This post is part of the Bible and Business series on Christian ethics for Christian Business Owners.
Nearly every company will need to be right-sized[1] at some point in its lifecycle. No business ever has sustained growth. There are always downturns which owners face.
Description of the Problem: Owners get caught in a downward spiral when they believe revenue growth is the answer to a sustained deficit. Rather than right-sizing the business and getting to profitability quickly by lowering payroll and other expenses, the owner attempts to sell more, build more, and create more to generate more revenue. The problem with this approach is that owners often are more optimistic than events would warrant as to the owner’s ability to reach profitability. The owner often underestimates the time required to break even and the amount of cash that will be burned while getting there. More importantly, the owner underestimates the stress this process causes and the significant impact that even minor setbacks can have on the owner’s efforts to reach profitability.
Most owners do not implement a proper right-sizing plan because the plan usually requires profoundly emotional decisions. Most owners care deeply about their employees and do not want to see their employees suffer unnecessarily. The ethical dilemma appears when an owner is asked to lay off a group of employees who have worked hard and given good work product, but instead of receiving a bonus, the employee receives a termination notice.
However, after working in several turnaround situations, this researcher has learned that the real ethical dilemma is not doing what needs to be done to keep the business profitable. Suppose a business has fifty employees. If laying off five of those employees, along with other cost reductions, saves the other 45 jobs, returns the business to profitability, and enables the owner to hire more people in the future, then the real ethical dilemma is sacrificing all fifty jobs through bankruptcy because the owner could not make an emotionally difficult decision.
Type: This type of ethical decision is an Ethical Trade-off
Filter: The ethical trade-off is that either a few suffer through layoffs or all suffer through bankruptcy. For a business owner, loving one’s fellow man will sometimes mean ending the employment of one or more employees when the business needs to be right-sized. Paradoxically, it is unloving to the other 45 employees if an owner does not do what is necessary to reach profitability again. It is also unloving to the customers, vendors, and other stakeholders in the firm. Moreover, it is unloving to the community at large to not run a profitable business that can sustain itself for the foreseeable future. Among other elements, communities need profitable businesses that provide predictable employment, stable influence, and quality products and services that enable the community to flourish.
For those who are laid off from employment, it is good to remember that God has something good for them in this experience too. The owner can trust God’s sovereignty that God will supply their need in such a way as to bring glory to himself while maturing their faith in him. Moreover, research has shown that a sizable number of those who are laid off start their own business within twelve months of being laid off. For example, one survey reported that out of 4,000 tech workers who were laid off, 1,007 started their own business (Schroeder, 2023:Online).
Regarding the Ten Commandments, when an owner keeps up a façad that it is reasonable to believe the business can grow out of the sustained devolution, the owner is not being honest with the owner or the employees. This violates, in a sense, the command to not give false testimony.
Correct decision: When right-sizing a business is needed, it is a correct ethical decision to reduce expenses to be under expected revenues. This will often mean reducing payroll expenses through lay-offs or position eliminations.
[1] Right-sized” means to shrink the company through layoffs, product or service line reductions, compensation reductions, or cutting back on expenses. A company right-sizes when revenues fall below projected levels and the leaders conclude that the best path back to profitability is through expense reductions.
