Reference no: EM133539297

CASE STUDY: Hard Times for You, for Them, but Not for Me

The title of this case describes the relative position of various stakeholders in companies that declare bankruptcy. It is a fact of business life that numerous public companies declare bankruptcy each year during normal economic times, the number rises during economic downturns.The great recession and the pandemic each caused many times more cases of bankruptcy. In addition to the large number of companies, and the eye-popping amount of dollars involved, there are tremendous negative and often devastating effects on numerous stakeholders such as employees (job loss and loss of retirement plan savings), investors (investment value goes to zero), suppliers (unpaid bills and lost future business), and surrounding communities (plummeting sales due to customer unemployment).

Pink Slip for You, and a Cash Bonus for the Boss?

Although many large public companies still operate after filing for bankruptcy, many employees lose their jobs, and the other stakeholders suffer the consequences noted. However, some employees actually get cash bonuses, and typically, the only employees in the "some" category are executives. Such decisions are made by company's boards of directors, as one of their key responsibilities is to determine compensation of top executives. Some boards of directors decide before filing to pay the CEO, and occasionally other executives, large cash bonuses. For instance, during the economic devastation due to COVID-19, J. C. Penny paid its CEO $4.5 million; Whiting Petroleum paid $6.4 million to its CEO and nearly $15 mil-lion to other executives; Neiman Marcus CEO received $2 million; and Hertz paid $16.2 million to 340 director-level and above executives, and $700,000 to its CEO.

Supporters and Critics

How can this be justified? Again, this type of action is not new, and supporters commonly explain that it helps retain the executives and other senior leaders through the tough times, encouraging them to stay and do the tough work of weathering the recession and improving the company's financial position.

Continued

J.C. Penny's board of directors, for instance, issued the following statement

We are making tough, prudent decisions to protect the future of our company and navigate an uncertain environment, including taking necessary steps to retain our talented management team ... Maintaining continuity of leadership is and will continue to be critical to the future of our company's long-term success. Our compensation program is in line with those of other companies in similar situations and is aligned with milestone-based performance goals to continue incentivizing our team to drive results."

Supporters also appropriately point out that when the entire economy tanks, like it did during the great recession of 2008 or the pandemic, many of the financial difficulties confronting companies were not the fault of any executive or any other employee. And for perspective, the dollar value of bankruptcies in the first half of 2020 due to COVID-19 already surpassed the total in all of 2008.44 For their part, some already surpassed the total in all of 2008.

For their part, some critics argue that instead of paying millions of dollars to one executive, that money would have a much greater impact if paid to frontline workers, the ones that most often suffer the greatest hardships. They also show little concern or sympathy for CEOs who often receive a large proportion of their compensation in company stock, which usually goes to $0 once bankruptcy is filed. This means that bankruptcy filings can and do wipe out millions and millions of dollars in accrued compensation. But again, for employees who have retirement plans composed of company stock, their compensation too goes to $0.

What Does Control Have to Do with It?

Another point to consider is relative control. The vast majority of employees have no responsibility in what happened or what will happen to their company before or after filing for bankruptcy, including not saddling the company with piles of debt. Prior to the pandemic, both Chesapeake and Hertz were struggling to service billions of dollars of debt incurred over the years, and any downturn would make this more difficult. Finally, it is worth noting that the actual practices are legal and have been common for years. Nearly one-third of large companies filing for bankruptcy due to the corona virus awarded bonuses to executives within a month of filing for bankruptcy.

For Discussion

1. Assume you're a board member who voted to change policy and award executive bonuses. Justify this action using two different concepts in the chapter.

2. Since this practice is so common, do you think executives even see this as a potential ethical issue? Why or why not?

3. What is the responsibility of an executive receiving such a bonus?

4. Consider a CEO who has accepted a pre-bankruptcy bonus and assume that this same CEO thinks that this practice is appropriate. Now analyze that CEO in terms of Kohl-berg's Model of Moral Development

5. Repeat #3 but assume the CEO thinks the practice is inappropriate. How does your moral development analysis change?

6. Explain how a board member or a CEO in a bankruptcy-bonus-granting firm might rationalize this practice. Work through all eight mechanisms (four stages) of moral disengagement. To clarify, give an example of what this person might think or say for each mechanism to justify this practice.

7. Assume you are the CEO of J. C. Penny, who received a multimillion-dollar bonus, while hundreds of stores were closed, thousands of employees lost their jobs, and the com-pany was saddled with piles of debt. Now, assume you are taking the TV Test and have to justify your bonus on the national evening news. What will you say?