It’s widely accepted that the economic fallout from the Covid-19 pandemic will be substantial.  Indeed, the World Bank predict that we’re facing up to the worst global recession since the 2nd World War.  Already we’ve seen retail demand falling to unprecedented levels, with reduced mobility also causing demand for oil to plummet.

It’s prompted economists to predict a recession that is twice as deep as that experienced after the 2008 financial crisis.  This unprecedented situation will claim the lives of many companies, but the fallout will not be felt equally across the economy.

Pleasingly, for those of us who have long been advocating greater employer investment in the workforce, new research from Warwick Business School suggests that those organizations that have done this are likely to be buffered from the worst of the Covid recession.

Building the contract

The researchers find that the best workplace performance occurs when there is a clear contract between employer and employees.  This isn’t a contract in an explicit and legal sense, but more in the implicit sense that employees know that their employer will do the right thing, will invest in them and their skills, and will generally have their back through thick and thin.

This implicit contract then invokes a feeling of reciprocity, with employees striving to return that faith and do the best they can for an organization that has done well by them.  It’s a contract that’s based upon trust and is vital if productivity is to be high across the business.

The risk is that when faced with the intense pressure an external shock, such as a recession, places upon managers, they can be tempted to take short cuts, reduce costs to the bone, and fundamentally break these implicit contracts, both through reducing pay and benefits, but also shortchanging employees in a variety of ways.

Such measures are not without consequences.  Redundancies made in haste leave an indelible mark on the employees left behind, especially as their work is likely to intensify in the absence of former colleagues.  It all adds up to a gradual, or even rapid, erosion of trust and commitment, which in turn undermines productivity.

Supporting the foundations

These implicit contracts are inherently fragile, but the research found that they can be bolstered and reinforced by robust HRM practices that are designed to benefit both employee and employer.  Such practices can often incur short-term costs, but they pay off in the long run.

The findings came from an analysis of the British Workplace Employment Relations Survey that was undertaken by the UK government either side of the 2008 recession.  In total, 989 workplaces were included in both the 2004 and 2011 surveys, allowing the researchers to compare employment relations in these firms alongside their ability to weather what was the worst economic downturn since the Great Depression.

The researchers assessed the state of HRM in each firm across five domains: employee development, team working, incentives, selection, and participation.  They then attempted to control for various factors that might influence workplace performance, such as the region the firm was based in, the size of the workforce, and the industry the company operated in.

The assessment revealed that those companies with a more comprehensive HRM practice were able to emerge from the recession better than their peers with weaker HRM practices.  What’s more, this was especially so among firms that had experienced a particularly severe contraction as a result of the recession.

Developing the workforce

In his latest book, Backstage Leadership, INSEAD’s Charles Galunic outlines a number of things organizations should take into account when developing the kind of workplace that can survive the Covid recession.

• Changing relationships with work – Many workers today lack the unstinting, job-for-life loyalty that was perhaps common in the past.  Instead, they are more loyal to values and causes, and want their work to help them fulfill those.  In a Covid context, this means operating in the right way, and investing in both your workforce and your community.
• Technology matters – More and more of the workforce consider themselves to be digital natives, so working from home is no big deal as they have the skills to do so.  They just need the technology and the trust from their employer to do their job from anywhere.
• Leadership needs to change – Leadership comes in many shapes and sizes, and the traditional hierarchical approach is increasingly outdated, with employees today expecting a more servant leadership style that sees the leader working to help the subject matter expert as much as they can rather than standing over them with whip in hand.

Galunic argues that leadership in such a context has to become a lot more accessible, with employees given real-time access to their leaders.  Organizations should also strive to ensure that work has real meaning to it, both in the outcomes of each employees work, but also how their work fits into the rest of their life.

“Work-life balance not only encompasses family life, but increasingly it goes beyond, touching on individuals and time for their personal development,” Galunic says.

If this can be coupled with rigorous development opportunities that offer both deep dive opportunities and ongoing mentoring, networking, and other more tacit forms of knowledge exchange, then organizations stand a better chance of developing the kind of culture the Warwick team suggest is key to surviving recessions like the one we’re about to encounter.  While it might be too late for organizations to pivot on such a scale to create this culture now, it will hopefully forewarn leaders for recessions to come.