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Should companies axe employees the moment dark clouds appear? By Gerald Giam.

Billion dollar profits but still axing jobs

Gerald Giam / Senior Writer

The stunning news blared out on Friday that Singapore's largest bank, DBS, will be cutting 900 jobs by the end of this month. (See here). At least half of the job cuts will be from its 7,600 workforce in Singapore.

DBS CEO Richard Stanley said that the cuts will be "across all business units and functions, and at all levels of the organisation".

When I first informed my editor of the news, his immediate reaction was, "Damn, the retrenchments have started."

It is natural to assume that retrenchments point to an economy that is hitting the doldrums. After all, won't companies only start retrenching staff after all other avenues of cost cutting have been exhausted and the company is starting to bleed?

Mr Stanley's explanation for cutting jobs tells another story: "To be a more streamlined organisation" and to "run a tighter ship".

Indeed DBS Group Holdings reported that for the first nine months of 2008, net earnings were S$1.67 billion, albeit down 13% from 2007. Profit before allowances was S$2.64 billion, down just 1% from last year. Third quarter earnings stood at S$402 million. The bank's press statement emphasized that their "balance sheet remains strong".

Of course, from a profit-driven business standpoint, job cuts make sense to help the company maintain its profitability and obligations to shareholders. In most organisations, employee payroll takes up the biggest chunk of expenses, so cost cutting cannot be complete without job cuts.

This is very much the pure capitalist, hire-and-fire approach, of which banks epitomize. One could argue that in good times, bankers can earn 12, 18 even 24-month bonuses, so why can't they also suffer the downside of a slowing economy? Working in a bank could be seen as high returns but high risk.

But banks are not the only companies who operate in this fashion. Back in early 2003, PSA Corporation, the port operator, retrenched 800 staff — 14% of its workforce — in its bid to remain competitive after its loss of major shipping firms Maersk and Evergreen. This despite posting a S$559 million net profit in 2002.

I can understand if a small and medium-sized enterprise (SME) has to cut its workforce to remain in the black. But is it ethical for large, profitable companies which have enjoyed years of profits and built up a war chest of reserves, to axe employees the moment dark clouds start to gather?

Shouldn't layoffs be a tool of last resort? Have these staff been given the option of working with reduced salary in order to keep their job? Or are retrenchment exercises a way of shedding off more expensive older workers, and replacing them with younger — sometimes foreign — talent. Keep in mind we are dealing with people's lives, not just digits on a spreadsheet.

Obviously I am not in a position to judge whether the DBS management has done their due diligence. Their press statement said that their expenses fell 16% from the previous quarter, due to what they claimed were "proactive management of controllable expenses". To their credit, they seem to have at least attempted other measures.

Some listed companies are known to conduct manpower reduction exercises to reassure investors that they are doing something to improve profitability. In most cases, the companies' stock prices rise immediately after the announcement is made. So while the axed employees are thrust into the jobless wilderness, the biggest beneficiaries of job cuts are often the executives who make the retrenchment decisions, as they stand to benefit from rising share prices and bonuses due to increased profitability.

There is a lot of talk about corporate social responsibility (CSR) these days. About how companies should give back to the community they operate in and spruce up their corporate image at the same time. But charity should begin at home. A company's first social responsibility ought to be to its employees, which depend on it for their living.

A company which retrenches staff when it can afford not to would be hard pressed to earn much loyalty and attachment from them. The net result is that it will find it much harder to attract and retain talented workers in the future, especially when the economy improves. This will force them to offer obscene salaries and bonuses to entice talent, setting themselves up for unsustainable manpower costs later.

Running a listed company is not easy, and it is made harder during lean economic times like these. However as Singapore and the rest of the world heads into recession, company executives will do well to remember that people should come before profits. This would benefit not only employees, but the company as well in the long run.

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