Coronavirus: Which firms are prepared for recession?

27 July 2020

By Hossam Zeitoun

The World Bank is predicting that the COVID-19 pandemic will cause the worst global recession since World War II, with unemployment expected to rise to its highest level since 1965.

It says retail spending and oil demand has dropped to unprecedented levels across the world and forecasts the recession will be twice as deep as the 2008-09 financial crisis.

Which companies are best placed to ride out this economic storm? Well, my research has found it is likely to be those who put in place a comprehensive range of human resource management (HRM) practices or have built a strong relationship with unions during the good times and preferably both.

That’s because workplace performance heavily depends on implicit contracts managers have with staff, which build trust and commitment. Those unsaid agreements, such as doing well at your work will be rewarded with long-term benefits, or being loyal and engaged will be noted by your manager and increase your job security or even lead to a pay rise, are what really count. These invisible deals are built on trust and are crucial in leading to improved productivity for the business as employees become more committed and involved in the company.

When external shocks to the workplace hit, like a recession, managers are under pressure to cut costs and breach these implicit contracts by reducing pay and benefits, increasing hours or even making redundancies. This erodes trust among staff left behind, who may well see their amount of work intensify – another potential breach of an implicit contract – and so reducing commitment and productivity.

However, the fragility of these implicit agreements can be reduced through comprehensive HRM practices and established negotiations with trade unions, which can benefit the employee and the company. Such practices might be costly in the short-term, but we have found they pay off in the long term, particularly after a deep recession.

We analysed the UK Government’s British Workplace Employment Relations Survey that was taken either side of the Great Recession, in 2004 and 2011. There were 989 workplaces covered in both surveys so we could compare their employment relations and what effect that had on their ability to thrive after the recession of 2008-09, which the International Monetary Fund, at the time, concluded was the most severe economic downturn since the Great Depression in the 1930s.

Using the surveys we were able to measure the strength of a company’s relationship with unions based on whether management normally ‘negotiates with’, ‘consults with’, ‘informs’, or ‘does not inform’ unions about six workplace-related issues: rates of pay, hours of work, holiday entitlements, pensions, training of employees and health and safety. And we assessed the depth of HRM across five domains: participation (such as meeting time and consultation), team-working, employee development, selection (ie skills and personality tests) and incentives (such as merit pay and profit sharing).

We then controlled for many factors that might independently influence workplace performance and so muddy the waters such as region, size and age of the workplace, and the industry. By looking at the ‘workplace performance’ as assessed by each company over the two surveys we can see the impact the recession had on the organisation. And we found that the more comprehensive the HRM practices and the stronger the union voice, the better the workplace came out of the recession, especially if it had suffered a severe impact.

There were certain firms where this relationship was not found and that was in family-owned companies, which traditionally are able to take a more long-term view and so already tend to be committed to maintaining implicit contracts with employees.

Our findings suggest that companies with strong practices supporting implicit contracts are literally pulling together during the hard times.

Employees are likely to remain motivated and committed to the company, work harder than ever and will understand some cuts have to be made, but know the management will take their inputs and concerns on board when deciding on, and implementing, tough measures. This is where transparency and trust are strong bedfellows in the tough times.

When the economy is ticking along nicely, that is the time to invest in HRM and build a good union relationship. It does mean sharing some of the profits, but it also means the company will be more resilient when the bad times come.

If the trust between management and workers breaks down, there is often a ‘survivor’s syndrome’ among the remaining workers; they can feel extremely demotivated and guilty even that they still have a job. A stronger employee voice helps make sure that things are done fairly with a proper procedure, and will be seen as a just process for those that survive, so they will maintain motivation.

When Germany brought in its laws around employee participation on company boards and at the workplace level in the 1970s – known as Mitbestimmung – employers were against them, but when bosses were surveyed again a couple of decades later most wanted to keep these practices because employees were more constructive than managers had thought, and they often brought performance benefits.

In many other countries, like the UK, it is a voluntary environment and incumbent upon the management of the firm to have the long-term vision to implement HRM best practice and build a strong union voice. But when in the midst of a recession it is very hard for bosses not to react by making myopic decisions.

If those implicit contracts are kept intact employees can help in a recession with valuable suggestions and extra effort, while a strong employee voice will not only act as a constraint against reactionary and short-term management decisions, it can also improve information flows between staff and bosses in turbulent times.

Plus, good HRM practices will help the workplace be more agile during a deep recession, which is often a necessity for firms to survive and thrive, and to increase the speed of not just decision-making but those decisions being implemented.

Those firms that have invested in HRM, their staff and a good relationship with their unions are the ones to bet on emerging intact from what is likely to be a hugely damaging recession.

Further reading:

Zeitoun, H., & Pamini, P. (2020). "A promise made is a promise kept : union voice, HRM practices, implicit contracts and workplace performance in times of crisis", Human Resource Management Journal.

Appelbaum, E., Batt, R., & Clark, I. (2013). "Implications of financial capitalism for employment relations research: Evidence from breach of trust and implicit contracts in private equity buyouts"British Journal of Industrial Relations.

 

Hossam Zeitoun is Associate Professor of Behavioural Science & Strategy and teaches Strategic Advantage on the Executive MBA and Executive MBA (London) plus Strategic Thinking: Strategic Evaluation and Analysis on the Full-time MBA.

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