Society's re-engineered future.

WITH BIG BUSINESS CAST AS A VILLAIN AS IT DOWNSIZES THE WORK FORCE AND TRIES TO BECOME MORE EFFICIENT, CEOS MAKE THE CASE FOR A NEW SOCIAL CONTRACT BETWEEN EMPLOYERS AND WORKERS - AND THE ECONOMIC AND SOCIAL COSTS OF FAILING TO DO SO.

When AT&T recently announced plans to restructure into three separate businesses and lay off 40,000 workers in the process, public opinion about downsizing reached critical mass. The pent-up rage of a decade in which up to 5 million middle managers alone were shaved from corporate payrolls exploded in the broadcast and print media, perhaps most visibly in a seven-part feature by The New York Times, which documented the reactions and conditions of rank-and-file employees - both those who were destroyed by the downsizing blast and those who survived.

While acknowledging the human consequences of downsizing and grappling with the precise role they must play in addressing them, many CEOs worry about its alternative - forcing businesses to run at a less-than-optimum level of efficiency. The price, they say, would be double-digit unemployment on a European scale and the loss of competitive advantage in such industries as manufacturing, chemicals, and financial services.

If downsizing is a necessary evil, what is the role of business and government in building a "new social contract" - that changed relationship between employers and employees in a global economy marked by deregulation, technological advances, free trade, and cutthroat competition?

CE asked a number of CEOs to describe this new contract, and how it might be built. Few say they wish to see government involved in ameliorating the effects of displacement, preferring to address the situation themselves with training and outplacement initiatives. Indeed, vaunted "learning organization" strategies play a large part in our respondents' model of the future, as they seek to create lifetime "employability" in the absence of a lifetime employment guarantee.

Many acknowledge that CEOs as a group do not wish to comment publicly on downsizing, fearing they and their companies would be scapegoated by the business press. Former Scott Paper CEO Al Dunlap, however, who last year slashed Scott's work force by 30 percent, urges his peers to step up to the plate.

"This is the key to the entire free-enterprise system, and everyone is running for cover," he gripes. "Society will pay the price."

ROBERT E. ALLEN, AT&T

As CEO, it's my job to make these changes work for AT&T's employees, customers, and investors. That has meant the restructuring of the company into three separate enterprises. Unfortunately, it also has meant downsizing. I've been criticized for deciding to reduce jobs while AT&T is a market leader, but I respond that a healthy company is better-positioned to absorb change. And competition within healthy industries creates jobs faster than the former regulated system.

I believe people need help from business to cope with the changes born of competition. Three areas are key, although I'm the first to admit I don't have all the answers.

First, a lifelong learning process can help people take advantage of new jobs and opportunities. AT&T spends $1 billion annually on employee education. Nobody can guarantee lifetime employment anymore, but updating skills can guarantee lifetime employability. Second, through the creation of industry wide job banks, businesses can develop leads for employees affected by downsizing. AT&T has identified 100,000 outside job leads for employees who must leave our company. Finally, businesses should help employees bridge the gap: When people leave AT&T, I know they're getting a good financial severance package, and a year's free health-insurance coverage for themselves and their families.

It's impossible to turn back the clock. But in addressing change in a straightforward manner, we can capitalize on today's business environment and create long-term benefits for all of business' constituencies.

DANA G. MEAD, TENNECO

Whether or not you call it a new social contract, restructuring and downsizing have changed the relationship between employers and employees. But corporations can address the effects of displacement and fulfill their responsibilities in the new environment.

For one thing, there has never been any portability in pensions, or very little, meaning that you couldn't take a pension with you as a base to grow a larger one. There are also more situations in which workers have six years in one place and eight years in another, and there isn't much to take anyway, since one accrues very little in the early years. Portability is also an issue for health care, and there are similar challenges.

Should the government play a role in addressing these issues? My first rule is the Hippocratic oath: Do no harm. The government should serve as a catalyst for change, but it also must remove impediments. Parts of ERISA, for example, don't permit portability. And NLRB regulations don't permit certain kinds of worker-management cooperation. [Editor's Note: Congress is scheduled to vote on those NLRB regulations in the coming months.]

Meanwhile, there are proposals in Congress that would use the tax system to bludgeon companies into a proactive social role. That's a mistake. The system is so overloaded with objectives right now that it can barely function. I can't help but observe that if the tax system encouraged more investment, rather than consumption, we'd achieve faster economic growth. Perhaps that's the best solution of all to downsizing.

W.W. ALLEN, PHILLIPS PETROLEUM

Has the American employee become disposable? Quite the contrary. With restructuring and downsizing, the employee is less disposable than ever, because in a leaner work force, every individual needs to have the critical skills to move a company forward.

The new environment will demand that you have training initiatives. At Phillips, for example, we recently launched a program called EXL, which assesses employees against the competencies required for excellence in their current jobs and helps them to define career aspirations.

Does government have a role in addressing some of the human needs caused by displacement? Though this cuts against the grain with some CEOs, I think Washington can help in three ways. First, by addressing such issues as the portability of health care. Second, by reducing its criticism of big business. If we are to thrive in an environment of free trade, we need to restructure to become as competitive as possible. Third, because training is such an important issue, government may complement the private job-bank programs designed by individual companies to help displaced workers.

EDWARD B. RUST JR., STATE FARM INSURANCE

Had you asked me about downsizing a year ago, I would have told you that in our more than 70-year history, we'd never released a single employee. But now, in an increasingly competitive environment, we are facing some restructuring. I don't know whether the American worker is disposable, but certain skills are, particularly on the blue-collar level.

In defining the terms of a new social contract, some miss the point that if an enterprise is asked to endure an artificially low level of efficiency, there is a cost to society as a whole. That's underscored in Europe by the fact that noncompetitive industries actually are finding it harder to keep their social contracts with workers.

Also keep in mind that an efficient business satisfies customers who seek more value with less cost. So what the worker loses in security, the consumer gains in a higher living standard. Is business failing if it enables that to happen?

Has the run-and-hide approach of some chief executives complicated the relationship between business and society? While my response may limit the number of Christmas cards I get, I think there's some validity to that argument. In fairness, more CEOs know they need to be more proactive in the way they seek solutions to any displacement, including the creation of skills-training programs and a culture based on continuous learning. It's in the best interest of business to do this. After all, studies show that a stable work force has a positive impact on productivity, customer retention, and the bottom line.

WILLIAM R. TOLLER, WITCO

There has been a change at Witco in the so-called social contract - the relationship between workers and employers - over the last five to 10 years. We'd like to think our management strategies take into account our employees' best interests. But in fact, several years ago Witco had acquired a number of businesses, many of which had retained their identities and brand names, and we found ourselves needing to consolidate. And consolidation means change.

Meanwhile, the business press reports that big business now views the American worker as disposable. That's grossly inaccurate. While there have been a couple of red flags out there - AT&T is the one that comes to mind - overall, there hasn't been a tremendous drop in employment, a fact that's underscored by an unemployment rate that's near an all-time low.

We must remember that there are high social and economic costs for failing to make a company run as efficiently as possible. Because of rationalization in the chemical industry, for example, we've become the largest net exporters of any U.S. industry. And exports mean jobs. But CEOs should play a major role in helping society adapt to the new environment by leading the charge in training. If we don't do it, government will, and the transfer of workers' skills from certain areas to others will become as inefficient as everything else Washington does.

T.J. RODGERS, CYPRESS SEMICONDUCTOR 

The only refuge for job security is competition. Individual competence is the only guarantee you've got, and that will guarantee you lifetime employability, not a single job forever. In our business - which has created employment in recent years and, therefore, might be thought of as something of a role model - that's particularly true. And a CEO's primary responsibility under a free-market system is to support that environment. That's a social contract based on fact and reason, rather than political correctness or belief.

I love to hear this stuff about the disposability of the American worker. This is the Robert Reich/Ted Kennedy/Dick Gephardt mentality that implies capitalism is greedy, and people need to be protected by the government. In reality, tinder the information revolution, the job situation is trending in the other direction - and not just in the semiconductor business. In the days of the assembly line, workers were much more interchangeable than they are today.

Meanwhile, to push companies into social responsibility, there are proposals floating around Congress, including one by Sen. Jeff Bingaman (D-NM), that would tax socially conscious companies at 11 percent and others at 18 percent. Under one iteration, a company with a conscience would be one at which the CEO earns no more than 50 times the salary of a company's lowest-paid employee. Let's look at how that plays out: First, you might see companies fire all their $15,000-a-year janitors, and outsource those jobs so the lowest salary becomes, say, $25,000.

Alternately, using Intel as an example, you create a situation where Andy Grove would earn $750,000 rather than $2.6 million - and even the latter figure is about half what some pro football quarterbacks make. Under such a scenario, the government is setting pay scales for private industry. It's draconian and ridiculous. But it's going to be a big issue in the next Congress.

JEREMY M. JONES, APRIA HEALTHCARE GROUP

We merged two companies last year to form one of the largest companies in home health care. There was some duplication in our work force, and we knew downsizing was a reality. We wanted to reach a stable level as soon as possible, because as you undergo a transition, organizationally you are inefficient. The CEO's role is to minimize that productivity hit and downsize right the first time.

One more point: Some business leaders describe training issues as a part of a new social contract. But I don't think you do those things because of the business climate or downsizing. The training you provide as a company should make your business better.

Having said that, you certainly would hope that the skills you impart are transferable to other businesses and that they make your people more marketable.

ALBERT J. DUNLAP, FORMERLY OF OF SCOTT PAPER

Everything you hear about contracts, disposable workers, fat-cat bosses, and social responsibility is unadulterated rubbish. If we guarantee employment for some, we jeopardize employment for everyone. We have historic low unemployment today, and that's because U.S. industry is competitive.

You just cannot keep someone on the payroll for whom you do not have a job. When America tried that several years ago, cost structures became bloated, and we lost our edge in shoes, clothing, appliances, and a hundred other areas. Some people say downsizing drains productivity. But it's inefficiency that kills productivity - and profitability, to boot.

You want to know about CEO responsibility in a new social contract? Take the heat. Lay out the case that business is more productive than ever and that jobs are being created, not just lost. We're the envy of the world everywhere except at home.

You want an example of what not to do? Look at Bob Allen of AT&T. He gets rid of 40,000 people, he catches a little flak, and he backtracks. He does a ridiculous public relations campaign. Business is being emasculated by the [Robert] Reichs and [Pat] Buchanans of the world. Until recently, the only guy willing to touch this thing was Bob Eaton at Chrysler. Allowing business to run at maximum efficiency is the key to the entire free-enterprise system, and everybody is running for cover.

If CEOs don't step up to the plate, lots of things will happen by default. You'll have special taxes and special regulations. You won't be able to control your costs, and society will pay the price.

This thing is coming like a freight train, and corporate America is dead in the middle of the tracks.

Joseph L. McCarthy is a CE contributing editor.