You are here

EE Times Op-Ed: New Social Contract Governs Business | Cypress Semiconductor

EE Times Op-Ed: New Social Contract Governs Business

Last Updated: 
May 24, 2012

You have just been laid off, along with the rest of your division. Your company is exiting a business in which it is struggling, but not losing a lot of money. Caught by surprise, you never considered moving to another company. You will miss the collegisl environment. generous salary and benefits, company-sponsored courses and frequent promotions. Fortunately, the company's severance package is generous enough to aDow you time to fmd another job. Yet you can't help but wonder: You were loyal; why wasn’t the company?

Government solution
liberal politicians, like Secretary of labor Robert Reich, would attribute your problem to 'corporate greed'- putting profits above people. Vice President Al Gore would add that companies should treat people like assets, not like "costs to be eliminated.

After the layoff, your CEO might even appear on the cover of Newsweek beneath the headline "Job Killer," and the story inside might note that some CEOs receive huge bonuses in the very years they order layoffs. Having read Newsweek, you might even respond favorably to recent proposals by Senators Bingaman and Kennedy that would mandate corporate “social responsibility" as those senators define it, with punitive taxes for errant corporations that fail to follow the good senators' mandates on CEO pay, employee benefits, employee training budgetsand layoffs. If corporations won't behave "responsibly,” they reason. thm government will have to force them to do so.

However, your rush to embrace government control is mitigated by the fact that you admire the way many companies are run. And you are coguizant of the fiascos that ensued when Congress tried to run a small bank, and the White House a small travel agency. If government cannot manage these small enterprises, how does it qualify to exert more control over America’s companies?

Free-market solutions
lf you harbor reservations about govenment intervention, you’re in good company. In the title of a 1970 New York Times article, economist Milton Friedman stated, "The Social Responsibility of Business Is to Increase its Profits.” Friedman labeled running a business for any other purpose to benefit the environment, the community or the poor—as “unadulterated socialism." He labeled businessmen who talk about social goals transcending "mere profits" as funwitting puppets of the intellectual forces that have been undemtining the basis of a bee society these past decades."

Another free-market champion, General Electric's J ack Welch, said in an interview with the Harvard Business Review, “The psychological contract based on perceived lifetime employment . . . produced a paternal, feudal, fuzzy kind of loyalty. You put in your time, worked hard and the company took care of you for life. But given today’s environment. . . where no business is a safe haven for employment unless it is winning in the marketplace, the psychological contract has to change: Jobs at GE are the best in the world for people who are willing to compete?

Friedman and Welch are not mean spirited cost cutters, but men who understand that a corporation’s true value lies in its people. Both believe that liberating employees’ energy and talent is the basis of corporate success. l believe that corporate patemalism———when practiced for its own sake——is bad for the country, its companies, their shareholders and, in particular, for employees who sleepin the comfort of the corporate womb, often awakening to a layoff trauma that could have been anticipated and avoided. I stress what my view does not mean: In order to be emcient. America`s companies must createa Darwinian "eat or be eaten” environment. In fact, I would argue just the opposite.

American workers face a choice: to accept the sometimes tough decisions made by free people and free companies in free marketplaces, or to subject themselves to the dictates of groups that have made a priori decisions on how companies should behave. Those tempted to surrender their frmdom of choice to the ’ dictates of liberal proposals might consider that ruling groups change. How would you feel if you surrendered your choice and later your worst nightmare took power in an election? We cannot surrender our freedom to dictators because they happen to espouse specific ideas we like.

Thou still tempted to opt for govemment control should try this exercise. Rewrite the downsizing scenario described in the first two sections of this article. Relabel Section l “’I’he Silicon Valley Story," in which an employee, afteralong, rewarding stints at a company, quits by surprise to start a venture capital-funded competitor. End Section 1 with the employee`: CEO lamenting, "The company was loyal, why wasn't the employee?"

Then. in your rewrite ofthe “Government Solution" section, let ultraconservative Sen. Jesse Helms, R—N.C., craft “corporate fairness" legislation that would prevent startup entrepreneurs from competing with their former companies for tive years. Does the free-market perspective look better now?

Why free market works
Here are six reasons why the free market serves employees better than paternalism or the best-intended govemment meddling:

Rules of the new social contact

First, all companies are owned by shareholders who have a right to expect the CEO’s best efforts to enhance their investments. I have received numerous letters from Cypress shareholders reminding me that their retirement fund, or their children’s college fund, is invested in our shares. These shareholders demand—and reasonably so—that I hght the tendency to subordinate their futures to some pet corporate objective, such as maintaining a favored business that is hurting the company or pursuing my favorite philanthropic goal—-—with their money.

Second, most companies treat their people well because of competition, not because of external pressure. Most Silicon Valley companies provide a long list of benefits, right on down to aerobics and weight lifting. But in another industry, such opulent benefits could prove disastrous. Consider a hard—pressed Rust Belt manufacturer forced to provide expensive employee benefits it could not afford: A shutdown would certainly be worse for its employees than a job with meager beneiits. The hee market says to employees, "We give you excellent benefits, because you are valuable to our company and our shareholders." Paternalism condescends, "For all the benefits we give, you owe us loyalty."

Third, there is an inherent fallacy in the lifetime-employment mentality, which maintains that all layoffs are bad. Obviously, employees who are laid off suffer trauma. But ultimately, many plant closings beneiit those furloughed, their former and future companies, and the economy at large. Consider a hypothetical case in which the law prevents a company from closing its plants. Since the jobs that companies want to eliminate usually are either low-productivity jobs or those that can be performed more efficiently elsewhere, maintaining those jobs traps people in the lowest-efficiency segment of the economy. After the so—called "humane" rescue of many low-productivity jobs, America would become a refuge for low productivity, and its gross domestic product would either stagnate or decline.

Far from a depersoualized indicator, GDP is a measure of our economic vitality that impacts the well-being of everyone. America’s GDP, divided by its population, is the average American’s salary—give or take $1,000. In other words, creating a policy—however well intended—tliat reduces economic efficiency is equivalent to lowering the average wage in this country. I do not see anything humane or kind-hearted about becoming poorer.

Fourth, job changes forced by layoffs can often improve the fortunes of employees, companies and the economy at large. For example, some semiconductor companies generate human—productivity figures of less than $100,000 in revenue per employee per year. By contrast, Cypress’s revenue per employee is about $300,000 per year.

When an employee leaves (or is laid off from) a company with low productivity and moves to a company with higher productivity, the GDP expands by an amount equal to that of the productivity difference. Furthermore, the new company probably will be able to consistently pay more to that employee, because its workers are more productive.

After a period of layoffs, many employees end up with better jobs in different in- dustries. When AT&'l` exited the personal computer business, for example, we immediately dispatched a recruiting group to South Carolina to find critical talent for our PC chip—set business. Our competitor Cirrus Logic got there first and hired more than we did, but we came away with a business unit manager and a skilled motherboard development group. We really valued the employees AT&T" no longer needed; they’re better off and so areiboth Cypress and AT&T—-which can nowlfocus on the telecommunications business it dominates.

Fifth, avoiding layoffs and treating people well is exactly what CEOs must do to make their companies profitable for their shareholders. While layoffs may be beneficial to the economy at large, they are intensely disruptive for companies. All the CEOs I ltnow aggressively avoid layoffs, because they know the company that can attract and keep the best and the brightest is the company that will win in the long haul.

No CEO wants his or her company to be unable to hire the best because it is known as the company that lays off people to tune up its quarterly profit and—loss statement. lf that were their objective, CEOs could simply cut R&D and double their profits overnight. (Of course, they would get their comeuppance in a year.)

Co-ops' three-way benifits

  • Useful insight into educational trends. Through interaction with the student, the company may gain ready access to a window on course content and methodological trends in engineering schools of interest.
  • Knowledge from periodic reviews and the exit interview. Solicitation of student reaction during the work periods and at the completion of the program may generate useful insights on company strengths and deficiencies not prospectively available (for obvious reasons) from the company’s regularly employed personnel.
  • Good community and industry PR. The participating company may use the co-op commitment as a publicity feature in corporate communications to promote its local or national image. When a company selects engineering and computer-science students who reside locally, it stands to generate goodwill in the community.
  • Part-time teaching jobs for qualified employees. Goodwill established with the school through the co-op connection may ease the way for qualified corporate personnel interested in teaching to secure desirable part-time positions.
  • Serves the institution’s educational objectives. The school that sponsors an effective co-op program may better fulfill its mission to prepare its EE and computer-science students for a professional career. A successful internship program can substantially enhance the student‘s educational experience.
  • Serves the institution’s professional placement objectives. By supplying able, well-prepared co-op students who perform creditably in their job assignments, the school fosters a foundation of respect and confidence with the participating companies. That tends to keep companies committed to the co-op program, which, in addition to keeping the supply of work—-and often job—opportunities open to interested students, reinforces the company’s motivation to rely on the school, via the placement office, to help fulfill its broader employment interests. A strong placement record clearly helps the school fulfill its commitment to attract, educate and tum out professionally qualified, job-ready students.
  • Serves the institution's competitive position. To the extent that the school is in a competitive position vis-avis other engineering schools, sponsorship of a first-rate co-op program can help sustain an incremental edge in terms of prestige—Compared with schools that do not offer such programs.
  • Payoff in enrollments. An engineering school that offers the educational and prospective employment benefits of a successful co-op program, plus a respectable track record of early placements, helps itself to maintain a healthy list of qualified and promising students eager to enroll, which is central to the economy and reputation ofthe school.
  • Strong enrollments, backed by high admission and educational standards, tend to attract outstanding teaching talent. Good teachers gravitate toward the most reputable schools.
  • Keeps tabs on industry practices. There is no better way for universities to keep on top of industry practices, technologies and workplace trends than through co-op programs

Success of the program is not assured. Certainly there is no single formula for success. But while design features may vary, seasoned professionals in the co-op education business will probably concur on three principles.

  • One, if the program is undertaken, every effort must be made to make it operationally sound .in all its facets.
  • Two, if the program is not comprehensively sound, it probably won’t accomplish the objectives set for it, and its value predictably will be compromised.
  • Three, a successful internship program is a win-win-win proposition. Everyone benefits: the students, the companies, the school.

Cooperative education is on the rise for good reason. lt would be hard to find a better answer to the need for professional experience in the context of a high-quality engineering education.

Corporate social contact

CEOs are obligated to make a profit for their shareholders. And unless they want short tenure, they must make that profit consistently.

Sixthrthe choices that companies make in a free market have consistently enhanced the lot of American workers for more than 200 years. The United States invented the economy of corporations, Although corporations existed in Europe prior to 1800, by that time America had only 5 million citizens but more corporations than all of Europe. It is only in the past 25 years, when government meddling has proliferated, that our businesses have not been able to produce continuous income improvement for their workers--the core of the American dream.

Employees should recognize the economic reality of the free market. Just as they must do what’s right for themselves and their families, companies must do what’s right for their shareholders. In so doing, companies will almost always do what is tight for their employees. Even if markets sometime sag or technologies change, that means releasing people back into the marketplace to find more productive jobs. Very much more typically, during rarely discussed upsizing, companies do what’s right for their shareholders by lighting tooth-and-nail to attract, reward and retain the best people to build an enterprise.

Employees should understand that their company’s only right to exist arises from the value it provides to its customers. Consequently, an employees only guarantee of employment arises from bringing consistent value to his or her company. The adversarial model, in which companies and employees argue about cost cutting vs. entitlements, is a losing model. Eventually a company with that cancer will succumb to healthy companies where people form winning teams to beat the competition. Winning teams are not forced to trade off among the interests of customers, employees and shareholders. That happens precisely because those teams create the wealth that drives the free market.