Shadowy Corporate Dealings Cast Shadows Over Workers’ Well Being

In the world of the nineties and after, where cutthroat competition is the reigning dictum and the corporate sector has seen major upheavals, workers’ well being increasingly is treated as a rather superfluous concern that can be sacrificed as per convenience. This is true not only for the less developed economies, but also for the developed countries where workers’ protection was supposedly operating at much higher levels. The growing number of job losses itself gives an indication of this emerging phenomenon. In an additional threat to workers’ protection, we have new instances of corporate bankruptcies which are ever more frequent, and worse, new instances of systematic malpractices leading to bankruptcies and closures. Workers seem to have no protection against these, at least in the short run. Corrupt malpractices, suddenly, do not seem to be the forte of only the less developed economies as has been claimed by the West for a long time. Enron is of course a now-classic example of that fact. But there are others. Take the instance of the following company based in Detroit, America.

February 7, 2002 saw the termination of services of 400 employees from the former Detroit Central Tool Inc. (DCT), at 30 minutes’ notice, and with a payment cheque for the last month that promptly bounced. Add to that the fact that the employees suddenly found themselves with no compensation, no pension and no healthy cover because the company had just been declared bankrupt. Add also the fact that the Detroit city pensioners, nearby Warren City Council and vendors used by the company all lost huge sums of money, and the murky world of corporate practices in America will slowly begin to reveal itself.

The US law that ensures a minimum of 60 days notice to workers being laid off could not be applied here because the company claimed “an unforeseeable business circumstance”. As a result of this apparently unforeseen bankruptcy, about $550,000 of DCT’s final $850,000 payroll is still tied up, and so is the workers’ access to their 401(k) pension funds, part of which they contributed themselves. Health care coverage of at least 18 months that is normally ensured to laid-off workers under the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1986 was also lost because the law does not cover workers in bankruptcy cases. The DCT was absolved of such responsibilities under the insolvency status. Curiously, the company had switched to a different health administrator only one month before the shutdown and they could actually settle a very small part of the workers’ claims. This despite the fact that weekly contributions by the workers towards their medical fund alone should have brought in at least $500,000 a year. So the workers were systematically cheated, of not only their employers’ contribution towards their pension and health care, but also of their own hard earned contributions.

The slump in the auto industry in summer 2000, due to which DCT lost contracts from Ford and Chrysler, was cited as the reason behind the bankruptcy. In reality, the bankruptcy could surely be foreseen by the owners over the preceding ten years, and was in fact meticulously contributed to by management strategy.

In the 1990s, the Detroit General Retirement System (DGRS), the city pension fund covering 23,000 active and retired city workers, lent $36 million to DCT. By the time the company folded up, DGRS lost about $33 million considering interest payments and part of the initial that was due, despite having taken a 15% ownership stake in the company. It also held back payments from its vendors, and changed them regularly in order to get out of paying them. DCT also managed to bypass payment of property taxes by making false promises to the nearby Warren City Council.

What is amazing is that while all this was going on, the company followed a different policy for its executives, spending enormous amounts on their entertainment and club memberships, which summed up to perks much larger than those given by even Chrysler. It maintained an intricate network of subsidiaries to pay executive compensation and expenses.

These details provide a valuable insight into the workings of an organisation that followed corrupt and dangerous methods with impunity, at great cost to its workforce. These practices resemble the policies followed by Enron, if at a smaller level, giving rise to fears that such cases are not isolated instances but part of a pattern. There is a real possibility of further such revelations given the workings of the new corporate America. The law is evidently unable to offer much reprieve to the workers, at least in the short run. Bankruptcy cases, whether due to corrupt practices or not, have seen a tremendous rise in the recent past. The 2001 record, led by giants such as Enron, Pacific Gas and Electric Company, and the Finova Group Inc., have been followed by K-mart in January, 2002. The impact on workers’ well being, even in cases of non-corrupt practices, is still very damaging. However, in genuine cases, there is usually some indication beforehand, so that the workers can protect themselves to a certain extent. While bankruptcy may be inevitable in the corporate atmosphere of today, malpractices and misleading of investors, creditors, and workers are not.

More alarming is the fact that bankruptcy cases are not restricted to the United States alone. Given the recent depression, such cases are on the rise worldwide. In the developed world, we have seen examples of the HIH, OneTel, Ansett Airlines in Australia, Marconi and Energis Plc in Britain. In Japan, figures released by leading private sector economic research firm Teikoku Databank, show that 19,441 companies went under in 2001, a 1.9 per cent increase on 19,071 bankruptcies in 2000. In Canada, the number of business bankruptcies in 2001 was 10,055. There has been a move towards reform of bankruptcy legislation in the developed world. For example, both Britain and France have adopted new bankruptcy/ insolvency laws since 1985 and a new bankruptcy law has also been proposed in Germany. Bankruptcy laws in the three European countries have traditionally been creditor friendly and oriented toward liquidation, but the new laws move in the direction of being more debtor-friendly and allowing reorganization in some circumstances, which is generally the orientation of the American laws. The more advanced Asian countries like Singapore, Korea, Hong Kong and Japan already had relatively more developed procedures in place and they are under further reform.

Bankruptcy cases are also on the rise in the third world. This is more so in the Asian countries, which were of course, traditionally plagued by corrupt corporate and bureaucratic practices. For example in Malaysia, 3764 cases of corporate bankruptcy were recorded way back in 1995. In India, industrial units, for example in the jute industry, have reported sick regularly. There is however, recognition of this fact among the third world countries, specially the Asian countries. Many of the Asian countries including Thailand, Vietnam, Indonesia, Malaysia, China, India and Pakistan are now considering various stages of reform of their corporate governance laws with specific reference to corporate bankruptcy. Most of these try to use rescue procedures as the main modus operandi. Cultural factors in Asian countries play a major role in determining the shape of insolvency procedures. The stigma factor associated with bankruptcy is high and this means court composition and liquidation are used less as instruments of rescue, while negotiations, arbitration and informal workouts are used relatively more.

Outside of the Asian region, the opening up of Eastern Europe to the market economy has led to review of insolvency law in many jurisdictions, though in most cases that happened about five years ago. In Africa, the first harmonised law for a group of countries, the OHADA project, came into effect in signatory countries in January 1999, and included both a pre-insolvency rescue procedure as well as the possibility for a court-ordered rescue in appropriate cases.

In addition, increased globalisation makes the entire world economy vulnerable to the fate and behaviour of corporate giants where earlier fewer countries would have been affected by the working of a single corporate body. International regulation of cross-border insolvency has been a matter of growing concern, and UNCITRAL, ADB, the IMF, World Bank have shown the latest initiatives in this direction.

As far as insolvency legislation all around the world is concerned, there seems to be more preoccupation with supervision and protecting creditors rights, or as in the US case, with debtors’ rights than with workers’ rights. Still, in some countries, for example in India, suggested legislative reforms indicate that workers’ rights are to be treated on par with that of the creditors. In Europe, e.g. in France, workers protection is stronger than in the US, though not always so in the case of bankruptcy. In most less developed economies, where corporate governance laws in such cases are not very well defined as yet, unemployment is high, court battles drag on for decades and workers are poorer in general, the workers’ protection issue is of even greater significance. For example, as the number of corporate bankruptcies climbed in Korea, the unemployment rate reached 7.0 percent, on a seasonally adjusted basis, in May 1998, compared with 5.9 percent in February 1998 and 3.4 percent in March 1997.

The increased vulnerability of the world economy in general and its workforce in particular, to systematic malpractices that lead to corporate failure, is not in doubt any more. Laws regarding workers’ rights in such cases need to be overhauled and so that workers are safeguarded against the worst effects and receive at least their basic dues. The escape route of bankruptcy may bring legal trouble for these companies followed by lengthy investigations, but prompt redress of workers’ grievances should remain an important priority.