Corporate downsizing is often morally wrong

"Corporate Downsizing" from the perspective of the deontological theory according to Rawls and Kant

Table of Contents

1 Introduction

2 Definition of corporate downsizing

3 Status of the discussion
3.1) Utilitarianism
3.1.1) Theory
3.1.2) Application
3.2) Libertarian Thought
3.2.1) Theory
3.2.2) Application

4. Deontology
4.1) Justice according to John Rawls
4.1.1) Theory
4.1.2) Application 1: Intuition of fairness
4.1.3) Application 2: Two principles of justice
4.2) Human dignity according to Kant
4.2.1) Theory
4.2.2) Application 1: Universalization test
4.2.3) Application 2: functional formula
4.2.4) Case study: Volkswagen

5 conclusion

6 literature

1 Introduction

"From a business point of view, the focus is on the potential and not the person of the employee concerned" (Marr, p.7, line 22 et seq.)

This quote seems to sum up the radical economic side of corporate downsizing - the extensive job cuts to increase profit.

But what is the moral view of this problem?

And above all: How can the economic and moral view, if they turn out to be different, be reconciled in terms of business ethics?

In order to consider these topics, a more extensive definition of the corporate downsizing considered here is first given in the second chapter.

The fundamental question of the present work is how these management measures are to be ethically assessed - which people have to be considered and which theories are best suited to form a good moral framework. The current state of the discussion, although perhaps not as extensively discussed as other areas of business ethics, has found various arguments for and against downsizing. The most important approaches that emerge can be assigned to utilitarianism, libertarian thought and the deontology according to Rawls and Kant.

To provide a general overview, all approaches are briefly described, but the focus of this work is on deontological theory. There are two reasons.

On the one hand, the approach is still relatively little described in the existing literature. On the other hand, in my opinion, it is of great importance precisely in this matter: It is a dilemma in which, to the benefit of some, great personal damage occurs to a few individuals.

The utilitarian view does not focus on the fate of the individual but on that of the masses, and libertarian theory also seems to be less about people involved than about a network of obligations. However, since there is a risk in this case that individual persons are treated in an intuitively immoral and unjust way, the focus of this work is on the investigation of the moral influence on individuals. The deontological theories according to Rawls and Kant are best suited for this: Rawls, since he develops a differentiated theory of justice, and Kant, since he establishes the fundamental respect for every human being.

In the following, the systematic theory for each approach is briefly explained and then applied to the case of downsizing.

Chapter 3 provides a general overview of the discussion related to utilitarianism and libertarian thought and is more general by comparison.

This leaves enough space for an extensive analysis and application of the moral theories according to Rawls and Kant in Chapter 4. A practical example shows how these approaches can be implemented in the company.

2 Definition of corporate downsizing

Corporate downsizing is the dismissal of many workers and entire departments of companies for the purpose of increasing profits. It is important to differentiate that the layoffs have nothing to do with the poor work performance of the employee concerned. They serve the pure reduction of jobs and the consequent saving of the corresponding payments. The individual is powerless against it.

In order to emphasize the moral relevance of the situation, this thesis aims to look at corporate downsizing under certain circumstances that, in my opinion, make the decision morally questionable in the first place.

Some arguments that describe corporate downsizing as unproblematic relate to the fact that employees can quickly find a new job and not suffer much damage, but rather benefit from the change.[1] This is certainly correct in individual cases and here one could probably classify the practice as morally harmless.

The more common and, in my opinion, morally problematic case of downsizing, however, has different requirements. These should form the subject of the study at hand:

Low-skilled workers, often factory workers, are most frequently affected by downsizing (see Orlando p.1). They have difficulties in finding a new job, also because many workers with the same qualifications are looking for work in the same area due to the wave of layoffs. In addition, these workers often do not have the opportunity to secure themselves financially and are therefore dependent on a regular income for their livelihood.

Only a few countries have social systems that compensate for these losses.

The assumption that the dismissed workers are actually affected and not just switch from one job to the next is important in the conception and decisive for a differentiated analysis.

3 Status of the discussion

Only recently has the question of downsizing entered the interest of economic economists. For about 20 years there have been some well-founded applications and discussions of philosophical theories that relate to the issue. This chapter sets out a few of these arguments, which fall under the utilitarian and the libertarian views. As we shall see, their outcome and the practical implications are not always clear-cut.

3.1) Utilitarianism

3.1.1) Theory

Utilitarianism emerged in the late 18th century, largely shaped by the works of Jeremy Bentham and John Stuart Mill. The general approach of the theory is to achieve the maximum amount of common good for society. When assessing the moral correctness of an action, the aim is to determine the consequences for all potentially affected persons. Depending on which action in the sum causes the greatest amount of happiness (or the smallest amount of unhappiness) is to be regarded as the most moral in each case.

It is important in our context that the distribution of happiness does not play a role for the utilitarian. If an action causes 10 units of luck, it is irrelevant whether these units are divided equally between 10 people, or whether one person gets 10 units while the other 9 people get nothing. For the utilitarian, both actions are morally equivalent.

3.1.2) Application

What about the luck balance on the question of downsizing? Do the positive effects of downsizing create enough happiness for other members of society to offset or outweigh the unhappiness of the laid-off workers? From a utilitarian point of view, the act would thus be justified or even required, since for the strict utilitarian there is only one correct moral act: the one that maximizes public happiness.

On the one hand, there are the consequences for the dismissed workers on the one hand. Since employees without large financial reserves and unemployed for some time are considered here, it can be assumed that the employee and perhaps the whole family will have to reduce their standard of living without income and in some cases fall below the subsistence level. According to Orlando, 15% of the workers affected lose their homes (p.1).

Further consequences are psychological in nature. Depression and even suicide are common phenomena. Some of the psychological stress factors also manifest themselves in those affected in the form of alcoholism and incipient crime such as theft, abuse or even murder. These consequences in turn affect other members of society.

Another affected group are the lagging workers, whose motivation and loyalty to the company decrease, which also means a decrease in happiness in the area of ​​their job for them

On the other hand, what are the positive consequences of downsizing? Since it is a profit-promoting measure of the company, it can be assumed that higher profits will be made. According to Stieb, 37% can increase their productivity and almost 50% increase their net profits. (P.71, line 5f.)

These extra wins add to the happiness of different people. First of all, the company's shareholders benefit proportionally. The company's employees who are still employed may also benefit from a higher salary or a lower risk of the company's bankruptcy - but this security could in turn be offset by the fear of experiencing the same fate as the laid-off colleagues.

It seems that especially the shareholders and possibly the high management, if they are allowed to award higher salaries due to the large profit margin, benefit from downsizing. The extent to which this occurs depends on the success of the downsizing measure carried out.

Shareholders are seldom as financially dependent on their investments in a particular company as the corresponding employees, so the above-mentioned emotional and life-changing circumstances in a positive direction will very likely not materialize. Even the senior managers of a company are unlikely to perceive the increase in salaries to the same extent as the workers in the loss of all financial inflows.

This is due to the decreasing marginal utility of money - the less a person has of a certain good, the more valuable an additional unit is. Conversely, the more a person already has, the less their happiness is positively influenced by additional units.

The rough balance of the above facts seems, at least in the normal case, to cause a large amount of unhappiness overall, while this is offset by only a small amount, if any, of happiness caused. So the act must be viewed as morally wrong.

A special case would be a company that is currently in a financial crisis and downsizing would be one, or the only, option to save the company. In this case, probabilities have to be taken into account, i.e. the actual misfortune and the possible misfortune if the company should actually go bankrupt and then all workers have to be laid off and the shareholders lose everything. However, it is questionable whether this type of company rescue still falls under the strict concept of downsizing, or has to be viewed from a new perspective anyway.

3.2) Libertarian Thought

3.2.1) Theory

The basic idea of ​​libertarian theory is “self-ownership”. This means that every person has ownership of himself, just as he can have ownership of any other thing.

Property in the libertarian sense that is relevant here primarily means having an exclusive right to use a thing, a "right to freedom to use property and a right vis-à-vis others not to use it." (Vallentine, Z. 80f., Translation MC)

Self-ownership has two important implications. On the one hand, the freedom of every person to do what they want (i.e. to do what they want with themselves), that is, to pursue their interests free from external interference. This freedom ends where other people's self-ownership begins. Things that violate a person's freedom are immoral. It is important to point out that this freedom primarily describes a negative freedom, that is, freedom from interference by other people. This freedom, on the other hand, does not include positive freedom, i.e. the freedom to or the right to help from others (for example to freedom in the sense that one is offered various possibilities to shape one's life).

On the other hand, self-ownership also implies the possibility of ownership of other things. Depending on the theory, this follows from different sources, according to John Locke, for example, from mixing one's own work with something (cf. Locke item 294), or from the donation or the lawful acquisition of a thing, whereby the property is transferred to another person transforms. The owner of a property in turn has the sole right to use the property. Things that prevent him from using his property in the way he intended are an interference with this right and therefore immoral.

The libertarian idea is particularly important in business ethics, since in this area it is often about the fair division of money and goods, i.e. property. According to the libertarian view, any redistribution that transfers property from one person to another without his or her stated will is an encroachment on his freedom and property rights and is therefore immoral. It is irrelevant whether a redistribution would lead to greater justice or greater happiness. The libertarian view therefore views the collection of taxes rather critically, expressed very radically even as “theft” of money or labor. (see Homann, p.223)

3.2.2) Application

Downsizing is viewed by the libertarian side as largely unproblematic. On the contrary, from a libertarian point of view, the failure to downsize to protect individual employees is more to be criticized.

The basis for the moral justification of downsizing are the freedoms of every actor involved, in this case the employees, the company and the shareholders. This freedom means that each participant should have the freedom to give or not to give their work (or even their money), as well as to accept or not accept a person's work. Of course, the law offers limits to this, for example protection against discrimination and the notice period as social protection. (cf. Stieb p.63) Within these limits, however, companies should be able to move freely from a libertarian point of view. You must not restrict the freedom of the employee to the extent that they force him to work, that would be immoral. But you are not obliged to keep his labor to help him as a person or to support him in a better life, that goes beyond the libertarian moral obligations.

The libertarian argument for the moral imperative of downsizing for the purpose of increasing professionalism relates to the property rights of shareholders. The shareholders have invested their money in the company, they are now co-owners of the company and, according to the theory, can decide what to do with the company, i.e. their property. The executive body is indeed the management of the company, but due to the property rights this is obliged to the will of the shareholders. This is how one of the most important current representatives of the liberal direction in business ethics, Milton Friedman, puts it: "The manager is the agent of the individuals who own the corporation [...], and his primary responsibility is to them." (Friedman, p.1 , Line 30ff.) It can be assumed that the shareholders have invested in the company with the conviction and will that their assets will be increased there. Therefore, their presumed will exists to the effect that the company maximizes the profit and thus also their respective share (cf. Stieb, p.67). So if the only moral interests that the manager has to consider are the property rights of the shareholders, and he has no moral obligations to the employees who do not own the company, then he is morally obliged to do so, only at the will of the owners to act and maximize profit. It follows that a downsizing measure, if it leads to higher profits and returns for shareholders, is morally imperative.

Choosing not to downsize to improve workers' lives would redistribute shareholder property - lost profits - to workers, so it is almost a tax. This is not in the interests of the owners and is therefore immoral, as the manager used their property without consent. Stieb argues that a shareholder who wants to invest his money for social purposes can do so in social institutions and not in companies.

Some counter-arguments are based on the question of whether the manager actually only has obligations towards the shareholders, or whether the rights of the stakeholders, such as employees, are also important.


[1] See, for example, Stieb, p.72, line 17, on the subject of downsizing: “I would think that it is in my best interest to be told that I am no longer needed at company A so that I can find a job at company B . ”

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