In a recently leaked video, the Group Managing Director (GMD) of Access Bank, Herbert Wigwe was portrayed as planning to sack about seventy-five percent of his workforce and a pay-cut for the remaining twenty-five percent as part of the strategy to survive the COVID-19 crisis. As it is in Access Bank, so it is in other banks and many other firms in Nigeria, a friend ardently maintained! With revenue and profit targets unlikely to be achieved, cost saving measures especially retrenchment of workers is normally the default option of most businesses. While this might be perceived as an appropriate management strategy during a recession/crisis, research of different economies and firms shows that focusing entirely on cost cutting measures are most of the times counterproductive. The firms that cut costs faster and deeper have the least probability of sustainable growth and profitability even when business environment improves.
While the Central Bank of Nigeria has commendably reached an agreement with the banks to tentatively jettison the sacking of their employees, there are pertinent issues that need to be highlighted. First, is it within the powers of CBN to stop the banks from sacking their workers and will the banks faithfully comply? Second, who or which agency will negotiate with other sectors as CBN did with the banks? The third issue which I will focus on is if the planned retrenchments are justified and will it be in the banks interest?
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Based on research, when a wide retrenchment of employees takes place, the concerned firm suffers two major risks with the first being that the engagement level of the remaining employees significantly declines due to fear that they might be affected if another downsizing exercise is initiated. With most of the remaining employees consequently hovering between disengaged and actively disengaged, the second risk relate to subsequent recruitments that might be done when the economy improves. In addition to the cost of recruitment, the firm will also struggle to attract and retain loyal and committedly engaged employees. Reason being that the new recruits will be influenced by the old employees that are mainly disengaged and actively disengaged in addition to inherent risks of adverse selection and moral hazard.
Before the COVID-19 crisis, a research on the level of employees’ engagement in Nigeria revealed that only 12 percent are engaged. While 65 percent of our employees are disengaged, 23 percent are actively disengaged. With such grim situation, the question is if wide retrenchment of employees is the best strategy for the COVID 19 challenge? In another research, CEOs from different parts of the world were asked to state the most important asset or stakeholder to a firm. With shareholders, regulators, employees, community and consumers considered as key stakeholders, majority of the CEOs selected the employees as their greatest asset and stakeholder. If employees are considered the greatest asset to a firm, a further question is if the greatest asset should be the first to be sacrificed in a time of crisis.
While sacking of employees will be inevitable in some circumstances, it should be the very last of the last when other options are fully exhausted. In another research, firms that have achieved sustainable growth and profitability did not use wide retrenchment of employees as a survival strategy during and after crisis such as COVID-19. Of the different options that can be used, the one that results to highest sustainable growth and profitability is a combination of operational efficiency and promotion focused strategies particularly innovation led market development and asset investment. Such firms are described as progressive firms with growth of about 37 percent during and after crisis.
As indicated, the strategy of progressive firms is that of creative thinking and customer led innovation, an area that Nigerian banks cannot be said to be doing very well. By innovation, I am not referring to only deployment of technology. I mean deep ideation and creation of products and services for sustainable financial intermediation and growth. Just to buttress the limited innovation of our banks, their revenues and profits come from both interest and non-interest services that are common to all banks.
In a country of about 200 million people and a banking sector since 1894 (over 120 years), all the banks can only boast of about 40 million customers even with all the noise about financial inclusion. Moreover, even when some innovate, it is not really to provide any superior innovative services but mainly to make more money through many questionable charges.
There is no doubt that COVID-19 comes with many negative impacts on businesses. However, the doubt is if the banks are among the most affected and if the impacts are so much to warrant the sacking of employees just within month of COVID-19. I do not think so. With all the banks claiming to have good digital platforms, they offered most of their services during the COVID-19 lockdown including both debit and credit transactions. Not only did transactions take place, a significant part of non-bank transactions interestingly moved into the banking sector due to the lock down and social distancing. Moreover, as the lockdown led to increase in data usage and entertainment services, most banks are recorded increasing revenue and profits from selling the products and services of telecommunication and entertainment firms like MTN and DSTV. It is therefore a bit difficult to justify the sudden decision to sack workers with COVID-19 as an excuse just within one month of the crisis.
Before COVID-19, most banks declared huge profits even with an average cost-income ratio of about 65. If the banks want to reduce the high cost-income ratio, they should not use COVID-19 as an excuse. What is required is creative thinking and innovation. While our banks are sacking their workers, another firm in Nigeria recently approved and paid the yearly salary increase to all their employees at the peak of the lock down in April. Between the firm and Nigerian banks, who will achieve higher employee engagement and loyalty? And who will better stimulate the innovative capabilities of their employees for sustainable growth and profitability?
Franklin Nnaemeka Ngwu
Dr. Ngwu, is an Economist/Associate Professor of Strategy, Risk Management & Corporate Governance, Lagos Business School and a Member, Expert Network, World Economic Forum. E-mail- firstname.lastname@example.org,