To axe or not?

Business leaders talk balancing act between bottom line and keeping workforce

WHILE some companies have moved to cut staff amidst COVID-19's crushing impact on their operations, others are trying desperately to strike the delicate balance between keeping their employees as well as their doors open.

Former president of the Private Sector Organisation of Jamaica Howard Mitchell explains that capitalism, globally, and to some extent in Jamaica, is moving towards the point where human capital is considered more important than other inputs, but he stressed that this will always be subject to financial ability.

Mitchell, who chairs the board of the Island Grill chain of restaurants, was speaking with the Jamaica Observer in a personal capacity, though having served on several public and private sector boards.

He highlighted a small company, which has kept all 40 of its employees with full pay.

“Their business is down by about 85 per cent, but they have done it. That is at tremendous cost to the shareholders — for instance, a publicly listed company could not do that, because of the number of shareholders that they have, you would be sure to have some shareholders filing a legal action,” he said.

Some companies which have folded early in the COVID-19 crisis have come under sharp criticism for laying off workers. However, Mitchell explained that two factors determine whether a company goes bust — its capacity and philosophy.

He pointed out that decisions about layoffs are heavily dependent on the philosophy of shareholders, and whether they decide that return on capital comes first, at which point management has no choice.

“The other thing is that in Jamaica labour is viewed merely as one of the inputs in the enterprise process, and, therefore, in the same way that you shut down your machinery — which is what is being done now — you shut down your labour. So there is no ranking in the minds of some business enterprises between the inputs of labour and the inputs of equipment and assets. You close your factory, you stop paying electricity, you turn off your water, similarly, you turn off your labour.

“It sounds callous, but there is merit to that, because you have to live to fight another day,” he said.

Mitchell pointed out that the middle ground — which is what many companies have taken — is to cut back on staff compensation.

“That, to me, is the favourable way to go, because everybody must live, and as long as it is within your capacity to do it, then you should do it. If it is not, then clearly you're not going to destroy the company to keep one component of the company alive for a temporary period,” he said.

Mitchell noted the approach that Island Grill has taken, which is to provide some level of assistance to those that have been laid off, keeping as many employees on as possible, and in some instances generating work to keep employees occupied.

Companies may boast healthy profits on their balance sheets, but an interruption in cash flow can be detrimental almost immediately for some, president of the Jamaica Manufacturers and Exporters Association (JMEA) Richard Pandohie explained.

He stressed that every company exists because of the workforce, as equipment or machinery cannot operate without human capital.

“In general, everybody recognises that you have nothing without your workforce; they're the force interface with your customers or consumers, they make things happen,” he said.

However, Pandohie emphasised that profits are not to be confused with cash flow.

“A company can be profitable but still be completely broke, because that money is on paper. It's the cash flow that is the lifeblood of the organisation, and when that cash flow is interrupted — and with the pandemic is completely wiped out for some companies — they have no money left to pay for their inputs and to pay workers,” he outlined.

“You have to look at not just the profit and loss, but at the company's balance sheet… How companies operate is by using debt; so they borrow money and they use that money to work, that money creates profit, and some of that profit is used to pay back debt, pay dividends, so that profit is doing a lot of things,” Pandohie added.

The JMEA head noted that without cash, companies cannot keep up with their obligations and, therefore, what is happening now is that some entities simply do not have the liquidity to keep their operations going.

“In many cases, I imagine that everything was done before they took the decision to lay off the workforce... but have kept the benefits going because they want to rehire their workers — when you let them go, you let go people who you have invested in that you may not get back,” he explained.

Pointing to the global situation, Pandohie said: “Three, four months ago, you couldn't imagine Richard Branson of Virgin Airlines talking about bankruptcy and looking for support from Government? So, this is what happens to these companies. You can see the money, but they don't have the cash to sustain the business. Nobody could foresee that your sales could just be disseminated.”

Amidst announcements of staff cuts, trade unionist and Government Senator Kavan Gayle earlier this month lashed out at local fast-food franchises, saying that they are using layoffs to dismiss workers in order to avoid the provisions of the Employment (Termination and Redundancy Payments) Act.

A little over a month after Jamaica recorded its first case of COVID-19, Restaurants of Jamaica (ROJ), operators of the KFC and Pizza Hut franchises, in a social media video, said as a result of a more than 50 per cent drop in sales because of the outbreak, the franchise has been left with no choice but to cut staff.

“Over the past few weeks, we have seen a significant decrease in the number of customers in our restaurants and, by extension, a reduction in sales and transactions to less than half of what they used to be. These are truly challenging times, and, unfortunately, we face even tougher times ahead. To sustain the business in this time of crisis, we have been cutting expenses throughout the company in all areas, at all levels, but we have tried our best to maintain all salaries despite having less available work and having to reduce working hours,” ROJ Managing Director Mark Myers said.

Locally owned fast-food outlet, Mother's, also announced the closure of its 18 restaurants across the island for 30 days.