Layoffs Can Ruin Your Investments

Wall Street may cheer when companies announce layoffs -- but it's in dire need of a reality check. Layoffs not only continue to drag on our already weak economy, but will also likely hurt the future prospects of many of the companies that turn to them to bolster profitability.

A rotten ripple effect
The Wall Street Journal recently explored a common-sense topic that investors should take very seriously: Even a hint that layoffs may be on the table sets off a nasty downward spiral in employee morale.

When workers worry that the axe is going to fall -- even far in the future -- negative outcomes begin. A fear-fraught environment takes workers' eyes off their goals, hinders companies' ability to recruit new talent, and can give the highest-performing employees the "incentive" they need to head for the exits in search of safer ground.

Such uncertain employment environments create stressed-out workers. And that stress goes far beyond simple emotional responses, to create real problems in the workplace.

The Occupational Safety and Health Administration (OSHA) has deemed stress a workplace hazard in the past. Estimates suggest that it costs American businesses hundreds of billions annually. The Centers for Disease Control have also pointed to the health risks and negative economic results stress, which causes increases in illness, absenteeism, and other negative drags that (obviously!) disrupt productivity.

Layoffs: more than just numbers
There may be a shortage of jobs in the U.S., but sadly, there's no shortage of companies cutting workers right now. Mass layoffs jumped by 3% over the summer as 145,000 people found themselves unemployed.

Bank of America (NYSE: BAC  ) intends to whack "overall employment levels" by 30,000; that figure represents people, of course, regardless of sanitized talk of payroll "levels."

Although companies like Lockheed Martin (NYSE: LMT  ) , Cisco (Nasdaq: CSCO  ) , and Goldman Sachs (NYSE: GS  ) probably gathered the most headlines due to their high-profile layoff plans, they're not the only companies slashing payrolls.

In July, Boston Scientific announced it would cut 1,400 jobs to slash $275 million in costs. Research In Motion (Nasdaq: RIMM  ) also announced plans to cut 2,000 positions in July. Pfizer (NYSE: PFE  ) started off 2011 with an unpleasant bang, with plans to reduce its workforce by 5,530 employees.

More recently, UBS (NYSE: UBS  ) had announced plans to cut 3,500 employees even before last week's dreadful "rogue trader" incident. An additional $2 billion in unexpected losses certainly doesn't do much to add an air of confidence at that financial company, I'm sure.

Go for greatness
Obviously, in difficult economic times, cost-cutting can become crucial for some companies to survive. However, investors need to stop cheering when companies imply that reducing payrolls will boost short-term profitability at the expense of building solid, strong long-term businesses. Layoffs should be chilling, not cheerful.

As Voltaire so famously said, common sense is not so common. His bon mot perfectly describes Wall Street's short-term focuses and pressures.

No company with deteriorating employee morale is destined for greatness. The best investments come from well-managed companies that don't attack their own workforces to make the short term more profitable.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Bank of America, Lockheed Martin, Cisco, and Research In Motion, and has created a bull call spread position on Cisco. Motley Fool newsletter services have recommended buying shares of Cisco and Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 22, 2011, at 8:18 AM, infektu wrote:

    @InfoThatHelp

    so this is what happened to you, this is why you wish so much RIM to fail...

    I'm sorry for your experience, but I personally think RIM does reward their high-performance, creative workers.

    Deadwood is a problem for every company when growing fast, however, it is less in RIM's case.

    Just sayin'

  • Report this Comment On September 23, 2011, at 4:14 PM, tab66 wrote:

    Sadly, lay-offs have become the easy way out in many cases for CEOs who have no idea how to innovate and grow their way through current problems. The fact that Wall Street (and all of us investors/employees) rewards this short term thinking is madness.

    There are times where a company looks long and hard at its business or part of its business, realises it is ultimately in decline, margins are under pressure and the workforce does not have the skills for new roles or the company the money to retrain. In those cases lay-offs have to happen; but more and more, lay-offs are a knee-jerk reaction.

    We all know companies that have gone through these process, dis-engaged the majority of the workforce who are staying and then often rehired directly or as consultants, people who it has only recently let go.

    If we want to get out of the current recession/depression change the tax structure to reward companies for hiring more people in the US i.e. allow them to repatriate funds to cover direct hiring

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