Overly Aggressive Retrenching Is A Western Disease

Every time recession hits, its the MNCs who will be the first to retrench workers. Yes, you can argue that on an export destruction platform, but that is just part of the real story. Generally, local companies "are not as quick" to fire or retrench staff than say MNCs.

If you look at what has been happening around the world, almost all listed companies have enforced some sort of retrenchment or cost cutting exercise. From the GMs to the Sonys to even pharmaceuticals and construction firms. No industry is spared.

Don't you find it interesting that Malaysian companies, in general, list and unlisted, are not quite so trigger happy. Companies in developed markets tend to follow the mantra that the CEO is responsible for the fortunes of the company. The big movement over the past 15 years to tie CEOs compensation (and those of senior management) to the share price returns has produced a magnifying glass effect on management's behaviour and financial figures.

Everybody knows that American and some European companies are the quickest to retrench and downsize at the slightest hint of uncertainty or diminished orders coming in or inventory piling up.

The biggest culprit is the emergence of the quite silly Quarterly Earnings Results and the subsequent Quarterly Earnings Guidance. Needless to say, this kind of short term managing will result in a very difficult operating environment. Long term objectives and strategy will be compromised to attain short term goals and targets. QEG will not just affect the top layer of management, but will work itself down to the nuts and bolts of every organization, especially sales and marketing. Constantly doing, re-doing, re-working, re-stating QEGs will create a damaging focus on meaningless short-term performance and undermine a company's ability to manage for the long term. This re-working, re-stating, re-doing will have to be re-communicated down the line re-peatedly. Re-diculous!

Wall Street's relentless focus on whether companies hit or miss quarterly earnings targets encourages balance-sheet manipulation and discourages long-range planning. A consensus is growing among CEOs, regulators and analysts to go against QEGs. Many CEOs despise giving such guidance but are afraid to stop because they think they would be punished by Wall Street analysts and shareholders.

The unfortunate consequence of these excessive focus on short term numbers is that retrenchments and downsizing are textbook plays when things are starting to look bad. When things are bad, the management is EXPECTED to quickly do SOMETHING, and firing and downsizing are the quickest to pacify the markets.

In many ways, we should be glad that Malaysian companies are not there yet. We do not yet have that magnified focus on quarterly numbers every few months. We do not see CEOs being fired every now and then for not meeting numbers (maybe we should fire more CEOs actually). Is that good or bad? But of course the local CEOs payscale and reward structure are nowhere close to those of the Western world.

I think companies should be managed not quarter by quarter but rather based on a 3 or 5 year plan with visible and measurable milestones being communicated to all. At the moment probably less than half of all companies have a proper strategy going forward - they have little idea of how their industry will pan out 3 years or 5 years down the road, and how they are positioning themselves. They do not know where their critical strengths are (if they had any) and where they have critical competitive advantages in order to leverage on them. They have no idea on scalability, organic growth strategy and growth via acquisitions. But I digress...

p/s photos: Linda Chung Ka Yan