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Mistreating Employees A Clear Sign of Management Troubles

Chris Banescu

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August 28, 2007

During the glory days of the Dot Com Bubble I worked as Director of Web Development at Homestore.com (now Move.com). Homestore ran Realtor.com, the largest real estate site on the web. Homestore's management team was unable to capitalize on the unique position and strategic advantages the company had in the marketplace and squandered the resources and talent they were entrusted with.

The way executives reacted to the looming financial crisis of their own making is an illustrative case study in how not to conduct layoffs and how not to manage a company's most important assets - its employees.

When it comes to difficult management decisions, improperly planned and implemented layoffs represent one of the most disruptive and destructive decisions made by executives. Many, if not most, of the layoff horror stories we've all heard about confirm that few managers understand the impact and consequences their decisions have on the reputation and goodwill of the business; the long-term value and strategic effectiveness of the company; and the morale, trust, and productivity of the remaining employees.

Facing significant losses and with no effective leadership and strategic management solutions from executives, Homestore decided to cut costs with wave after wave of layoffs. (I was laid off in October, 2001).

Here's how Homestore did it:

  1. Do not disclose anything to your employees in advance and do not communicate your intentions or reasons for doing anything.
  2. Reassure employees that their jobs will be secure, that the company is doing ok, and that layoff rumors are false.
  3. In order to manipulate and intimidate employees and managers that are hoping for advancement or a better raise, leak rumors about the layoffs and threaten them privately with the statement: "be lucky you still have a job!"
  4. Keep the entire organization guessing until the very last moment; usually the morning of the layoffs.
  5. Lay people off in multiple waves to avoid problems with employees figuring out what is really going on. This insures that employees remain in a constant state of uncertainty and further degrades innovation, productivity, and morale.
  6. On the day of the layoffs, start calling each employee one by one into the vice president's office, make them sign a waiver, and withhold their last paycheck until they release the company of all liability.
  7. Escort employees back to their office or cubicle and give them until the end of the day to clear out everything and say their goodbyes. If they're an especially talented or appreciated employee, have security watch over the process to insure the employee does not suddenly turn into a criminal after years of loyal service and starts destroying key information and steal company property.
  8. The day after the layoffs are completed, have the CEO send out a condescending email to the entire company telling everyone how terrible, but necessary, the whole process was and how the remaining employees need to sacrifice for the success of the company. In the same email remind everyone that bonuses this year will be halved, and raises will be kept to 2%.
  9. Finally, issue a severe warning to all remaining employees that absolute loyalty is mandatory and no one is allowed to look for another job on company time. Further threaten employees who discuss the layoffs with the loss of their job.

None of the layoffs improved Homestore's bottom line. The company lost of some its most critical and talented people. The process created absolute chaos, confusion, and mistrust throughout the entire organization.

In the years immediately following Homestore's collapse, the SEC indicted and prosecuted many Homestore executives for fraud and corruption. It turns out that while the employees were being threatened and mistreated and the company was driven into the ground, management was lying to investors and arranging fraudulent transactions, while they continued cashing in tens of millions of dollars in stock options.

Homestore represents an extreme, but unfortunately not unique, example of Dot Com abuses and greed that we saw with Enron, WorldCom, and other corporations. The company had great promise and wonderful opportunities. But when management forgot that truth, integrity and ethical treatment of employees are essential elements to managing organizations, they embarked on a course that led to financial disaster and criminal prosecutions and indictments for many of the executives involved. To date 11 former executives, including the CEO, Stuart Wolff, sentenced to 15 years in federal prison, have been convicted on multiple federal criminal charges.

Related links:

SEC Files Financial Fraud Case Charging Three Former Homestore Executives
http://www.sec.gov/news/press/2002-141.htm

Former Homestore CEO Stuart Wolff Sentenced to 15 Years in Prison
http://losangeles.fbi.gov/dojpressrel/pressrel06/la101206usa.htm http://10qdetective.blogspot.com/2006/11/former-homestore-ceo-stuart-wolff.html

SEC and US Attorney Charge Former Homestore Executives With Scheme To Inflate Advertising Revenue
http://www.sec.gov/news/press/2003-120.htm

Former Homestore Exec Peter Tafeen Receives,30-month sentence
http://www.silvar.org/index.cfm/news/Former_Homestore_exec_receives_30month_sentence_201.htm

Chris Banescu is an attorney, entrepreneur, and university professor. His business, ethics, and management articles and podcasts can be found on www.ChrisBanescu.com. He is a regular contributor to OrthodoxyToday.org, manages the conservative site www.OrthodoxNet.com, writes articles, and has given talks and conducted seminars on a variety of business and management topics. He has also written book reviews for Townhall.com and articles for Acton.org.

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Posted: 28-Aug-07



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