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Socially Responsible Enterprise Restructuring PDF free Download. Think more deeply and widely.

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!NTRODUCTION TO THE SUBJ ECT

INTERNATIONAL I.ABOT]R ORGANIZAIION

SOCIALLY

ENTERPRISE RESPONSIBLE

RESTRUCTURING

INTRODACTION TO THE SU BIECT

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Victor Beznossikov

Senior Programme Offrcer

Enterprise Development,

ILO International Training Centre,

Viale Maestri del Lavoro 10,

10127, Turin, Italy

Tel: + 39 0ll 6936302

Fax: * 39 0ll 69 36 589 or 66 38 842

PREEACE

In a globalized and increasingly competitive economic environment, en-

terprises must constantly adjust and restructure to survive and grow. The

liberalization of trade and finance and rapidly changing production systems

create both major opportunities and threats to business. Enterprises through-

out the world have to respond even more rapidly to new technologies, new

competitors and turbulent markets. Their capacity to sustain productive and

quality jobs depends on their ability to meet competitive challenges and to

take advantage of the emerging opportunities. In fact, enterprise development

can be looked upon as a series ofrestructuring undertakings.

At the same time however, restructuring involves dislocations and human

costs. It affects not just the owners and workers of the enterprise but other

stakeholders as well. The challenge is to remain competitive and be viable

while at the same time minimizing the social costs (e.g. dislocations, loss of

jobs, deterioration ofquality ofjobs, loss ofsocial cohesion at work and in the

community, loss of social security and other social benefits, precarious jobs,

etc.) of enterprise restructuring. When radical enterprise restructuring is re-

quired, as in the case of countries in transition from command to market econo-

mies, in countries undergoing economic downturns, and even in developed

economies where turnaround of distressed enterprises, mergers and acquisi-

tions are a constant occurrence, there is even greater need to adopt approaches

that will minimize the social costs of restructuring.

This working paper synthesizes the various concepts and notions on

socially responsible enterprise restructuring. It gives an overview of the why,

what and how of restructuring that minimizes the social cost implications. It is

part ofa package ofworking papers, guides and manuals that the Job Creation

and Enterprise Department of the ILO is publishing to help build consensus

and the capacities of the social partners, managers and workers to pursue

restructuring in a socially responsible way.

ACKNOWLEDGEMENTS

The preparation of this joint ILO/EBBF working paper has been directed

by George Starcher, Secretary-General of the European BahS'iBusiness Forum

@BBD

Valuable contributions were made by a number of ILO staffmembers. Gciran

Hultin, Executive Director of the Employment Sector and Michael Henriques,

Director of the Job Creation and Enterprise Department, provided both guid-

ance and inspiration from the conception to the completion of the paper; Arturo

Tolentino, Head, Management Development Programme, served as project

manager. Alexander Louzine, Rainer Schliwa, and Takafumi Ueda drafted sec-

tions of the paper on Russia, Poland, and ILO constituents respectively. Masaru

Ishida, Rolph van der Hoeven and Christine Evans-Klock contributed to

reviewing early drafts. We also wish to recognize the contributions of the

Employers' and Workers' Activities Branches in reviewing and commenting

on the draft of this paper. In addition, Luda Petcherina of the ILO Library

rendered an invaluable service in initial documentation searches.

Two EBBF members contributed importantly to this working paper.

Ruxandra Boros, an independent management consultant, participated in the

original conception and structuring of the project, carried out a significant part

of the research and prepared the initial drafts of several chapters. Diane

Chamberlin provided valuable editorial assistance which made this a much

more coherent and readable document. Several other EBBF members provided

valuable comments, including William Walker, General Manager of DuPont

Luxembourg, Gregory Dahl of the International Monetary Fund, and Darwin

Gillett, independent consultant.

The European Business Network for Social Cohesion was helpful in grant-

ing permission to use five cases of best practice from their extensive Resource

Data Base, as was Regina Matthijsen for permission to cite best practices from

Philips International. Two private sector specialists from the World Bank, John

Nellis and Sunita Kikeri, were generous in providing pertinent information on

privatization.

Among the other contributors were Steve Voien of Business for Social

Responsibility, who shared BSR's knowledge on downsizing practices in the

United States; Michael Novak, Chairman of the Caminos Corporation, who

kept us well informed of significant news on restructuring in Japan; and pro-

fessor Henri-claude de Bettignies (INSEAD and Stanford Business School),

who made very informed comments on Section 5.2,Japan.

EXECUTIVEST]MMARY

The central propositions of this working paper are, first, that enterprise

restructuring will continue to be necessary in order to remain competitive and

survive in an increasingly turbulent global economy and, second, that socially

responsible approaches to restructuring are in the best interests of sharehold-

ers as well as other major stakeholders in an enterprise.

Continued turbulence and change in markets and increasing intensity of

competition are among the few certitudes upon which business leaders can

count. Globalization of markets, commerce and financial flows; deregulation

and trade liberalization; rapid technological changes; the shift from an indus-

trial to a knowledge- and information-based economy; the threats to environ-

mental sustainability; changing expectations and value systems are all con-

vincing reasons to expect continuing turbulence.

Because of these changes, new factors for success are emerging. These

new factors include building deeper and more strategic relationships with cus-

tomers, employees, suppliers and other business partners; developing a repu-

tation for integrity, trust, and environmental and social responsibility; being

customer-oriented and a leader in quality, service and reliability; innovating

and striving for continuous improvement and excellence; building an educated

and motivated workforce.

Business operates increasingly in a highly interdependent ecosystem in

which management must balance the interests of the various stakeholders.

This is particularly true in decisions on restructuring. All too frequently, em-

ployees are the first victims of restructuring when management decides to

implement short-term cost reduction measures, often without really diagnos-

ing the problems or studying the underlying reasons for the need to change

and restructure.

The socially responsible enterprise can be defined as one which:

. rewards shareholders with a reasonable return over time;

. is customer-focused;

. considers employees as its most important asset, provides meaningful

work, fair wages and benefits, ensures their employability, and provides an

enabling work environment;

. contributes to the prosperity and social cohesion of the communities in

which it operates;

. applies the golden rule ("do unto others as you would have them do

unto you") to its business partners (suppliers, alliances, franchisees);

. practices eco-efficiency and environmental sustainability.

This paper develops the concept of a hierarchy of restructuring and advo-

cates that higher, more strategic, levels of restructuring be studied carefully

before decisions are taken to downsize or reduce personnel costs. These higher

levels include revitalization and changes in strategy, ownership, financial struc-

tures, organization, production, outsourcing and non-personnel cost reduction.

Nonetheless, these changes and other conditions may well mean fewer

jobs and a number of socially responsible approaches to downsizing are de-

scribed. Often these measures will suffice to achieve the needed results with-

out redundancies or layoffs. If not, a great deal can be done to facilitate

reemployment and to reassure the remaining employees.

Countries such as France, Japan and the United States differ widely in

their restructuring practices. While these differences reflect tradition and culture,

as well as the legal and regulatory framework, there is increasing evidence of

convergence in approaches to restructuring and downsizing.

Governments, in consultation with employers' associations and workers'

organizations, have a very important role in defining the legal and regulatory

environment within which managers decide on whether and how to restructure.

These same stakeholders, as well as non-governmental organizations, are of-

ten partners in restructuring programmes. Such partnerships will inevitably

characterize more and more major restructuring efforts.

In reviewing the new factors for success, in studying best practices in

restructuring and in noting the growing importance of partnerships, it seems

clear that enterprise competitiveness and sustainability will be determined in-

creasingly by human capital built on trust, social cohesion and values, rather

than on financial and physical assets.

This working paper is based to a large extent on experience and research in

large companies in industrialized countries. Many of the conclusions are

nevertheless relevant for small and medium-sized enterprises and in develop-

ing and emerging economies.

INTRODUCTION

The impact of enterprise restructuring and its effect on millions of employ-

ees all over the world each year is of major interest and concern for all

constituents of the International Labour Organization.

For well over a year, officials in the Entrepreneurship and Management

Development Branch of the ILO and the European Baha'i Business Forum

(EBBF) met informally to discuss the issues of corporate social responsibility

and enterprise restructuring. At the same time, EBBF has been promoting the

social responsibility of business and business ethics in Europe and many

other areas of the world. From these discussions emerged the project of a joint

working paper which would capture some experiences and best practices, pri-

marily in the developed economies, concerning enterprise restructuring.

In undertaking this project, both the ILO and EBBF recognize the inevitability

of continued enterprise restructuring. It has become imperative for economic

survival and competitiveness in nearly all sectors of the economy. The very

nature of a world economy, which increasingly embraces free markets and

private enterprise, implies constant change and adaptation to the dynamics of

the system. However, having accepted the need for restructuring, the issue of

how to carry it out becomes all-important. There are many socially responsible

approaches which take account of the interests of all the stakeholders or part-

ners in the enterprise, both internal and external. This paper concludes that

responsible restructuring makes good business sense.

Theageof paradox

Most business leaders throughout the world agree on at least one thing:

that the new millennium will bring fresh challenges and relentless, continuous

and rapid change. Globalization, the increasing intensity of competition, de-

regulation, new technology, changing societal expectations and values all

combine to create an environment of permanent turbulence and increased

complexity in all sectors of the economy and in all regions of the world. Many

authors agree that this represents a post-industrial revolution, even more pro-

found than the industrial revolution itself.

It is not surprising that an increasing number ofparadoxes are emerging as

countries move from traditional industrial economies to post-industrial econo-

mies based on knowledge and information. At the same time, developing

countries are moving away from supplying basic commodities to increasingly

sophisticated production and the marketing of finished products to the devel-

oped world. These paradoxes affect all aspects of society. Perhaps enterprise

managers are even more affected by these changes than other people, as may

be seen from the following five examples.

Paradox one: There is increasing evidence that practices which provide

more meaningful work and a higher quality of life in the workplace have a very

direct impact on profits through increased productivity, greater innovation,

higher quality and reliability, and more skilful and committed people at all levels.

Several studies have examined the relationship between good human resource

policies and practices on the one hand and long-term competitiveness and

financial performance on the other. For enterprises in a turbulent and complex

environment, which means most private firms, the difference in return on

investment of businesses practising good human resource policies was sig-

nificantly higher than for enterprises with more traditional practices (Mack,

1992, p.60). Furthermore, research seems to validate earlier publications on

participative management and employee involvement. Yet, and here is the para-

dox, current management practices do not reflect this finding. In fact, some

evidence indicates that practices may be moving in exactly the opposite direc-

tion. What explains this failure to connect knowledge of the importance of

meaningful work to actual management practice?

Paradox two: We read that human and social capital are becoming all-

important in the post-industrial economy. Human capital includes intelligence,

values, technical knowledge, experience, creativity, networks and corporate

memory, as well as skills. Nearly all corporate codes of ethics or conduct state:

"People are our most important asset". Yet managers often destroy the human

tissue of their own organizations as they downsize, reduce training budgets

and divest whole "communities" within their group.

Paradox three: Research shows that customer loyalty is closely related to

employee motivation and loyalty and that the most profitable customers are

the most loyal ones. Employee satisfaction translates into customer satisfac-

tion. Yet many companies still treat their employees as a cost. Large staff

reductions are still fashionable and even likely to increase. Short-term focused

financial markets love it, and collective layoffs usually correlate closely with

CEO bonuses. However, the human side of downsizing paints a very different

picture: morale, motivation, loyalty, creativity and productivity all suffer.

Paradox four: Surveys indicate that almost all large companies have

downsized and many have downsized several times. Yet these same surveys

(Tomasko, 1992) show that fewer than one in four downsizings really achieve

their objectives ofreducing costs, increasing productivity, improving quality

and enhancing customer service. This experience has led to the expression

"downward spiral of downsizing" to reflect the inevitable mind-set which creeps

in, focuses on repeated cost-cutting and ignores growth opportunities.

To quote Peter Drucker (February 1995 issue of The Atlantic Monthly):

"In many, if not most cases, downsizing has turned out to be something that

surgeons for centuries have wanted against: amputation before diagnosis.

The resuh is always a casuaby."

Paradox five: In a similar way, numerous studies have shown that over half

of the mergers and acquisitions which take place do not achieve their objec-

tives. Often the only beneficiaries are the shareholders of the company being

taken over who cash in on over-inflated valuations, while the acquiring

companies realize very limited added value. Yet 1998 saw more mergers and

acquisitions than any other year in history and 1999 maintained this pace not

only in the corporate world but also in the remunerative activity of the

investment bankers, lawyers and consultants involved. Do corporate egos

sometimes make size an end in itself?

Some philosophical beliefs about the role of business in society

Underlying this working paper are certain principles and beliefs about the

role of business in society. These are summarized below:

/ The role and economic mission of private enterprise is fundamental to

the prosperity of mankind.

/ The enterprise has a double mission: on the one hand to be competitive

and sustainable, that is profitable, and on the other hand to be socially and

environmentally responsible. Enterprises that are not economically viable

cannot be socially responsible in the long run, nor can enterprises be viable

without being socially responsible.

/ Profits generally reflect success in satisfying customers' needs for prod-

ucts and services. These are essential to finance the growth of the enterprise

and to support, through taxes, the functioning of the communities in which the

enterprise operates. Profitable companies are better able to maintain stable and

meaningful employment, fair wages and benefits.

/ Profits earned ethically and spent responsibly are a vital source of

wealth creation for the community.

/ Globalization, new technology, increasingly intense competition and

deregulation will continue to render the business environment turbulent,

requiring continuous restructuring and change in order to survive in a global

economy.

/ The survival and sustainability of the enterprise will also require a

workforce that is autonomous, responsible, motivated, creative and empow-

ered with a new attitude to work which is considered fulfilling, meaningful, and

socially useful.

/ These same forces are affecting other parts of society at a time when

the credibility of many traditional institutions - government, religion, even the

family - is eroding. Business therefore has a responsibility to offer social value

as well as economic value.

/ Because of changing value systems and the expectations of various

stakeholders in the enterprise, shareholders, customers, employees, business

partners and communities are putting pressure on business for better'torporate

citizenship."

/ Being socially and environmentally responsible will prove to be en-

tirely compatible with the best interests of shareholders, especially in the me-

dium and long term. Slowly but surely, managers are waking up to their social

and environmental responsibilities primarily because it makes good business

sense for them to do so.

/ Government has an important role to play in creating an enabling

environment which encourages and rewards business for acting responsibly

and in partnership with other actors in society.

Aboutthisstudy

The subject ofrestructuring is quite broad, as we shall see, and the avail-

able literature is vast. This study focuses largely on the restructuring of pri-

vate enterprises in developed economies. we recognize that restructuring in

connection with the privatization of state-owned enterprises is particularly

significant in emerging and developing economies, and that governments play

a pivotal role in this process. This subject is treated in Chapter Six, although

the comments on restructuring private enterprises are also relevant to enter-

prises which are being privatized.

The primary audience of this paper consists of government policy mak-

ers, workers' organizations, employers' associations, top managers of private

or public enterprises about to be restructured, management consultants, aca-

demics, trainers and other experts directly involved in enterprise restructuring.

Organization of the paper

This paper consists of seven chapters which broadly cover the reasons

why enterprise restructuring is important, why it will continue and how it can

be done responsibly. The study describes practices in various countries and

presents different experiences of privatization. Chapter Eight draws some

conclusions and indicates areas for future research.

Chapter One: "The changing business environment" describes the changes

in the external environment which are creating such a dramatic increase in

restructuring. The chapter points out some requirements for success in

the twenty-first century.

Chapter Two: "Socially responsible restructuring" develops the concepts

of the social responsibility of enterprises and stakeholder capitalism. It

then defines restructuring and describes some of the more relevant concepts

and approaches. Annex A gives a more comprehensive lexicon of terms

related to restructuring.

Chapter Three: "Why and how to restructure" explains why companies

find it necessary to restructure and suggests the most appropriate ap-

proaches to follow. It then discusses a hierarchy ofrestructuring, begin-

ning with the approaches to strategic restructuring and moving down the

hierarchy in order of potential impact on stakeholders to ownership

restructuring, financial restructuring, revitalization, organizational

restructuring, production restructuring, outsourcing and reduction of non-

personnel costs.

ChapterFour: "Downsizing" is the most visible form of restructuring with

the greatest social impact. This chapter describes the different strategies

and approaches to reducing the number ofjobs and summarizes best prac-

tices and the lessons to be learned.

Chapter Five: "Restructuring practices in selected countries" describes

and compares restructuring experience in France, Japan, the United States,

Russia and Poland.

Chapter Six: "Privatization" deals with restructuring enterprises in the

context of privatization.

Chapter Seven: "Roles of government and employers' and workers'

organizations" offers examples of initiatives and good practices of these

partners in enterprise restructuring.

Chapter Eight: "Conclusions" is a general summary of the paper and sug-

gests issues which merit further research and study.

The annexes are as follows:

A. Lexicon on restructuring

B. The Volkswagen (VW) case

C. List of organizations promoting corporate social responsibility

D. "The Principles of Business" of the Caux Round Table

Bibliography

Background reading

ChapterOne:

THE CHANGING BUSINESS ENVIRONMENT

This chapter discusses the external forces that are radically transforming the

business environment. We are only beginning to grasp the extent and meaning

of these changes. Yet we know they are challenging many traditional views of

competitiveness and of the key factors for competitive success. The chapter

concludes with some new key factors for success in this turbulent new economy.

1.1.. Foncps lr wom

There are a large number of trends and changing forces at work which

explain the widespread and increasing restructuring throughout the world.

. Globalization ofmarkets, consumer preferences, commerce, zupply chains

and financial flows. There is a lively debate over the pros and cons of

economic globalization. Conventional wisdom is that the emerging global

economy and freer trade will bring worldwide prosperity, faster economic

growth, more democratic institutions and ultimately world peace. Others

argue that global economic integration is a negative force weakening the

nation state and crushing the security and economic aspirations of millions

of workers. They feel that globalization is responsible for increasing social

injustice and income inequality, unemployment, insecurity and instability.

In either case, globalization is a reality and a revolutionary force, not sim-

ply a concept or a trend. This shrinking of our planet creates an interde-

pendence which calls for a new mind-set, a shift in thinking from the parts

to the whole, to connections and relationships, to cooperation rather than

competition. Business ethics are becoming global as new pressures are

building from non-governmental organizations and international institutions

for more principled behaviour on a global scale.

. Rapid technological change. Changes, particularly in information technol-

ogy and communications, are transforming markets, alleviating burden-

some tasks, enabling greater customization of production and contributing

to high labour displacement. They are also providing instant updates on

the movement of capital, goods and production locations, making domes-

tic markets increasingly interdependent and integrated into a world

economy. Even the present basic business model is being challenged by

the Internet revolution.

Deregulation and trade liberalization. The changes brought about by

regional trading agreements (EU, NAFIA, MERCOSUR, ASEAN and

EFTA) and global trade liberalization have contributed significantly to glo-

bal economic growth and higher standards of living in most countries. Yet

free trade has also created havoc for companies (particularly in emerging

and developing countries) that prospered under government protection but

lack the management experience and technology to survive the onslaught

of foreign competition. Many have been forced to restructure by selling,

creating joint ventures or closing down completely. Liberalization has also

created major challenges for companies in industrialized countries. For ex-

ample in February 1999, the European Union electricity markets officially

became competitive. Large industrial consumers now have the right to choose

their electricity suppliers. For many utilities, this will mean major strategic

restructuring and rethinking of their vertically integrated model of produc-

tion and their value chain ("European power: Managing through deregula-

tion", 1999). Another example is the European telecommunications market

which was deregulated in January 1998. Since then, competition has become

fierce, prices have fallen by as much as 70 per cent and service has improved.

Changing capital ownership. Privatization of companies and the

consolidation of entire sectors of the economy through mergers and ac-

quisitions have led to major restructuring and change, creating both op-

portunities and the need for transformation at all levels. Governments and

international agencies have been directly involved in the pre- and post-

privatization restructuring of state-owned enterprises. At the same time,

there is increasing employee ownership of companies through stock op-

tions, company share purchase plans, or through pension schemes.

Shiftfrom an industrialeconomy to a knowledge- and information-based

economy. Just as factories and fixed assets replaced land as the critical

asset when countries moved from agricultural to industrial economies,

human capital is today replacing financial capital as the most important

strategic resource. Traditional concepts of the job, of work and of motiva-

tion are being challenged as telecommuting, shared jobs and part-time

employment are making anachronisms of the 8-to-5 job and the one-

company career.

Increasing intensity of competition. Peter Vaill (1996) used the expression

perntanent white water to describe the conditions of turbulence and

instability which global competition has created. Managers at all levels are

facing changes unprecedented in both magnitude and frequency. Most

often they comment on the growing complexity and unpredictability of

change, and the confusion and even chaos in which they must develop

strategies and plan for survival.

. Changing expectations and value systems. Business is confronted with

different lifestyles and more demanding expectations on the part of em-

ployees, customers and communities as a whole. Groyder (1998) refers to

this as the "death of deference". Society is demanding greater respect

for international labour standards in the workplace in such areas as health

and safety, human rights and child labour. After all, when the reality of

the enterprise is out of phase with the values of the people, there is a real

problem. According to Richard Barrett (1998) ..This mismatch of per-

sonal and corporate values is perhaps the most pervasive problem fac-

ing companies today". This trend is challenging executives io think more

profoundly about the fundamental purpose of business, its responsibility

to society and the nature of potential threats to its own ';licence to

operate."

' Growing foreign direct investment. perhaps one of the most powerful

change agents for corporate restructuring in developing and emerging

economies is foreign direct investment. In some cases this provides ac-

cess to new technologies and management practices. In others, foreign

shareholders or partners bring pressure lor change and increased

competitiveness. This foreign private investment is pioving much more

effective in provoking change than many structural adjustmenlprogrammes

imposed by international agencies.

' Threats to environmental sustainability. The sustainability of our planet

Earth is being severely tested by increasing pollution and resource deple-

tion..In response to these dangers politicai forces, public opinion and

certain non-governmental organizati,ons have become real constraints on

managers' freedom to exploit scarce raw materials.

Two other trends in society also affect the business environment. Their

potential impact on tomorrow's market place and employmenrui" "uur", or

concern. The first is the weakening of social cohesion and the increasing

disparity between rich and poor. Soi-utions are needed for three work-Jated

Changing demographics. The increasing presence of women and minorities

in the workplace is leading executives to challenge many outmoded poli-

cies, practices and traditions. Equally important, feminine values such as

intuition, caring relationships and participation are increasingly accepted

as necessary for effective management in the new economy. The ageing of

the population in industrialized economies, another demographic trend,

will affect the mix of future customers as well as the composition of the

workforce.

challenges: unemployment, decent work (ILO, 1999) and workaholism, for which

business must assume responsibility. The second societal change is the fact

that business is becoming the dominant institution in society as the credibility

of political parties, religious institutions, governments and other traditional

institutions erodes. As David Korten (1995) says, of the world's 100 largest

"economies", 5l are corporations and only 49 are countries. The economy of

Mitsubishi is larger than that of Indonesia, the world's fourth most populous

country. A growing number of CEOs consider it in their own enlightened self-

interest to contribute to solving social problems. Nearly a decade ago, the late

Willis Harman already captured this change as he wrote:

Business lrus beconte, in this last half century, the most powerful

institution on the planet. Tlrc dominant institution in any society needs to

take respottsibility for the whole - as the church did in the days of tlrc Holy

Roman Empire. But business lms not had such a tradition. This is a new

role, not yet well understood or accepted. Built on the concept of capitalisnt

and free enterprise from tlrc beginning was the assumption that tlrc actions

of nmny units of individual enterprise, responding to market forces and

guided by the "ir:isible lmnd" of Adam Smith, would somehow add up to

desirable outconrcs. But in the last decade of the twentieth century, it has

become clear tlmt tlrc "invisible hand" is faltering. It depended on a

consensus of overarching meanings and values that is no longer present. So

business lms to adopt a traditiott it lms never had throughout the entire

history of capitalisnt: to share responsibility for the whole. Every decision

that is made, every action that is taken, must be viewed in light of that

respons ibility. ( H arman, n. d. )

1.2. Nr,w ru,croRs FoR succESS

As the world business environment changes, so do the requirements for

success and competitiveness. Of course, the key factors are sector specific,

and may vary by market or geographical area. They are not the same for running

a steel mill and a software house. But, as we move from a nationally focused

industrial economy to a global information- and knowledge-based economy'

the following factors will become increasingly critical to success:

. Buitding deeper and more strategic relationships with customers' em'

ployees, suppliers and other business partners. With the increasing in-

tensity of competition, loyalty and trust are becoming even more important

to success. Such relationships can form the foundation for a new, progres-

sive and people-oriented corporate strategy that attacks the sources, not

the symptoms, of challenges facing business today. This strategy should

consider all stakeholders as active partners in developing win-win solu-

tions.

Developing a reputation for integrity, trust, and environmental and social

responsibility. In a decentralized and empowered organization, these human

values become more important precisely because of the greater distances

between .employees and the minagement hierarchy. Eq'ually important,

trust and integrity are vital to building and sustaining external rLlationships.

Being customer-oriented and a leader in quality, service, and reliability.

A major cultural transformation in this sense will be required of many

companies in emerging economies and in state-owned enierprises undei-

going privatization.

Developing and introducing high-quatity products and services both

quickly and globally. Time-based competition is here to stay. Reducing

the time taken to develop and introduce new models is a major focus oi

restructuring in many industries.

Innovating and striving for continuous improvement and excellence. Value

creation in a knowledge-based economy depends on innovation and

creativity more than on the control and allocation of resources which have

characterized the industrial economy.

Building an educated and motivated workforce. Almost all the above fac-

tors. for success imply recognition of the critical importance of human

capital. Human resource management, which has traditionally been viewed

as an administrative function, has therefore become a strategic function in

business. Its. critical importance in restructuring and dowisizing is dis-

cussed later in this paper. An ability not only to tolerate, but alsoio value

greater gender, racial and cultural diversity in the workforce can be a great

asset.

ChapterTWo:

SOCIALLY RESPONSIBLE RESTRUCTURING

DEFINED

This chapter discusses three topics: first, different views on the social

responsibility of business and the relevance of the stakeholder concept; sec-

ond, different ways in which companies restructure; and finally, how social

responsibility relates to restructuring.

2.1. Socur. REsPONSTBTLTTY

Whether or not a company is restructuring, the issue of social responsibility

is relevant. What comprises social responsibility and what is its importance for

business success?

2.1.1. Concepts of social responsibility

The issue of social responsibility remains perplexing to many who continue

to be convinced that "the business of business is business" and subscribe to

Milton Friedman's (1970) business morality that:

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 tlrc rules of the game.

He also stated that the responsibility of management is to "conduct the

business in accordance with shareholders' desires which generally will be to

make as much money as possible while conforming to the basic rules of soci-

ety, both those embodied in law and those embodied in ethical custom". Maxi-

mizing shareholder value, he argued, provides a clear focus for management

and efficient allocation ofresources. Further, he argues, business is not equipped

to take on all the problems of society.

To whom is the corporation responsible and accountable? As we look

around the world, we notice that in high-trust or consensual societies such as

Germany or Japan a much broader view is taken on this issue. Employees and

customers tend to be equal partners with investors in those countries. In

Scandinavia, the environment is also considered an important partner or stake-

holder for many companies. There are several arguments for a more inclusive

approach. First, tomorrow's leaders, that is, today's students of business and

economics, rank shareholders behind customers and employees when

answering the question: "To whom is the corporation responsible?" In 1995

the International Association of Students of Business and Economics and the

Prince of Wales Business Leaders Forum conducted a survey of 7,500 stu-

dents of management and economics aged l9 to 26 from 28 countries. Of these,

50 per cent responded that companies have the greatest responsibility to

customers,24 per cent ranked employees as a company's most important stake-

holder group, and only 13 per cent ranked shareholders as the most important.

Second, in a survey of executives in five countries carried out by the Ministry

of Finance in Japan in 1996 the majority of executives in the United States and

the United Kingdom responded that the corporation belongs to the shareholders

whereas the majority of executives in Japan, Germany and France replied that

the corporation belongs to all the stakeholders (Wind, 1998). It is worth reflecting

on the fact that the share prices of companies considered to be socially

responsible in the United States and the United Kingdom tend to outperform

most indices of share prices in these two countries.

In addition to Friedman's view that business has only one social

responsibility, which is to maximize the profits of its owners, there are a number

of other concepts or definitions of corporate social responsibility (CSR). Most

affirm that an economic model based on a clear separation of the role of busi-

ness and government simply does not work because of the separation of

ownership and management, government involvement in the economy, and

conversely, industry involvement in the political process through various

relationships, campaign contributions and lobbying.

Another concept is that of a contractual obligation which corporations

have towards society. Because society has permitted firms to develop and use

both natural and human resources, there exists an implicit contract or covenant

between the firm and society. The legitimacy of the demand that firms exercise

social responsibility is based upon this relationship. Closely associated with

this contractual concept of CSR is the notion that, through the political pro-

cess, society can and ultimately will impose more regulations upon business if

it does not act responsibly and ifit fails to strike a reasonable balance between

the interests ofdifferent groups. For example, in response to business abuse,

legislation was passed in the United States to provide better protection for

consumers, the environment and even shareholders. It is therefore in its own

enlightened self-interest that business assume a responsibility with respect to

society.

Yet another concept arising out of this model and developed by a growing

number of scholars is that corporations have a social as well as an economic

mission. This is not dissimilar from the widely discussed stakeholder model

which emphasizes the responsibility of the enterprise not only to investors but

also to others who are affected by its decisions and actions. Some will add that

this stakeholder concept is simply another layer of managerial responsibility

resulting from the evolution of capitalism in a changing world. Others suggest

that the word "responsibility" be replaced by "responsiveness" because

companies may not be legally responsible to all stakeholders but it is in their

interest to be responsive to them. Yet another point of view is that once an

enterprise has satisfied its basic needs for survival, safety and affiliation or

belonging, CSR is a natural response or development. Drawing the obvious

parallel to Maslow's hierarchy of needs, CSR is the fulfilmentof a firm's internal

and external self-actualization needs which are at the top of their own

organizational needs pyramid.

As we have seen, opinions differ on the definition, scope and emphasis of

CSR. For the purposes of this paper, the discussion will be based on the stake-

holder concept. Who are these stakeholders? There are six primary groups

who are affected by business and who in turn can influence the success of the

business. The six which are the focus of this working paper are shareholders,

customers, employees, suppliers and other business partners such as franchi-

sees, distributors and joint venture associates, local communities and the

environment. Other stakeholders closely linked to these primary groups in-

clude governments (national, regional and local); certain non-governmental

organizations such as advocacy groups (Greenpeace, Amnesty International,

Transparency International); unions and other worker representatives; fami-

lies; banks and other creditors; and future generations.

For the purposes of this paper, CSR is defined as the process by which an

enterprise manages its relationships with and balances the interests of those

groups and/or individuals which affect or are affected by the enterprise in a

significant way.

2.1.2. CSR and business success

Some studies on the longevity and survival of companies have concluded

that one of the criteria for success, and not the least important, is the quality of

the enduring relationships which an enterprise develops and maintains with

employees, customers and business partners - all essential for a flexible and

cooperative response to continual change and turbulence. This section dis-

cusses how the changing environment and factors for success discussed in

Chapter One create a context in which it makes increasingly good business

sense to be socially and environmentally responsible. The following diagram

depicts the dynamic relationships between the enterprise and each of its major

stakeholders.

Corporate ecosystem:

The stakeholder concept

Banks and creditors

FinanciaI institutions and analysts

. Consumer

organizations

. Suppliers

. Joint ventures

. Alliances

. Distributors

. Workers' organizations

Retirees

. Environmental NGOs

. Future generations

. Society

. Local government

. National government

The stakeholders, shown in a simplified way in this diagram, are the parries

which contribute to or influence the success of the enterprise as well as those

whose rights and interests are affected by or affect the company. Those shown

inside the ecosystem are the primary stakeholders. Many of the secondary

stakeholders are indicated outside the ecosystem.

The basic concept of this ecosystem is that there is an important and

dynamic two-way relationship between the enterprise and each of its stake-

holders. "It is in its ability to manage the tension created by simultaneous

competition and cooperation that stakeholder capitalism distinguishes itself'

s; '""9

ENTERPRISE

;'d kd

(Freeman, 1997). At the simplest level each stakeholder contributes resources

such as capital, labour, sales revenue, raw materials, sub-assemblies, a "licence

to operate", or local infrastructure. In return, the enterprise rewards each stake-

holder by providing dividends, products and services, wages and benefits,

taxes and so forth. All these relationships are mutually beneficial and

reinforcing. They can take on an elastic quality when stretched by the tension

created by the partners who are all demanding their "fair share". This tension

can be very creative, encouraging each to contribute more to a mutually ben-

eficial relationship, or it can be destructive ifone partner seeks to exploit the

others.

Another element is that there are no absolutes in these relationships.

Every enterprise makes some positive social contribution. The very act of

purchasing parts from a supplier, engaging and paying an employee minimum

wages and benefits, selling products that meet health and safety standards

can all be considered as socially responsible actions. An employee who

contributes only the minimum time and effort to stay on the payroll, a customer

who drives prices down unreasonably, a community financially unable to offer

enterprises competitive infrastructures or adequate education for its workforce

- are all nevertheless contributing something, as depicted in the diagram, by

the fact that each oval stakeholder overlaps the circle representing the enter-

prise. At the other extreme, the shaded circle represents an area where a stake-

holder has claimed too much for itself to sustain a viable relationship. There are

cases where employees, or unions representing them, place political interests

above those of their own members and drive businesses into bankruptcy. Or a

major customer may drive a supplier out of business by insisting on an

unreasonable price or by not paying on a reasonable basis. Also shareholders

or financial institutions may be overly opportunistic and insist on maximizing

short-term profits at the expense ofdeveloping the enterprise.

The following sections of this chapter provide an overview of each of

these relationships. The reader can find more complete explanations inPalazzi

and Starcher, 1997.

Shareholders. Private enterprises exist because individuals invest their

own money with the expectation of a positive return in the form of dividends

and capital gains. In the case of publicly traded corporations the enterprise

seeks financing at a low cost by issuing shares. It also seeks shareholder

loyalty and support for its strategies, policies and actions. When the enter-

prise meets or surpasses shareholder expectations in terms of financial profits,

dividends and growth, management and employees may be rewarded in vari-

ous ways (stock options, profit sharing, greaterjob security). Ifthe enterprise

or its top management focuses undue attention on the interests of other stake-

holders at the expense of shareholder returns, it may well find shareholders

selling out and, as a result, an increase in the cost of capital. Top managers may

also find their own jobs in jeopardy. On the other hand, if certain shareholders

pull too hard on the elastic, for example, if they become greedy and demand

that the enterprise focus exclusively on short-term profitability at the expense

of other stakeholders, the prosperity of the enterprise may be jeopardized as

core customers, employees and suppliers leave.

Undoubtedly, the reality of this relationship is not as simple as it might

seem. Shareholder expectations and the demands of government-owned enter-

prises and privately held companies are very different. Also, a complex

relationship exists between the shareholder and the enterprise because of the

way in which shareholder demands are formulated and communicated, increas-

ingly through institutional investors, and the way top managers with large

stock options represent the enterprise. Yet, conceptually, shareholder value

can best be maximized over time through careful balancing with the interests of

other stakeholders.

Also, creditors (commercial banks, bondholders, suppliers) certainly have

a stake in the well-being of the enterprise, although their overriding concern

about repayment of principal and interest and their low tolerance of risk may

conflict with shareholders' goal of wealth maximization.

Customers. Globalization has set in motion forces that shift power from

producers who make goods to customers who buy and use them. The outcome

of the cold war was not so much a victory of capitalism over Communism as a

victory of market-based decision making over centrally planned economies. In

market economies, if any single factor distinguishes the successful company

or business, it is putting the customer first. Successful companies build lasting

relationships with customers by focusing their whole organization on under-

standing what customers want and providing superior quality, reliability and

service. "Having a passion for customers" means building a customer per-

spective into all activities, including research, engineering, production and

finance, as well as selling and marketing. Achieving this customer orientation

requires a major transformation and restructuring in many emerging economies

and in most state-owned enterprises being privatized.

The relationship between the enterprise and its customers is clear: the

enterprise offers products and services; the customers provide revenue in

return. The dynamics of this relationship are, of course, more complex. They

differ according to the nature of the products and services, the degree of

competition, the relative importance of price, quality and service, and the his-

tory of the relationship. Tension between customers and enterprises is at the

heart of the free enterprise system. It can stimulate creativity and innovation

for both parties. It can destroy the relationship if one of the partners insists too

strongly on short-term self-interest, such as an unrealistic price; yet it can

nurture a long-lasting mutually beneficial and loyal relationship if managed

properly. This is the reason why leading companies spend a great deal more

time with their customers than their less successful competitors. They make a

greater effort to understand customer needs, improve the company's value

proposition and identify new markets.

This relationship is increasingly affected by the relationship between the

enterprise and other stakeholders such as employees, local communities and

the environment. The growing empowerment of consumers creates increasing

rewards for companies which act ethically and responsibly, and it results in

sanctions for those which do not.

Employees. We will not distinguish at this point between employees and

managers, or between employees and the unions or works councils which

represent them but which may also have their own agenda. As concerns em-

ployees themselves, the traditional hourly pay and legally mandated benefits

in exchange for time and the performance of well-defined tasks is giving way to

totally new concepts of work and employer-employee relationships. One of the

major reasons for this change is that service industries and knowledge-based

businesses are obliged to decentralize and empower their employees, who are

asked to make decisions as well as perform tasks. These companies are asking

employees to contribute their intelligence as well as their muscle. They are

finding that the motivation and retention of these "human assets" requires the

satisfaction of a higher level of employee needs. In developed economies,

gone are the days when companies had only to satisfy their workers' physical

needs for food, shelter, safety and health; or their emotional needs for

relationships and self-esteem, or even their mental needs for achievement and

personal growth. Increasingly, even higher level needs are being expressed,

and enterprises seeking to capture the full potential of their core employees are

trying to satisfy their need for meaningful work, for making a difference and for

service.

Business partners. In sectors characterized by intense global competition,

building and investing in enduring win-win relationships with business part-

ners can be critically important to competitive success. These partners include

suppliers, joint venture partners, strategic alliances, franchisees and even

competitors who might also be suppliers or partners in research efforts. Global

competition and increasing complexity are driving more and more companles

to refocus their activities on core businesses and core competencies and, as a

result, to develop collaborative long-term strategic relationships, alliances and

partnerships with suppliers and other business partners. These relationships

result in new ways of reducing costs and increasing profits, and of improving

quality, delivery reliability, and product innovation. Either partner may be

tempted to exploit opportunities for short-term advantage or benefit, but leading

companies are managing these relationships for long-term success and are

investing effort and money in them. Both partners are also finding that values

such as trustworthiness, integrity, fairness and honesty are essential for effec-

tive collaboration and fundamental to the success and sustainability of the

relationship.

A legend in Hewlett-Packard, a company noted for its good supplier

relations, is about a purchasing agent who told the President that he had

just negotiated a great contract with a supplier with prices reduced by 20

per cent. The President questioned whether the supplier could make a fair

profit at that price, and called inthe supplier to renegotiate afairer (higher)

price. Not surprisingly, the supplier became avery loyal andvaluable part-

ner to Hewlett-Packard.

Communities. Companies relate to their communities - neighbourhood,

local, regional, national and global - in different ways. At the first level, busi-

ness contributes to communities and to society by its fundamental mission of

providing products and services in an efficient and ethical manner, by creating

meaningful jobs, both directly and indirectly, by providing fair wages and

benefits and by paying taxes. At another level, companies can contribute to

communities through the direct support of activities which enhance their

commercial success, such as contributing to local charities. At yet another

level, that of social investment, companies can support initiatives in education

and help alleviate social problems such as unemployment, exclusion and

homelessness, often in partnership with government authorities and non-gov-

ernmental organizations. Finally, corporations can contribute through sup-

porting charities. In return, and commensurate over time with the contributions

made by companies, communities may provide customers, an educated

workforce, increased pride, loyalty and motivation of employees, a

communications and transport infrastructure, security, a "licence to operate",

and in some cases subsidies of various kinds. Is the balance sheet for the

enterprise positive? In one worldwide community survey, over 80 per cent of

executives interviewed felt that the benefits of community involvement in-

cluded higher achievement ofcorporate goals and increased productivity. Fur-

ther, over 90 per cent felt they contributed to building team skills, improving

morale, attracting and retaining better employees, thereby reducing recruiting

and training costs.

Otte way that responsible companies are reaching out to communities

is through regular consultation with representatives of the local community.

Some years ago the newly appointed manager of the Londonderry plant of

DuPottt irt Northern Ireland established a Community Advisory Committee

grouping a cross sectiott of leaders of the community inwhichthe plant was

located. The members of this Committee include some of DuPont's friends in

tlrc community but also some of its critics. It nteets quarterly to review and

consult on issues of concern to the community. Once each year the drart of

an environmental report is submitted to and discussed in this committee.

Tltis practice is becoming widespread in industry. Tlrcre are some 240

conununity advisory committees in the chemical industry in the United States.

Environment. The environment is a very important stakeholder in the en-

terprise. It is certainly affected by management decisions, and its condition

has a direct effect on business. It is the source of raw materials, many of which

are not renewable and are becoming scarce. Responsible corporate leaders are

providing clear evidence that sustainable environmental management makes

good business sense. By sustainable is meant "an economic state where the

demands placed upon the environment by people and commerce can be met

without reducing the capacity of the environment to provide for future genera-

tions" (Hawken, 1993). The first level of action on the part of the enterprise is

to promote and practise eco-efficiency, which means creating value by doing

more with less over the full life-cycle of the product. Companies are recognizing

win-win opportunities to (l) reduce energy inputs (2) reduce toxic wiste (3)

enhance recycling (4) maximize sustainable use of renewable resources (5)

extend product durability and (6) enhance the functionality of goods and ser-

vices. Another level of possible action is the definition of pricing tools such as

environmental taxes and permit systems to recognize and reflect more accu-

rately the environmental costs of production, use, recycling and disposal. A

third area being adopted by an increasing number of enterprises ii that of

environmental accounting and reporting.

To cummarize this section defining CSR:

The socially responsible company:

) rewa,rds shareholders with a reasonable return over time;

) is customerfocused;

I considers employees as its most important asset;provides meaningful

work, fair wages and benefits; ensures their employability; and provides an

enabling work environment;

) contributes to the prosperity and social cohesion of the communities

in which it operates;

tl applies the golden rule ( " do unto others as you would have them do

unto you") to its business partners (suppliers, alliances, franchisees, etc.);

) practises eco-efficiency and environmental sustainability.

2.2. Wsnr rs RESTRUCTuRTNG?

As pointed out in Chapter One, globalization, new technology, the in-

creasing intensity ofcompetition, deregulation, and changing societal expec-

tations and values all combine to create an environment of permanent turbu-

lence in nearly all sectors of the economy and all regions of the world. Faced

with such turbulence, few companies have escaped the need to reorganize,

downsize, outsource, acquire or divest. Restructuring has become one ofthe

hottest topics in the business press, in financial markets, among economists,

and it is high on the agenda of business leaders, union officials, national

governments and local authorities. Restructuring can involve whole national

economies or industrial sectors like steel, coal or automobiles. It may concern

companies, divisions, individual factories, even field sales and service centres

and small units of a few employees within companies. Whether it is a one-time

action to bolster flagging share prices or an ongoing process aimed at

maintaining competitiveness, restructuring seems destined to stay on the

agenda of top executives. This conclusion is supported by the well-known

economist, Joseph Schumpeter, who 50 years ago discerned that the essential

feature ofthe capitalist system is a creative destruction, which he defined as

"an organic process ... of industrial mutation that incessantly revolutionizes

the economic structure from within, incessantly destroying the old one and

creating a new one" (Norton, 1996).

while financial markets and shareholders love to hear about restructuring

initiatives, one hears less (ifanything) about how they frequently fail to achieve

the objectives management announced. In the case of layoffs one does not

hear about how they often destroy lives, homes and communities. Restructuring

can be the source of much anxiety and many social problems: not only do

layoffs profoundly affect those who become unemployed, they may inflict

irreparable damage on communities and families who suffer the consequences

of restructuring. Quite often they are the source, not only of lower morale, but

also of lower productivity and product quality on the part of the remaining

disenchanted employees and managers. This helps explain why restructuring

programmes fail more often than they succeed.

But the expression socially responsible restructuring has yet to find a

place in management literature. In fact for many executives it is a contradiction

in terms. One of the purposes of this paper is to destroy this myth and demon-

strate that restructuring can be effective, especially when it balances the inter-

ests of all the stakeholders in the business.

Restructuring takes many forms and the term is used to cover a wide

variety of different actions. For the purposes of this paper, restructuring is

defined as the deliberate modification of formal relationships among

organizational components. It involves redesigning work processes,

delayering, eliminating structural elements through outsourcing, spinning

off, selling off, and divesting units, activities orjobs. Restructuring is not a

synonym for downsizing or re-engineering but is a much broader and more

inclusive concept. It can include the modification of financial structures (share

repurchases, reducing debt/equity ratios and issuing new shares), market

structures (changing product/service portfolio), technological structures

(automation), and production structures. It includes changing the portfolio

of existing businesses (rationalization, selling off unproductive divisions or

activities and entering new businesses through acquisition or internal growth).

Restructuring even goes beyond the confines of the organization itself and

can affect the organization ofstakeholders such as suppliers and other busi-

ness partners.

In the following discussion, the dozens of possible approaches to

restructuring are grouped into nine categories: strategic, ownership, financial,

revitalization, organizational, outsourcing, production, reducing non-person-

nel costs and downsizing. It has been observed that over time, the higher the

category and the more strategic the approach, the greater the sustainable im-

pact on shareholder value and the less the impact on employees and other

stakeholders. For this reason, companies should focus their attention initially

on the "upstream" approaches and practise continuous "rightsizing" rather

than hurriedly initiating a major one-off downsizing programme.

The socially responsible company:

) rewards shareholders with a reasonable return over time;

) is customerfocused;

) considers employees as its most important asset; provides meaningfiil

work, fair wages and benefits; ensures their employability; and provides an

enabling work environment;

) contributes to the prosperity and social cohesion of the communities

in which it operates;

) applies the golden rule ( " do unto others as you would have them do

unto you" ) to its business partners (suppliers, alliances, franchisees, etc.);

) practises eco-fficiency and environmental sustainability.

2.2. W un rs REsTRUCTuRTNG?

As pointed out in Chapter One, globalization, new technology, the in-

creasing intensity ofcompetition, deregulation, and changing societal expec-

tations and values all combine to create an environment of permanent tuibu-

lence in nearly all sectors of the economy and all regions of the world. Faced

with such turbulence, few companies have escaped the need to reorganize,

downsize, outsource, acquire or divest. Restructuring has become onJofthe