Layoffs Can Ruin Your Investments

Wall Street often cheers when companies announce layoffs; yay, cost-cutting! Come on -- it's time for a reality check. Layoffs not only continue to drag on our already weak economy, but they will likely hurt the future prospects of many of the companies that turn to them to bolster profitability.

A rotten ripple effect
The Wall Street Journal recently explored a common-sense topic that investors should take very seriously: Even a hint that layoffs may be on the table sets off a nasty downward spiral in employee morale.

Specifically, when workers worry that the axe is going to fall -- even far in the future -- negative outcomes begin. Such an environment takes workers' eyes off their goals, hinders companies' ability to recruit new talent, and can give the highest-performing employees the "incentive" they need to head for the exits, emulating the practical search for safer ground.

Such uncertain employment environments result in stressed-out workers. Stress goes far beyond simple emotional responses; it presents real problems in the workplace.

The Occupational Safety and Health Administration (OSHA) has deemed stress a workplace hazard in the past. Estimates suggest that it costs American businesses hundreds of billions annually. The Centers for Disease Control have also pointed to the health risks (and negative economic results) of stress, which causes increases in illness, absenteeism, and other negative drags that (obviously!) disrupt productivity.

 Layoffs: more than just numbers
There may be a shortage of jobs in the U.S., but sadly, there's no shortage of companies cutting workers right now; in fact, mass layoffs jumped by 3% over the summer as 145,000 people found themselves unemployed.

Bank of America (NYS: BAC) intends to whack "overall employment levels" by 30,000; that figure represents people, of course, regardless of sanitized talk of payroll "levels."

Although companies like Lockheed Martin (NYS: LMT) , Cisco (NAS: CSCO) , and Goldman Sachs (NYS: GS) probably gathered the most headlines due to their high-profile layoff plans, they're not the only companies slashing payrolls.

In July, Boston Scientific announced it would cut 1,400 jobs to cut $275 million in costs. Research In Motion (NAS: RIMM) also announced plans to cut 2,000 positions in July. Pfizer (NYS: PFE) started off 2011 with an unpleasant bang, with plans to reduce its workforce by 5,530 employees.

More recently, UBS (NYS: UBS) had announced plans to cut 3,500 employees even before last week's dreadful "rogue trader" incident. An additional $2 billion in unexpected losses certainly doesn't do much to add an air of confidence at that financial company, I'm sure.

Go for greatness
Obviously, in difficult economic times, cost-cutting can become crucial for some companies to survive. However, investors need to stop cheering when companies imply reducing payrolls will boost short-term profitability at the expense of building solid, strong long-term businesses. Layoffs should be chilling, not cheerful.

As Voltaire so famously said, common sense is not so common, and many of Wall Street's short-term focuses and pressures fit perfectly into that philosophical observation.

No company with deteriorating employee morale is destined for greatness. The best investments are companies with strong managements that don't attack their own workforces to make the short term more profitable.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

At the time this article was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Bank of America, Lockheed Martin, Cisco, and Research In Motion, and has created a bull call spread position on Cisco. Motley Fool newsletter services have recommended buying shares of Cisco and Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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