On Monday 17th April, the Vice President of Engineering at Boeing, John Hamilton, sent an email within the company stating that, from the 23rd of June this year, hundreds of engineering employees are to be laid off. It’s doubtful that this was exactly the news Boeing engineers wanted to hear on a Monday morning – especially considering the the company has already made thousands of cuts in employment over the year or so, with 245 workers laid off last month alone.
So what happened after this was made public? Shares of Boeing went up by 2%. For those of you who aren’t too savvy when it comes to share prices, this is not a negligible amount. In fact, many economic writers would probably use the word “soar” to describe that sort of increase in the space of a day.
For a sense of the kind of value we can be talking about here: remember the stock fall of United after the recent violent fiasco with the passenger who was forced off one of their planes? Their stock dropped by 1.1% after that video surfaced . That represented a drop in value to the tune of $255 million.
So why did the stock of Boeing increase when they announced hundreds of layoffs of engineering workers? Because laying people off represents a boost in profits – in the short-term, at least. It’s shareholder value maximization at work. In order to boost the value of stock, downsizing (which usually harms the company in the long run) is often employed.
This may have a lot of engineering businesses (and especially their employees) a little rattled, not that this will be new information to a lot of them. Is downsizing in this way the only way to boost your stock?
No. Some solutions companies may want to look towards include consulting, equipment investment, and marketing. These may not see massive boosts in stock immediately, but they will help the long-term health of the company, which will, well, pay off in the long-term.
The reason that downsizing to boost shareholder value and (temporarily) profits is so bad in the long-term is that you don’t end up investing in improving them company that much. Downsizing is best used when you have no other choice and have to do it to save the company. But investing in better equipment, such as Cat parts and new technology, as well as better employee training, can really pay off in terms of profits if you’re willing to play the longer game.
A good marketing campaign can actually see a pretty quick boost in shares. But this usually requires you to develop a campaign that becomes extremely popular – the kind of thing that goes viral. Looking into professional and specialized engineering marketing should be considered.
Getting a consultant that specializes in boosting stock value while avoiding downsizing is another solution you can look into, though such services don’t tend to be very cheap.
At the end of the day, this news shouldn’t convince you that this is the only way to boost value, even if it’s what many of the giants of the engineering industry seem to be doing. Harmful shareholder value maximization actions have been prevalent since the 80s – but that doesn’t mean you have to join the herd.