The Case of Bad News
The new CEO of a corporation learns that he has inherited problems with growth and profitability. A four-day workweek and, eventually, layoffs prove necessary. Who is the CEO obligated to inform and when?
Responding to a Business Downturn
George Anderson was just a few months beyond his 40th birthday on the day he became CEO of Astratech Communications International (ACI). What an upper! He was still basking in the glow of his good fortune, eager to try out his skills as the CEO. He hoped to get the chairmanship one day when the company's founder, Mike Marcus, decided to step down. Life was good.
ACI was a leading supplier of fiber optic transceiver components for the telecommunications industry. It sold to companies like Alcatel, Northern Telecom, and Ericsson, who put ACI's components into the lightwave equipment they manufactured. The company was based in Irvine, Calif., a great place to live, work, and raise a family.
ACI's annual sales were around $500 million with 2,500 employees in locations in Mexico and Scotland, in addition to its Southern California headquarters. All of ACI's hourly employees in the United States and abroad were represented by the IBEW, a union with a history of good working relationships with management. The Mexican operation was launched to take advantage of lower labor costs and close proximity to headquarters. The Scotland plant gave the company relief from onerous European tariffs. Both offshore facilities enjoyed excellent employee relations.
After settling into his new position, George busied himself identifying the major issues facing the company. Coming in, he had realized that ACI's growth and profitability were problems, but he wasn't sure if the source was the management team, product development, marketing and sales, or something else.
After several months, George was clear that it wasn't the people. Sure, there were a few problem areas, and some employees seemed a bit too comfortable. But the main issue was a lack of focus and a general weakness in the business systems required in this fast-paced industry. There was no clear vision of what ACI wanted to be and no acceptable plan on how to get there. What was it that someone said? "If you don't know where you are going, all roads will lead you there."
To address this weakness, George implemented a task force made up of middle managers from all the various disciplines, as well as the executive team. He chaired the task force because he believed strongly that CEOs shouldn't delegate strategy.
When it came to business systems, the problem seemed to be a lack of adequate cost accounting. The company didn't know its individual product costs to any reasonable degree of accuracy. To address this challenge, George brought in a new chief financial officer.
But just as George was beginning to feel optimistic about where ACI was going, he got a phone call from sales to tell him that Alcatel was canceling its backlog. Apparently, Alcatel's customers were slowing their acquisition of new equipment, and Alcatel seized that opportunity to shift all of its business to a French competitor of ACI's that had a reputation for higher product quality.
George's first call was to the chairman. To his surprise, Mike handled it well, voicing his empathy and support. But clearly, George was expected to take action quickly. He decided that one way of avoiding a layoff was to implement a four-day workweek. That spread the pain evenly among all employees. George called his executive team together to tell them the bad news and to get the necessary action underway. Next, he went to discuss the issue with union leadership. The regional head of the union-also the local steward-was in George's office before lunch with a stern look on his face. "Look, George, you're the new kid on the block, so we don't think this setback was your doing. No one likes to lose part of their paycheck, but your plan treats management the same as the blue-collar workers, so you've got our support. We want to give you a chance to act. If we don't like what you're doing, we'll be back."
The four-day workweek was implemented. Without being told, the entire management staff knew that they got four day's pay, but they were expected to be there five. After about six weeks, the lower costs began to kick in, and ACI was again holding its head above water...barely.
Then, George's worst fears began to unfold. The lack of demand from Alcatel was now spreading to his other customers and, although they didn't cancel their backlogs, they significantly reduced them. The customers' forecasts reflected the same story.
Like it or not, George could no longer avoid a layoff. His best calculation was that 900 people would have to go. The remainder would go back on a five-day week. But a lot more details had to be worked out. What projects should be cut? What parts of the organization should be hit the hardest? Who should be protected?
Discussion Questions 1. When George moved to the four-day workweek scheme, should he have expected his managers to work five days for four days' pay? 2. Should George tell anyone except his immediate staff about the impending layoff before the details have been worked out? What about the board of directors? The union? The employees?
The Mike Wallace Factor and the Common Good
George decided to be open about the impending layoff with all the important constituencies even though the implementation details were not worked out. That evening as he left his office for the day, George was surprised to see that a television crew had set up their camera near the main entrance and were talking to employees as they left.
As soon as the reporter spotted him, the crew raced over and thrust a microphone in his face. "We understand that there are going to be layoffs at this plant. What is your comment? We hear that the plants in Mexico and Scotland are not going to be hit as hard as the Irvine plant. Aren't you just using this layoff as a way to export jobs to lower-wage countries? Don't you owe it to the American workers to let them keep their jobs so long as there are foreign workers to be laid off?"
George made a few comments that set the matter in perspective. Although still skeptical, the press grudgingly conceded the argument...for the moment.
When he got to the parking lot, he found that his car had been slashed. The paint job was ruined. As he drove home, he thought, These problems are not my doing. If the managers and workers had paid more attention to quality, they might not have been hit so hard by order cancellations. The layoff was going to happen the next Tuesday, and he scheduled an all-hands meeting for the remaining employees. Did he ever have things to say to them!
The next six months were the roughest of George's career. But things started to click, the industry was coming back, and the organization had fixed the quality problems. Best of all, the new product, which used technology that was a generation ahead of the competition, was moving along at lightning speed. They would have it to market by his first anniversary. As George reflected on the past year, he realized he had learned a lot.
Two years later, ACI was the most profitable company in its sector. It felt like a rebirth, for George as well as for the company.
Discussion Questions 1. Was George's decision to be open about the impending layoff the ethical thing to do? Are there situations in which it is best to try to keep a lid on such information? 2. The particular jobs cut at ACI were chosen on the basis of the long-range interests of the business and not on the nationality of the work force. As the reporter's questions implied, shouldn't American businesses favor American employees over foreign employees? What do you think George said to the TV reporters?
Gil Amelio, partner in the Parkside Group and former CEO of Apple Computer Inc., presented this case at a meeting of the Ethics Roundtable for Executives.
April 1, 1999
Ethics Center announces faculty Hackworth grantees
The Ethics Center is please to announce its Hackworth Grant Faculty recipients, awarded to selected Santa Clara University staff who will focus on ethics-related projects.
Young Park New Global Jesuit Network Scholar
Professor Young Park from Sogang University in Seoul, Korea has been named Global Jesuit Network Visiting Scholar at the Ethics Center, thanks to a generous gift from Chuck and Nan Geschke.