Individual investors in the U.S economy have sufficient power in corporate governance of companies because the economy predominantly market-based is pioneered by investments from individuals or households. Thus, the trajectory of these companies in times of financial distress is primarily determined by the decision of the investors and the judiciary. Apparently, the probability of a company filing for Chapter 7 or Chapter 11 bankruptcy as a remedial measure is under the jurisdiction of the court and individual investors. Experience reveals that, there is a conflict of interest from the perspective of investors and management. In the past, such tendencies complicated management selection of the appropriate medium of remediation, solvency or liquidation for the companies.There have been instances where the interest of management and investors differ with regards to the future of the company when it is perceived that the company's financial status is gravely in red. Supposedly, the goal of paying off the company's creditors or investors under the auspices of investors often conflicts with the prospect of keeping the business in operation which is the prerogative of management. In this wise, much as investors are seeking chapter 7 bankruptcy to retrieve their money, management may be agitating under risk and uncertainty for chapter 11 bankruptcy depicting a characteristic agency problem. However, with regards to small businesses or firms, the discrepancy in interest between investors and management is trivial as most of these businesses are sole proprietorship or partnership managed. Consequently, there is the ease of filing for Chapter 7 bankruptcy so that the owner or partners can regain some money from the sale of assets to repay the incurred debt. Such ease of Chapter 7 bankruptcy in remediation has perpetuated the demise of many small businesses in America in the last years augmenting the unemployment rate. Nevertheless, in the last few years, the problem emanating from the conflict of interest for medium - large scale businesses has become surmountable through the conviction of investors by management. That is to say, the situation presents a different scenario when it comes to medium to large scale businesses.
These businesses are predominantly corporations which are candidates of limited liability such that investors cannot be held responsible for the firm's debt. In the event of financial distress, and a "tug of war" begins, it is pulled in the direction of management resulting in the pursuance of chapter 11 bankruptcy and avoidance of Chapter 7 bankruptcy. Tentatively embracing Chapter 7 bankruptcy by a corporation would mean the collaboration of management and creditors or investors to arrange a workout purported towards the repayment of creditors or investors after auctioning of company assets. Now, the proclivity of these corporations towards chapter 11 bankruptcy these days has been a center of criticism.
Critics argue that because the executives or management of these large public companies cannot pay the debt, they often agitate for Chapter 11 bankruptcy which may be in the shareholder's interest who has nothing to loose if the reorganization through chapter 11 produces an unprofitable outcome. Again these executives would like to perpetuate the huge salaries and bonuses they are accustomed so they would opt for chapter 11 bankruptcy. They again argue about the conflict between shareholders and all stakeholders interests. That is to say, chapter 11 bankruptcy remedial measures may be in the interest of shareholders but it might not be in the interest of majority of stakeholders (namely managers, employees, suppliers, distributors, customers, community, nation and the government). Judiciously, majority of stakeholders believe in the utilitarian rule which states that the decision regarding the remediation of a company should be ethical such as to produce an outcome that is beneficial for the majority.
Now, one must not loose sight of the fact that the engagement of Chapter 11 bankruptcy is a multi-facets course. It is comprised primarily of two facets namely remediation and sustainability with profitability. Remediation facet includes the injection of new capital, reorganization of operational structure to curb the current financial mess to the satisfaction of creditors or stakeholders. Next, for this bankruptcy option to coincide with the expectation of all stakeholders in America, remediation must be followed by the pursuance and realization of a sustainable, profitable business. Sustainable and profitable business can be attained through very stringent and prudent measures including but not limited to structural changes in management, executive salaries and bonuses cuts, modified business model (reengineering, lean management and marketing strategy changes inclusive) and investment in research and development in new areas of technology.
Unfortunately, much as the former challenge of remediation can be realized easily, it is hard to decipher if the latter challenge namely the sustainability with profitability of the company can be achieved in the current economic recession. This is substantiated by the fact that, the measures for a sustainable and profitable business calls for careful planning and organization, appreciable reductions in remunerations, efficient loss control management, investment in human and intellectual capital and the application of an appropriate or environmentally friendly technology for differentiation and competitive edge in the market. These are hard facts of achieving success in every business. Now, it remains to be known by the federal government and all stakeholders if GM, Chrysler that file for bankruptcy and emerge from it recently can realize and pursue a sustainable and profitable business. The fact remains that tax payers whose money was used to bail out these companies are watching to see if these companies can achieve and sustain stronger cash flow and profitability in the current recession of weak product demand, credit crunch, rising cost and weaker consumer spending.
Contrarily, proponents of chapter 11 bankruptcy argue that even though Chapter 11 also has its negative connotations, it has the history of nursing firms back to health. Good examples are United Airlines (UAL) and Delta Airlines. These companies had pre-bankruptcy total assets of $25.2 billion and $21.8 billion but file for Chapter 11 bankruptcy in December 2002 and September 2005 respectively. They emerged from the bankruptcy stronger even in the midst of the impact of global recession and terrorism on airline operations. In addition, if nothing is done to save these American icons, it will greatly impact negatively the American economy besides giving a competitive edge to Toyota and other foreign competitors. On the contrary, critics of Chapter 11 bankruptcy contend the cost of saving businesses that are not worth saving as nonsensical. They argue that the reorganization of the company will call for additional works of capital which can be sourced from buying goods on credit and borrowing money from the federal government.
The avoidance of bankruptcy by Ford Motors is a compliment to critics allegations. Ford is still in business and only time will judge the critics as being wrong or right. As a critic, my further argument is about the likely dissimilarity in the efficiency of chapter 11 in the auto industry and airline or finance industry respectively. That is to say, there is no guarantee that if chapter 11 has been efficient for some companies in the airline (in the past) and finance industry (in the present), it will work also for the auto industry (in the present and in the future). The cash for clunkers program may improve the cash flow mechanics of these companies temporarily but time would tell if GM and cohorts can become candidates of sustainability with profitability.
For just as emergence from bankruptcy through remediation is important, company attainment of sustainability of operations with profitability should be the ultimate goal. Otherwise, solvency, divestiture or merger of such businesses should be options in future should these companies fail and they decide to file for chapter 11 bankruptcy again. Another Chapter 11 bankruptcy pursuit would put tax payers' money at the severest risk. One prudent thing is that mergers and acquisitions of such businesses would lead to the consolidation of the parent company (to be formed) in the auto industry. It would also pave the way for synergy in operations in addition to capital and asset restructuring precursors to improvement on total asset turnover which is a component of profitability. Finally, the question that would be answered by posterity is whether Chapter 11 bankruptcy provides the optimal solution for the auto companies with respect to remediation, sustainability with profitability in an economic recession.
By Charles Horace Ampong [B.Sc(hons), Graduate Dip, MSc(Eng), MBA, GLG Council Consultant
Article published: http://www.EzineArticles.com/?expert=Charles_Ampong
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