Applying Theories of Ethics to the Business Practice of Downsizing

What is the Purpose of Downsizing?

Downsizing is one of the most controversial business practices in the current world. With increasing competition and significant economic constraints in the current globalized world, several companies get rid of less productive employees to minimize costs and improve operational efficiency (Bravo and De Egana, 2017). Downsizing policy involves the reduction of a firm’s workforce by laying off unproductive workers or getting rid of underperforming divisions. When a branch or division of a business is closed down, several employees lose their jobs.

Apart from reducing costs, downsizing also enables an organization to free up some of its assets so that they can be auctioned during corporate restructuring to raise funds.

Concerns of Downsizing

The downsizing process has significant ethical, economic and legal consequences. According to Hopkins and Hopkins (1999), the employees affected by downsizing attach greater ethical concern to the practice than business leaders or managers who formulate, implement and/or communicate the downscaling decisions.

The process may also have negative consequences on employees and the organization. For instance, the company may experience bankruptcy, loss of customer morale, and reduced productivity (Bravo and De Egana, 2017). The ethicality of the practice can be analyzed based on the consequentialist perspective.

Theories of Ethics

Consequence-based ethics include utilitarianism and teleology which suggest that an action is right or wrong depending on its consequences. In this regard, if downsizing a business results in reduced cost and improved financial health for the company, it may be considered as ethical. However, if the benefits are achieved at the expense of employees’ and customers’ welfare, the practice becomes unethical.

According to the proponents of utilitarianism, an action is ethical if its consequences contributes the greatest good for the largest number of people in society (Howard et al, 2014). The ethical question that arises from downsizing is: will the largest number of people benefit from the practice? According to Bravo and De Egana (2017), companies that engage in downsizing often experience bankruptcy regardless of their financial strength. With loss of jobs to employees, and the possibility of bankruptcy, downsizing is likely to cause more harm than benefits to the greatest number of people in society.

It also causes more pain than happiness, and deprives a large number of people some pleasure. Therefore, downsizing practice in business is unethical from a consequentialist perspective because it is likely to cause more negative than positive consequences.

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