FINANCIALDISTRESS, ADMINISTRATION AND RE-STRUCTURING ON THE HIGHSTREET:
FINANCIALIZATION AND THE WORKPLACE?
Ian Clark, University of Birmingham, UK.
Abstract
A globally focussed financial capitalism is encroaching on the UK’s regime of managerial capitalism. Many contributions on thisissue whilst they use empirical material to substantiate theoretical argument, are themselves abstracted from workplace studies. To address the gap between theoretical and empirical evaluation of financial capitalism, financialization and subsequent financial crisis this paper grounds an abstract research question – the impact of financialization and financial crisis – empirically in a study of employers in UKretailing in distress or administration. The study concludes that use of administration to downsize retail firms is widespread and has unreported consequences for many employees.
Key Words
Administration, Distress, Downsizing, Employee Interests, Financial Capitalism
Ian Clark
Department of Management,
University of Birmingham
Birmingham, UK. B15 2TT
INTRODUCTION
Sometimes referred to as financialization of the real economy, work, employment and society a globally focussed financial capitalism is encroaching on the UK’s established regime of managerial capitalism. This encroachment has not been stalled by financial crisis and recession, if anything both have re-vitalised the process. For early adopters financialization represented a theoretical, institutional and empirical threat to established low trust bargains and fledgling high trust bargains between employers and workers, (Thompson, 2003). For those developing this theme financialization marks a threat to established regimes of managerial capitalism by new business models associated with financial capitalism such as private equity buy-outs which de-list going concern firms (Clark, 2009). More recent contributions to the literature argue that financialization transmits the neo-liberal paradigm and associated market forces within organizations.This creates the potential for a political economy of class relations where neo-liberalism, retrenchment, cuts and austerity appear as the penalties for failure within and beyond employment (Heyes, et.al. 2012). Allied to this approach, financial capitalism appears as a challenge to the evaluation of the labour process and industrial relations. The labour process focus on qualitative studies of workplace industrial relations, change, politics and re-structuring is well suited to unravel the processes of value creation, distribution and extraction where the priorities of financial capitalism pre-dominate (Delbridge, 2006). However, labour process theory is limited in its concentration on the workplace, adopting as it does the assumptions of managerial capitalism and a focus on relations between managers and workers, see Blyton and Jenkins, (2012a & b).
New actors and new mechanisms of value extraction for investors within financial capitalism require a re-framing of how the labour process is conceived and its relationship to different capitalist actors. Recent contributions further outline the imperative for established academic formulations of the labour process and industrial relations to be positioned within the wider structural conditions of financial crisis which shape financialized capitalism (see Appelbaum, 2010, Appelbaum et.al., 2013, ILPC, 2012, Thompson, 2011). In 2013 such a re-framing remains necessary for two reasons; firstly, the cited sources, although they refer to and use empirical material to substantiate theoretical and institutional arguments, are themselves abstracted from workplace studies. Secondly, the political economy approach evident in these contributions needs to be grounded empirically by incorporating workplace studies focussed on divergent interests, conflict, distrust and subordination in firms controlled by financial capitalists. To address the gap between theoretical, institutional and empirical evaluation of financial capitalism this contribution grounds an abstract research question – the impact of financialization and subsequent financial crisis - empirically in a study of distressed employment in UK retailing.Where a firm is unable to meet a promise made to creditors that it defaults on a contract it is in financial distress. A comprehensive definition of distress is detailed in section two but at this stage suffice to say if a firm is unable to meet a promise made to creditors distress frequently results in re-structuring between a firm, its creditors, equity holders and employees.This study examines how financial capitalism, has during the financial crisis, stimulated the use of ‘administration’ to sustain but radically downsize distressed businesses as going concerns and the effects of this on the interests of workers and managerstoaddressthree research questions.First, the manner in which the financial crisis is grounded for labour and the management in ‘going concern’ businesses owned by increasingly detached forms of financialized capital, that is, businesses which represent one component of an investor’s portfolio. Two, theoretically and empirically, how the crisis in financial capitalism affects labour in retailing - a more routine and less glamorous area of employment than those which are often the focus of HRM studies.Three, how decision making over the management of the employment relationship and the labour process is increasingly removed from the workplace and even ‘employers’.
The onset of a sustained financial and consumer spending crisis has witnessed desolation on the high street.Employment in retail now routinely features decisive re-structuringoften entailingimmediate job loss without notice, redundancy payment or access to unpaid wages and salaries. Creditors, capital markets and landlords inform decisive re-structuring and downsizing as an emerging form of uncertainty in employment and employment relations. If a firm experiences sustained operational distress, for example, a cash flow crisis, a failure to secure trade credit, or is unable to re-pay debts or re-negotiate debt or lease repayments the directors may apply to a court to have the firm placed in administration. Once in administration court appointed administrators replace incumbent directors to protect a firm from legal action to sustain the firm as a going concern seeking to secure the best possible return for investors possibly selling the firm to new investors. The priorities of financial capitalism inform the actions of administrators and investors in distressed firms viewing themfirms as bundles of assets to be bought and sold like any other investments not living entities which employ workers.Empirically this paper reports on fifteen cases of distress and administration which led to decisive re-structuring, the blatant cancellation of commitments to employees and other stakeholders and the application of a ‘lower cost’ form of employment protection. Part oneoutlines a theoretical framework informed by a literature review.Part twofocuses the research question, outlines the research design and details how the empirical evidence was constructed to inform a diverse critical case approach. Part three reports on empirical findings and part four contains further discussion and a conclusion.
1. MANAGERIAL CAPITALISM TO FINANCIAL CAPITALISM?
In the framework of managerial capitalism, relations between management and labour are built on low-trust and an acknowledged divergence of interests (Fox 1974:25-30, 73). This frameworkencouraged researchers to examine the impact of product market institutions on labour, work regimes and employment relations. In the 1970’s and 1980’s focus was added to this by evaluation of workplace industrial relations, (Clegg, 1979, Hyman, 1975), the production process and class relations at work, (Friedman, 1977) and studies of workplace change, politics or re-structuring, (Benyon, 1973, Buroway, 1979, Edwards, 1979). As institutionalized industrial relations declined in the 1990’s these approaches transformed into studies of the presence or absence of cultural change and management inspired employee commitment, (Purcell, 1993, Storey, 1992).
That is, in the managerial capitalism paradigm,researchers looked at the workplace in the light of product market forces sometimes to the neglect of the capital market as both Appelbaum et.al. 2013 and Heyes et. al. 2012 in their respective critiques of employment relations research and the varieties of capitalism thesis establish. It is not that the essence of the labour process has changed; rather its insertion in the always recognized (but not always emphasized) circuit of capital has changed. As Burawoy (1979: 123, 194-196) observes conditions outside the firmcan transform the contemporary dynamics of capitalism particularly where the state, although relatively autonomous from the change dynamic, actively encourages the change process. The pressures associated with financial capitalism take evaluation of the firm beyond its going concern status often emphasized in managerial capitalism where managers and workers mediated the effects of globalizing capitalist forces.In stark contrast to this the diffusion of new business models associated with financial capitalism give explicit priority to investor and shareholder value, promote short-term profit horizons and stimulate profitability and growth by downsizing, merger and acquisition rather than sector driven longer term development.These pressures threaten the ability of employers to maintain commitment to established firm level regimes whether they are lower road, focused on cultural change or higher commitment bargains, (Thompson, 2003, 2011). Rather, a contemporary focus on the priorities of financialcapitalism may witness business owners seeking to re-structure firms they own through accounting and taxation arbitage, application of business models which de-list plc firms, forced downsizing and re-domiciling a country of origin, (Appelbaum, et. al. 2013). The imperative of investor and shareholder value gives priority to the requirements of financial capitalism over and above culturally and institutionally embedded features of managerial capitalism in national economies, (Delbridge, 2006:1215). An example of this imperative is the emergence of ‘distressed’ economic conditions on the high street which many employees experience as decisive and immediate re-structuring informed by three developments. First, the priorities of financial capitalism and financialization, crisis and austerityconstitute the wider structural conditions which necessitate immediate workplace re-structuring.Second,these priorities diffuse the neo-liberal paradigm and market forces within firms and ultimately employees. Third, ‘employer’ decision making is becoming increasingly prioritized by owner-investors and investor and shareholder value over the heads of managers. These demands further detach capital owners from more traditional characterizations of managers and labour in the employment relationship.
1.1.Financialization and the Nature of the Firm:
Financialization is most readily defined as the growing and systematic power of the finance sector broadly defined and with this the associated growth of financial engineering, (Blackburn, 2006). The full blown development of financial capitalism since the late 1990’s marks a step change in capitalist activity. The internationalization of finance began in the late 1970s and accelerated in waves of de-regulation during the 1980’s resulting in two principal effects.Firstly, internationalization and de-regulation create a tension between a global financial capitalism and the regulatory capacity of national financial regimes.Overbeek, (1989), and Cerny, (1997:174-178), provide contemporaneous accounts of this whereas Coffey and Thornley, (2009) provides a more recent account centred on the economic and political impact of globalization.In summary, the state is less significant as an active regulator of financial activityadopting instead a lighttouch approach to‘self’ regulating frameworks supportive of free market forces. Secondly, rather than earning profits solely from trading goods and services non-financial firms and their owners now secure an increasing share of profits through financial activities. External sources of finance are found in the euro dollar market, hedge, private equity and sovereign wealth funds. Internal finance devices include special purpose investment vehicles and securitization of assets, that is, adoption of innovative business models centred on debt finance.Across Europe virtually all department stores and many other retailers promote the diffusion of ‘store badged’ credit cards as a complementary way of making profits, (see, Lawson, 2009, Baud and Durand, 2012). Peripheral employees become part of the financialization process that permeates everyday life as consumers are incentivized to sign-up and use store based credit cards often at initially subsidized rates, (Lapavitsas, 2011).
2. RESEARCH DESIGN AND METHODOLOGY: A CRITICAL CASE APPROACH
Detailed inquiry relies on qualitative data which in this case was collected through interviews, observations, documents and published material in the public domain. Five detailed cases are reported on; an outdoor sports retailer, a bingo and leisure group, a specialist tea retailer, an estate agent and a mobile phone provider. A further ten cases are examined as mini-case studies. The rationale for selection of the cases was rapid access to businesses in or approaching financial distress. To secure an effective research design a ‘fleet of foot’ method was developed encompassingfour aspects. First, careful tracking of the financial media and financial press identified firms nearing financial distress. Second, regular on-going ‘cold calling’ of identified firm level contactssecured an initial interview based on a pre-structured introductory questionnaire. Thirdly, substantial efforts to convert the first two steps into formal interview access were undertaken. At this stage many initial contacts from within a larger population of contacts declined to participate further in the project, but eight firms did so resulting in forty nine semi-structured interviews. Consistency across the cases was provided by a common template of issues and questions. In each case managers responsible for human resources and branch managers were interviewed at least twice over a period of three months. The interviews administered face-to-face questionnaires utilizing a coded interview template. Interviews were recorded, transcribed and coded on data analysis software. Interviews in portfolio firms took place between Autumn 2008 and Spring 2012 as and when ‘distress’ commenced and became apparent. Fourth, use of secondary material was essential in this study because of the speed at which many of the case firms closed which made it impossible to either sustain or secure access in the manner which is more usually associated with case study or survey analysis. Primary data sources from Administrators and the British Retail Consortium and secondary sources from the financial press and company websites have been thematically analysed to code for evidence of constructs, relationship and common factors. That is, the fleet of foot method was used to analyse a further ten cases of distress where the speed of distress and administration precluded more formal case study analysis.
The contribution of this design is a suggestive theory where the evidence is constructed through a critical diverse case comparison, that is, does the posited relationship – the effects of financial crisis and distress at firm level- hold in particular firms in a sector? If posited results are found here they should generalise in other firms in this and other sectors.Building the critical case approach the ten mini case studies are reported using a combination of primary and secondary methods where findings from secondary published sources have been confirmed by primary source interviews with former employees or statements from administrators. The distress of these firms is well established in the media and financial press therefore it is appropriate to name the firms. In terms of research methods and sources for these ten cases three of the firms (Focus DIY, HMV and Mothercare) were originally fully fledged cases where access and interview contacts were terminated as a result of administration and store closure (HMV). These cases are informed by primary source material including nine interview transcripts with three store managers and three HR managers. In these and the other seven cases this evidence was corroborated by documents and statements published by administrators which were also reported in the financial press. At Aquascutum interviews were held with the GMB national organizer and the Corby factory shop steward. The findings from these interviews were confirmed in administrator statements. Two store managers at La Senza and one manager at Peacocks Cardiff headquarters gave telephone interviews on the day that administration was announced and findings revealed from the notes of these conversations were confirmed by published administrator statements. At Woolworths the main sources were interviews with an USDAW official, the judgement of the employment tribunal and interviews with the administrator which confirmed the testimony of these sources.In summary, interview findings from the five full case and the ten mini-cases are supported by a mass of consistent secondary material much of which is further reinforced and contextualised by documentary sources in the public domain.
2.1 Research Strategy – Defining ‘Distress’
Since October 2008 financial distress has developed beyond an isolated feature of business failure towards a systematic uncertainty (Wood and Wright, 2010). In the contemporary financial crisis ‘distressed’ business sales fall into three categories. Firstly, where a going concern runs out of cash and is unable to service its debts. Oftensuch firms are sold at a discounted price and a portion of the share capital, often referred to as ‘distressed fire sales’. Second, ‘seizures’ where creditors or investors effectively seize control of a firm in the form of an equity for debt swap where they liquidate their investment in a company in return for at least a 51% controlling stake of any future share stock on which they hope to secure a return. For example Citibank recently seized 100% control of EMI, liquidating all their debt in the firm and securing all the (worthless) share capital. Third, where a business currently governed by new investors under leverage is sold in the secondary market at a discounted price, often referred to as a secondary ‘fire sale’ where a portfolio firm already governed by private equity is bought by another private equity firm, for example, in the UK the Focus DIY chain was subject to an unsuccessful secondary buy-out before falling into administration followed by closure in 2011. Firms which are traded under distressed administration are acquired on the basis that ownership of economic debt enables investor-owners to re-structure a firm in particular its management and its operational strategies, for example, the cancellation of promises made to employees, (Blackburn, 2006:69, Clark, 2011). Distress can be measured across a number of conditions, developments and situations ranging from a profits warning to a situation where a firm is unable to repay debt covenants. Further still distress can be more serious where a firm is unable to secure trade credit insurance for themselves and their suppliers to very serious where a firm is put into administration or liquidation.