In the 2011 film Margin Call the bank portrayed—while triggering a financial crisis—saves itself from total wipeout at the expense of thousands of redundancies and stymied careers.
Although this is an extreme example, the tortuous decision processes the film depicts have echoes in countless less existential business situations. An underperforming foreign subsidiary may need to be shut down, an outdated product line discontinued, or a strategic realignment undertaken—all severely harming employees due to the resulting layoffs. Looking after employees and not upsetting suppliers and customers may be part of the company’s creed, but its survival must surely come first.
This occasional pressure to harm employees plays badly with the much-touted need for leaders to be empathetic with and have genuine concern for the welfare of employees, and more specifically, in the case of management decisions, avoid severe harm to employees. In progressive organizations managers are encouraged to show prosocial preferences, both for ethical reasons and because prosocial managerial preferences can have far-reaching positive consequences for employee behavior and performance.
Recent research, by Prof. Daniel Keum and Xin Lucy Liu at Columbia Business School, examined managerial prosocial preferences—the desire to care about other people and avoid harming them—as a critical input to firm-level corporate strategic decisions, and posed the question: could high prosocial preferences lead managers to put concern about harm to employees above the interests of the company?
This is a loaded question. While people will often incur personal costs to help or not hurt others, managers have a prime responsibility to ensure the interests of the company and will be tempted to avoid a straight answer, not least to avoid negative shareholder reaction. With this in mind, the study focuses on two business decisions that less obviously relate to employees—exit thresholds and risky investments—and considers the extent to which strategic decisions around these two critical areas are influenced by managers’ prosocial preference to prioritize employee welfare over company interests.
Exit thresholds are the lowest levels of performance and return that managers are willing to accept before deciding to shut down a line of business. On the face of it an exit threshold is set according to economic performance, in fact it is not only an economic decision but also a prosocial decision that incorporates the prosocial cost that managers incur in the process of laying off employees—the psychological cost of violating their desire to care for and not harm their employees. Because risky investments might lead to an exit, decisions on corporate investment risks can also be influenced by high prosocial preferences.
The Columbia study confirmed the thesis that facing economic setbacks, many managers will continue operating due to the concern that exiting may harm employees who would lose their jobs, and that managers with higher prosocial preferences set lower exit thresholds and avoid risky investments that increase the likelihood of having to exit.
Managers can be unwilling to make economically justified exit decisions because of loyalty to employees, fear of consequences for their own careers, pride, or other emotional reasons. Avoiding feelings of guilt can be another reason—the anticipatory guilt of the harm they would cause to others, or guilt they would feel at their part in the poor performance that crossed the threshold.
In view of the unfortunate but pervasive public perception that business leaders are just in it for themselves, greedy and immoral—underpinned with evidence of sweatshop labour scandals at Apple, Nike, M&S, etc.—this study presents a welcome rebalancing. It shows that many managers genuinely care about employees’ wellbeing and take it into consideration when making managerial decisions. This is both a good thing morally and because the link between employee happiness and customer satisfaction, which in turn positively impacts firm performance, is well proven.
Yet maintaining a failing business line or investing too conservatively can in the long-run cause huge damage to all employees. Senior leaders while encouraging a prosocial managerial mindset should be aware of the potential downsides and ultimately insist that company interest must come first. ………………………………………………………………………………………………………………..
Access the full research paper: 'Hanging in There for Employees: Managerial Prosocial Preferences, Firm Exit Thresholds, and Risk-Taking,' Daniel Keum and Xin Lucy Liu, 2023. or http://dx.doi.org/10.2139/ssrn.4420492