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C. Gopinath

LUCENT Technologies Inc., the telecommunications company, announced that it was paying two executive vice-presidents a total of $7.58 million (Rs 36 crore) as retention bonus to stay with the company. The company fears that they may leave for greener pastures and feels the need to retain them for their skills to see the company through the difficult times it is facing.

Although the payment seems a bit high, you might think of it as a kind of bonus and there is nothing wrong with that. But when you realise that the company, over the last year, had laid-off 23,700 employees as part of a cost-cutting and restructuring move and did not pay any performance bonuses, you begin to wonder. This is an issue that pits ethics and social responsibility against good capitalist practice.

Ethical behaviour would suggest that in a situation wherein the company is laying off so many and is restructuring payment to creditors, it would not be appropriate to make sizeable payments to so few in management. But management theory can be used to argue that the skills of these two executives is so crucial to the company's future that they must be paid their price and retained so the survival of the firm is not jeopardised. Which argument do we buy?Adam Smith would be aghast if a manager compromised his pursuit of profit to consider the effect of his actions on society. After all, the economist pointed out to us that when individuals pursue their selfish interests, society benefits through an `invisible hand' since jobs are created and goods reach the market place. Thus, would it not be better for these two individuals to receive their millions than the whole company collapsing and losing billions? But in the Lucent kind of situation, it is not black and white. There is a broad gray area too.

For it can be argued that the managerial decision to pay the high bonus to the two individuals is not in pursuit of profit for the shareholders but an instance of managerialism — wherein individuals in decision-making positions grab what they can in an exercise of their power and confirming the need for agents to be more closely supervised by their principals. Corporate America has had to face this ethical question repeatedly in the recent past. And its response has not shown it in a shining light.

Take the case of Polaroid Corp., which declared bankruptcy in October (see this column, October 29, 2001). It now transpires that only a few weeks before that, the company made large cash payments to five members of its board of directors which were fees earned by them over several years but had been placed in a deferred compensation fund. The plan had been dissolved in August, so there was nothing wrong in making the payment. But the directors would have known about the forthcoming bankruptcy filing which left several creditors without much hope of recovering their claims.

Therefore, was it ethical for the directors to pay themselves in a situation where they were unsecured creditors, like several others who were being denied payment?

Lawyers for the outside creditors are expected to sue for recovery. Meanwhile, the company has also sought permission from the bankruptcy court to pay retention bonuses to its 45 key employees. Take that other recent glorious example of capitalism, Enron Corp. For years, the western business press warned us that Enron was a test case and if it was not treated right in its venture in India, multinational corporations would have second thoughts about investing in India. After recent exposes on the mismanagement in that company (`Enron in trouble; Microsoft sees reprieve', Business Line, November 12), you do not see Enron being held up as a touchstone anymore. Enron has also filed bankruptcy, and is also lining up to pay retention bonuses. It decided that there were 500 employees that it considered critical to its survival and paid them $55 million (an average of $110,000, or Rs 52,80,000 each). Enron, only recently, laid off about 5,100 of its employees, or 25 per cent of its workforce. And those laid-off got a maximum severance of $4500 (Rs 2,16,000) each.

Polaroid and Enron employees lost not just their jobs but also their retirement benefits. The employees' money was heavily invested in their own company stock that crashed pursuant to the bankruptcy. Many Enron employees saw their retirement assets fall 70-90 per cent. Clearly, the senior managements of these companies are listening to their lawyers more closely than their own minds or hearts. The decisions they have taken, in the face of difficulties, have done little to endear them to their employees, both current and former. While their actions may end up being sustained as technically legal, they all fail the smell test.

We can introduce another twist to the argument here. While Smith provided the justification for businessmen to pursue profit, is it also justified for employees to demand that they be paid extra for staying to help the company they caused to decline in the recent past?

Research on declining companies tells us that as part of the turnaround strategy, senior management is usually sacked and new blood brought in. Here, we have cases where senior management is paying itself bonuses!

The incoming managers do not give too much hope that the ethical perspective of these companies would improve into the future. A magazine appropriately called `MBA Jungle' reported the results of a survey of MBA students recently; 26 per cent said they would allow a gift from a client to alter a purchasing decision on behalf of the company, 70 per cent admitted to stealing office supplies from their place of work, and 52 per cent said they would buy stock based on inside information.

Malden Mills

But all is not lost! To serve as a counter weight to the above situations, we have the case of Malden Mills, a family business that produces specialised fleece fabrics. Chief Executive and owner, Fuerstein, attracted national attention in December 1995, when the mill burned down. A rational businessman would have collected his insurance payment and moved operations to the south where labour costs are cheaper. But Fuerstein felt he owed something to the employees and to the town of Lawrence where he was a major employer. So, he decided to stay and rebuild the plant and even kept the 3,500 employees on his payroll until work re-started.

A few years later, in 1998, the company laid-off 10 per cent of its workforce as one of its divisions was losing money, but the company promised to re-hire them if operations improved.

End November 2001, the company again got into difficulties and was unable to secure a loan it needed in order to continue operations. Finally, as a last resort, Fuerstein filed for bankruptcy protection as it was the only way it could convince its lenders and get the loan to continue business. Malden Mills may or may not survive, but its owner, Fuerstein appears to be making decisions that look beyond the bottom line. I wonder what Adam Smith would say to him.Whether a company is doing well or facing difficult times, we would expect its managers to make decisions in the best interests of the survival and growth of the firm. What we are also hoping is that they act ethically in the process. What we are yet to teach in our classrooms is how to make smart business decisions without sacrificing ethics or a sense of responsibility to society.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@Suffolk.edu)

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