Large number of jobs in the Information
Technology (IT) sector is at stake. Automation and new technology are
disrupting the industry. Skills that created value so far are becoming
redundant. New skills are required to work with new technologies, such as, Big
Data, artificial intelligence, Internet of Things, robotics and virtual
reality. Companies have started up-skilling existing employees and recruiting
those with required skills. Employees, who are unable to acquire new skills,
are losing jobs.
In the above context two questions have
emerged. The first question is whether it is better for the top management to
take pay cut rather than to layoff employees in difficult years. The other
question is whether IT employees should form union to protect their interest
when the going is tough. The first question is relevant when the job loss is
due to a slow down, which is transitory. In that situation, the pay cut by the
top management will be for a short period in order to retain the talent that
will be used after the bad period is over. It is not relevant when jobs and
skills become redundant due to disruption caused by technological advancement or
some other mega event. The second question is relevant in all situations from
the perspective of employees. Bargaining power is relevant in all types of
negotiations and collective bargaining is desirable when individual bargaining
power is low. Protecting the job during tough times or securing adequate
compensation when a job is lost requires hard negotiation with the employer.
Therefore, it is no surprise that employees, including IT employees, have the
propensity to form union.
There are no straight answers to both the vexed
questions.
Although the IT industry is in focus at
present, such disruptions occur in almost all industries with fast changing
technological, social and geo-political environment. Therefore, it is
appropriate to examine the issue from the perspective of corporate governance.
Companies create value through its
operations while complying with law and social norms, and taking care of the
social and environmental concerns. A very small portion of the value is shared
with socially and/or economically marginalised population of the society
through Corporate Social Responsibility (CSR). Shareholders, customers,
providers of inputs (including human capital and debt capital), and government
share the value created by the company. Government gets its share through direct
and indirect taxes. Companies, through industry associations or otherwise,
lobby with governments to reduce their share of the value. The share of
customers and input providers in the value created by the company depends on
the market forces and their relative bargaining power vis-à-vis the company. The
share of shareholders is the residual amount. Shareholders’ primacy is well
established in corporate governance. Therefore, companies focus on creating
‘shareholder value’ while being ethical and fair to other stakeholders. There
are two reasons for the same. First, financial capital is sticky in the sense that
once invested in non-financial assets (such as, plant and equipment) to build
capacity, it cannot be recovered without substantial loss. Second, the
non-controlling shareholders after entrusting their fund to the company cannot
participate in strategic and operating decisions. In absence of focus on
creating ‘shareholder value’ and effective monitoring, the management might
misallocate the resources causing depletion of shareholders’ wealth
permanently.
Human capital is also ‘sticky’ like
financial capital. After completing substantial period of employment in a
company, employees develop specialised skills, which are not useful in other
industries. Consequently, their market value outside the industry is very low, almost
zero. Similarly, when business model or technology changes many of those skills
become redundant. Therefore, those who lose job due to change in the business
model or technology cannot find an alternative employment. In this context it
is important to consider whether employees should also be considered as a
primary stakeholder along with shareholders. Companies should focus on both ‘creating
shareholder value’ and ‘protecting and creating employee value’.
It is not enough to merely honouring the initial
employment contract with an employee. It is important that employees are
trained to acquire skills that would be needed in future, when the company sees
disruption coming, that is, much before the disruption occur or the company
plans to change the business model. Companies should ensure alternative
livelihood for those who cannot acquire new skills, particularly if they are
low-paid employees.
The issue is complex, particularly because
companies engage large number of employees on short-term contracts and
off-role. It deserves serious debate among academicians, regulators and
practitioners of corporate governance.
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