southern Economic Journal, pp. 626643.; and Popma, V.,: supra note 74.
79
Cf. Kinicki, A. J.,: supra note 77.; and Latack, J. C., A. J. Kinicki and G. A. Prussia, (1995): An Integrative
Process Model of Coping with Job Loss, Academy of Management Journal 20, pp. 311342.
80
Cf. Leana, C. R. and D. C. Feldman, (1994): The Psychology of Job Loss, in G. R. Ferris (ed.), Research in
Personnel and Human Resources Management (JAI Press, Greenwich), pp. 271302.
33
which dismissals are communicated to employees also appears to be important.81

Following job loss, an employee may feel as if the transactional contract of job
security and the relational contract of reciprocal goodwill have been violated.
Perceptions of violated contracts may be magnified if the termination decision is
communicated in such a way that is inconsistent with the employees self-esteem.82
In the absence of communication of the dismissal by a supervisor and the provision of
a rationale for dismissal, feelings of outrage and resentment on the part of dismissed
employees may make emotional acceptance of the job loss much more difficult.83
Thus, by providing an external attribution for the decision (e.g., poor corporate
performance), both of these actions may help dismissed employees regain a sense of
control and afford them a chance to openly discuss the decision with their
supervisor.84
Furthermore, when learning about downsizing decisions, employees are likely to
perceive that the own rights (e.g. breach of the implied agreement) have been violated
if they first hear about the downsizing from outside sources rather than from formal
organizational channels within the company. This likelihood is supported by Pompas
85
study on managerial secrecy and the ethical implications of withholding information
about impending downsizings. In such cases, employees are likely to feel that they are
being manipulated or controlled, tricked, or at the very least subjected to impersonal,
uncaring treatment by their respective employer.
Content of the downsizing communiqu

This ethical dimension of downsizing considers whether employees are provided with
a reason for the downsizing and other relevant information. According to Conrad, one
of the most consistent findings in research on organizational communications is that
81
Cf. Latack, J. C. and J. B. Dozier, (1986): After the Ax Falls: Job Loss as a Career Transition, Academy of
Management Journal 11, 375392.; and Smeltzer, L. R. and M. E. Zener, (1992): Development of a Model
for Announcing Major Layoffs, Group and Organization Management 17, pp. 446472.
82
Cf. Latack, J. C. and J. B. Dozie,: see supra note 81.
83
Cf. Latack, J. C. and J. B. Dozier: supra note 81.; And Leana, C. R. andJ. M. Ivancevich, (1987): Involuntary
Job Loss: Institutional Interventions and Research Agenda, Academy of Management Journal 12, pp. 301
312.
84
Cf. Latack, J. C. and J. B. Dozier: supra note 81.; and Miller, M. V. And S. K. Hoppe, (1994): Attributions
for Job Termination and Psychological Distress Human Relations 47, pp. 307327.
85
Pompa, V.: supra note 74.
34
employees feel that they receive too little relevant and useful information about events
which directly affect them and their jobs.86
Furthermore, if dismissal is communicated to the employee by someone other than
the employees immediate supervisor, it may be particularly dehumanizing and
stressful.
87
The stress of job loss may also be exacerbated if the supervisor fails to
provide a rationale for dismissal. A legitimate explanation may help to buffer the
shock of dismissal and help the employee to come to terms with the decision, rather
than harboring feelings of self-doubt and victimization.88
Brockner89 recommends that organizations take time to provide an adequate,
unambiguous explanation for an impending downsizing, and he also suggests that the
content of the explanation include valid arguments for the necessity of the downsizing,
which employees may not have previously considered.
Moreover, the mere fact that time and effort was taken to provide an explanation and
other information about the downsizing symbolizes to employees that they are being
treated in a dignified and respectful way.90 Perceiving that they are being treated as
such, employees are likely to judge the downsizing process as fairer and be less prone
to seeing it as unethical.
The message here is that the ethical, or at least proper, handling of a downsizing is a
significant measure of management fairness and credibility. Viewed as such by employees,
they are likely to consider a downsizing and the manner in which it is carried out to be
ethical if (1) they are told of the downsizing by management rather than learning about it in
the press; (2) they are given sufficient advance notice and are informed of their personal
status in order to be able to take steps to adjust their personal plans accordingly; and (3)
they are provided with a clear corporate message that explains the reasons for the
downsizing.
86
Cf. Conrad, C., (1985): Strategic Organizational Communication: Cultures, Situations, and Adaptation ,
Holt, Rinehart and Winston, New York.
87
Latack, J. C. and J. B. Dozier: supra note 81.
88
Feldman, D. C. and C. R. Leana: supra note 78. And Latack, J. C. and J. B. Dozier: supra note 81
89
Cf. Brockner J.: Managing the Effects of Layoffs on Survivors, California Management Review, pp. 9-28.
90
Cf. Tyler, T. R. and R. J. Bies, (1990): Beyond Formal Procedures: The Interpersonal Context of
Procedural justice, in J. S. Carrol (ed.), Applied Social Psychology and Organizational Settings,
Erlbaum, Hillsdale, NJ.
35
2.6 Conclusion
In analysing the issue of the moral permissibility of downsizing in I have first briefly
elucidated the two widely discussed theories of corporate social responsibility encompassing
the stockholder and stakeholder theories on the background of the socially responsible
restructuring concept. Subsequently I have summarized and commented some of the
arguments presented by John Orlando in challenging the reasons advanced for privileging the
interest of stockholders above all other parties and found no disagreement with. Finally, in
using the three basic theories commonly used in managerial ethics, which are the utilitarian,
the rights and duties, and the justice and fairness approaches I have analyzed the issue of the
morality of layoffs. The views of these three basic theories generally coincide.
Where downsizings are contemplated in an attempt to change a company that is already
performing well and which does not appear to be in danger with the sole purpose of
maximizing stockholder wealth in accordance with the stockholder theory, none of the three
approaches supports the conclusion that such an act is permissible from an ethical point of
view. This situation does not achieve the greatest good for the greatest number due to the fact
that is wrong to subject individuals to certain type of harm in order to benefits others. The
right and duties approach suggests that the rights of the employees to job security and due
process in firing are violated due to fact that there are no good reasons for terminating the
employment agreement. Finally the justice and fairness approach, does not find layoffs to be
moral, because they lack proportionality between the individuals behaviour (good
performance) and the resulting action (termination of employment).
In the extreme case where downsizing is the only way to save the company, I am of the
opinion that the utilitarian approach finds the decision to conduct layoffs to be moral justified,
because layoffs generate the most good for the greatest number of utilities. The rights and
duties approach requires that downsizing be conducted in a fair and just manner because
employees do have a right to be treated fairly. Finally the justice and fairness approach, find
layoffs to be at least permissible from a moral stand point, if the welfare of the employees is
seriously considered and the necessary procedural steps are properly implemented.
36
3. Overall Conclusion
In today's company, professional amorality turns into economic morality. When the screws of
the performance control systems are turned tight, economic morality can turn into social
immorality.91
This is exactly the situation when companies decide to downsize, citing inherent necessity and
economic realities as the main reason. However, strategic decisions, such as the decision to
downsize, ultimately encompass social as well as economic outcomes that are positively
interrelated. The breach of promise to society is perhaps the most serious implication of all
because everyone is hurt as a result. The rationale commonly used to describe the benefits of
a particular cost management effort appears flawed, not only in terms of its return to the
company, but to the society in which it operates as well. Continuous implementations of
restructuring efforts that do not appear to have focus are evidence of this rationale, which
continues to cause damage to employees lives and to the company itself. The reduction of the
workforce for the singular purpose of reduced cost and to maximize profit for the
stockholders is not only morally wrong, but also breaches the integrity of the company in
relation to the quality of its contribution to the overall health of society. A profit oriented
approach simply leads to a restriction of a companys definition of goals and an indifference
to the means by which these goals are pursued.
91
Cf. Mintzberg H., Quinn J., and Voyer J., (1995): The strategy process. Englewood Cliffs, NJ: Prentice
Hall, p. 213.
37
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39
5. Selbstndigkeitserklrung
Ich erklre hiermit, dass ich diese Arbeit selbstndig verfasst und keine anderen als die
angegebenen Hilfsmittel benutzt habe. Alle Stellen, die wrtlich oder sinngemss aus Quellen
bernommen wurden, habe ich als solche kenntlich gemacht. Mir ist bekannt, dass adernfalls
der Senat gemss dem Gestz ber die Universitt zum Entzug des auf Grund dieser Arbeit
verliehenen Titels berechtigt ist.
Zrich den 20. Januar 2007
Arturo Giovanoli
40

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Ethik-Zentrum der Universitt Zrich

"On the way to Socially Responsible Restructuring

January 19, 2007

Erstgutachter: PD Dr. Stefan Grotefeld

Temporary or permanent shrinking market demand or overcapacity: The

Competitiveness: Deregulation or a lowering of tariffs can confront many companies

Privatization: This is a further stimulus to restructuring in cases where companies can

Structural changes: A shift from an individual economy to a knowledge- and

In the short run, it creates the illusion that

The two most

severance pay to induce attrition, outplacement assistance, transfers to other locations,

Cf. Hardy, C.,: supra note 18

Rightsizing: A company, based on an in-depth assessment of mission-critical work and

2. Ethical Considerations of Downsizing

Source: www.ilo.org/dyn/empent/docs/F795877461/Starch_1.pdf, December 31, 2006.

Orlando J.: supra note 1.

contends that only those who are directly or primarily

2.3.3 Stockholder and Stakeholder Theories on Downsizing

Friedmann, M.: supra note 36

expected to function in a manner consistent with society's interests. Social responsibility

implies that for

downsizing to be permissible it must be justifiable from a utilitarian perspective, which takes

Orlando J.,: supra note 1

Considerations on the stockholder as the legal owner of the company

Evan, W.E., and Freeman R.E.,: supra note 40.

complex network relationships among suppliers and customers produce interdependencies

Considerations on fiduciary duties

Orlando, J,: supra note 1, p. 300.

2.4.5 Other Peoples Money

Orlando, J,: supra note 1, p. 302.

Orlando, J,: supra note 1, p. 302.

caused by unemployment cannot be measured in term of pecuniary considerations, he

Orlando, J,: supra note 1, p. 305.

2.5.1.2 The Rights of Employees

Timing of the downsizing communiqu

Method of communicating downsizing

which dismissals are communicated to employees also appears to be important.81

study on managerial secrecy and the ethical implications of withholding information

Content of the downsizing communiqu

Creating the Corporate Future. New York: John Wiley and

Strategic organizational communication: Cultures, situations,

Hardy, C., (1987)

California Management Review, vol. 4.

Persons, rights and corporation. Prentice-Hall, Englewood

Zrich den 20. Januar 2007

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