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FINANCIAL DISTRESS, 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 this issue 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 UK retailing 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 ClarkDepartment of Management,University of BirminghamBirmingham, UK. B15 2TTi.a.clark@bham.ac.uk

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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

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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

managers to address three 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

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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-structuring often

entailing immediate 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 them

firms 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 one outlines a theoretical framework informed by a literature

review. Part two focuses 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?

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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

framework encouraged 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 firm can 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

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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 financial capitalism 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 austerity constitute 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

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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 activity adopting instead a light touch 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

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of foot’ method was developed encompassing four 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 contacts secured 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

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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’

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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. Often such 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.

2.2 Downsizing by ‘Pre-Packaged Administration’

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The use of pre-packaged administration enables decisive re-structuring where the assets of a

company are sold immediately after it has entered administration. Incumbent directors,

management or new investors can buy assets from the administrator and create a new

company transferring some employees to the new company, liquidating the previous larger

firm. Pre-packaged administration attracts criticism because it allows a business to discharge

liability to unsecured creditors, for example, to employees, who are not transferred to the new

firm, in the form of unpaid wages or access to redundancy payments or pension schemes

(OFT, 2009, 2010). In effect a firm downsizes by dividing its assets into good and bad bits

where the bad assets remain in administration with some of its financial claims transferred to

publicly funded schemes. One result of distressed financial restructuring is a downsized

‘minimalist organization’ , (Rodregues and Child, 2010:1324-5). Theoretical and empirical

evidence suggests that minimalist organizations often privatise gains for investors and senior

managers but socialize losses to employee stakeholders (Schliefer and Summers, 1988,

Akerlof and Romer, 1993, Folkman et.al. 2007, Appelbaum, et.al. 2013). In effect taxpayers

underwrite the cost of private sector re-structuring; a practice that is well established in the

UK. For example, Blyton and Wass (1995) outline the public cost of deregulation in port

transport and the dock labour compensation scheme. Bailey, et.al. (2009) outline the cost to

the taxpayer of the abortive management buy-out of MG Rover in 2005. Similarly, Froud

et.al. (2012:1-2) outline the manner in which investors cannibalize property assets of

portfolio firms a strategy that led to the collapse of Southern Cross care homes and the

attendant fiscal, political and social implications of this practice for local authorities. Indeed,

the empirical evidence revealed in this paper demonstrates that in the contemporary period

the use of pre-pack administration is a deliberate strategy to facilitate organizational

downsizing at minimal cost to a firm. Administration and pre-packaged administration in

particular, provide an economic rationale for the immediate downsizing of a business which

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reduces the liabilities of a firm to some or all of its employees. The evidence presented in this

paper indicates that in many such situations line managers and HR managers are distant from

and powerless to prevent re-structuring of this type. This finding too is not necessarily new;

Blyton and Jenkins (2012a&b) report on the distance and powerlessness of managers and

workers in the closure of the Burberry manufacturing plant in south Wales. The difference

between the Blyton and Jenkins study is that Burberry was not in distress and whilst impotent

to prevent closure workers were able to mobilize against the employer to improve

redundancy and severance terms. In contrast to this in many of the cases reported on this

paper were subject to a new form of capitalism where the use of administration precluded any

opportunity for effective employee mobilization. Moreover, it was often the case that store

managers and managers in the HR function worked to actively support the use of

administration. For workers made redundant by the administrators before a new buyer for the

good bits of a firm is found there is likely to be no recourse to employment protection

legislation or the services of the HR function as use of a pre-packaged administration enables

administrators to by-pass the incumbent HR function, statutory HR procedures and related

contractual rights.

Employees with two years employment service are entitled to a statutory redundancy

payment if their job comes to an end and the employer remains as a going concern. However,

if a firm goes into administration employees remain entitled to a redundancy payment but

assume the status of an un-discharged creditor. Administrators and future owners of the good

bits of a firm now in administration are under no legal liability to make redundancy

payments. Rather, employees made redundant by administrators must apply for payment to

the national insurance fund which is managed by the insolvency service. This is a limited

guarantee scheme where payments are restricted to eight weeks wages up to a maximum of

£400 or £3,200, (www.bis/insolvency). It follows from this that use of a pre-packaged

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administration enables potential new owners to plan for ‘low cost’ downsizing before they

own a business in order to maintain a business as a reduced size going concern by purchasing

the good bits of a firm out of administration.

2.3 An Overview of Distress in the UK Retail Sector

The UK’s retail sector employs 3 million people, approximately 10% of those in

employment.Over 90% of all retail sales take place in shops with only 7.5% of the £300

billion sales figures generated by on-line sales. The retail sector is dominated by a few large

employers who employ more than 500 workers and account for 65% of all retail employment,

(BIS:Retail, 2012). Despite creating over 12,000 new jobs in 2010 retail continues to shed

jobs as difficult trading conditions remain on the high street. The extent of distress on the UK

High Street is evident in the ‘Business Distress Index’ published by R3, the business recovery

professionals’ trade body. In July 2012 31,000 or 8% of retail businesses had ‘zombie status’

defined as being able to only pay interest on debts, be unable to pay debts if interest rates rise,

are in negotiation with creditors over payment terms and are struggling to pay debts when

they are due. Thus, around 8% of retail businesses are in near administration distress. Since

January 2011 21,000 jobs have been lost from the closure of major high street names alone

and retail has the highest percentage of zombie businesses across all sectors, just ahead of

construction and is likely to continue to do so for the foreseeable future (BDI, 2012). The

likelihood to which pre-pack administration is used when a business is in distress can be

gleaned from BDI figures on distress. Since March 2012 16% of retailers made maximum use

of overdraft facilities, 22% experienced a fall in market share, 31% experienced a reduction

in sales volume and 34% reported a decrease in profits. However, only 5% of businesses took

corrective or pre-emptive action to manage these effects via redundancies, that is,

maintaining the headcount of a firm when it is in serious difficulties. The BDI reports that

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many of these businesses experience zombie status followed by administration, (BDI, 2012).

Critical evaluation of work and employment in retail is reported on in a collection edited by

Grugulis and Bozkurt (2011) which presents theoretically informed empirical studies

undertaken before 2009. The collection focuses a contrast between retail practitioner and

academic views of skill in the sector, the debate around jobs versus careers, the pressures of

performance and the negotiation of ‘good’ work in the sector. The theme concludes that retail

work is precarious and diverse in terms of types of work, types of worker and rewards but

unsurprisingly because of its closeness to the onset of financial crisis no studies focus on

administration, financial crisis or distress.

3. EMPIRICAL FINDINGS IN 15 CASES OF DISTRESS AND ADMINISTRATION

Once formal access was secured findings from a first round of interviews was used to devise

a semi-structured question template used in second and successive interviews. At this stage

two interview contacts declined to continue, resulting in forty-seven useable interview

transcripts. (One contact declined to continue because in their words – ‘they knew we knew

what was happening’, that is, the preparation of a pre-packaged administration. The other

contact gave no reason although the firm they worked for announced its administration soon

after the withdrawal of this contact.) This article reports on three coded categories for

sources of potential distress which are summarized for each firm in table 1.

3.1 New Controlling Stakeholder

The implications for employees resulting from a new controlling stakeholder in a distressed

firm are fourfold. Firstly, the likelihood of immediate downsizing. Second, the likelihood that

the distressed purchase is combined with a pre-packaged administration and the repudiation

of liability for redundancy payments and any pension contributions and payments where

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former employees are directed to claim from publicly funded schemes. Third, employees may

find themselves transferred to other operations or employers. Fourth, operational and

strategic management of line and back office operations including human resources may be

replaced by administrators, advisory teams or consultants. In three of the five portfolio firms

managers reported no immediate operational changes following a change of controlling

stakeholder other than that the firm remained in business and had sufficient cash-flow

injected into the balance sheet to keep the firm running as a going concern, pay staff wages

and secure on-going trade credit and trade credit insurance. In the other two firms (Outdoor

and Tea) the effects of new ownership was immediate.

“we were directed by mail by the new consultants to lay off 400 staff immediately (without notice or payment) by closing least profitable stores” (HR manager at Outdoor.)

“Advisers appointed by new owners began implementing a ‘back to London’ strategy of closing stores as leases expired in provincial stores. Some of these were let go at the time of the acquisition” (HR manager at Tea)

The uncertainties for the workforce which followed the arrival of a new controlling

stakeholder were evident in immediate downsizing at Outdoor and gradual layoffs at Tea as

leases expired. Medium to longer term uncertainties for employees became evident as new

contracts of employment identifying the new owner-investor were distributed. HR managers

at Outdoor, Tea and Bingo were instructed to inform staff that whilst they remained at their

current place of work they were being transferred to a subsidiary of the new owner. In each

case subsidiaries were created as off balance sheet instruments designed to cushion potential

tax liabilities resulting from the purchase. In addition subsidiaries held no assets and made no

‘employer’ contributions to any pension schemes. The most significant employee

uncertainties of a change in controlling stakeholder fell on managerial grades, HR managers

in particular. In Bingo, Tea and Outdoor new controlling stakeholders managed the firms by

using advisory teams of consultants.

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“Since the new owners came in I have been in a reporting relationship to them. I don’t really have any executive control over workers or how we organize the work – shifts and stuff” (HR manager, Bingo)

The research found only one clear cut example where new owners externalized commitments

to existing stakeholders. Outdoor entered a pre-packaged administration where management

supported by outside private equity investors bought back the most profitable/least

unprofitable branches leaving the remainder in administration. Questions from former

workers over redundancy, pay and pension commitments were directed to the insolvency

servive. Tea was bought in the same way, that is, at a fire sale price, but virtually all branches

remained open. As the HR manager revealed:-

“the pre-pack discount was so large the fixtures and stock alone secured the price”. (HR manager Tea)

3.2 Competitive Effects of Distress

For employees in distressed retailers one short-term effect of distress is a unilateral reduction

in employee entitlements. At Mobile Phone staff labelled as ‘non-core’ were re-located to

subsidiaries which did not provide the same level of employee support such as free car

parking, a canteen and a designated rest area. New owners sold higher cost premises leasing

them back to reduce operating costs renting some of the space out to another company. New

investor owners at Bingo, Estate Agents, Mobile Phone and Tea made unilateral changes to

teams, work organization and start times via advisory teams and consultants leaving branch

managers and HR managers to implement these decisions and complete the necessary

paperwork.

The new owners of distressed retailers did not consult, negotiate or speak to any stakeholders

such as creditors or employee representatives. Second interview findings across the five cases

indicate the acceptance of unilateral change and the uncertainty created in the form of ‘there

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is no alternative’. Evidently, changes were implemented without notification that is,

managers and employee grade workers were informed after the changes were made due to the

urgency of business conditions. Turning towards minimalist re-structuring and the potential

for externalizing liability for stakeholder commitments that flows from this, the effects of a

more unilateral owner-investor (managerial) prerogative appeared in the first instance to be

relatively minor. Examples of this include less good workplace conditions a move which

directed the cost savings of better employment conditions to investor stakeholders. In

addition to this HR managers in Bingo and Tea suggested that the impotence they felt

following rapid and unilateral changes created listlessness for staff. The five case firms are all

non-union and post distressed acquisition employee consultative mechanisms remained in

place but ceased to meet and provide any effective voice mechanism. A majority of

interviewees regarded these changes as an acceptable price to pay to remain employed

whereas a minority felt they had no option to continue whilst actively seeking an exit option.

“They told us that our terms and conditions had changed? But most of us didn’t really understand what this meant. I wasn’t that bothered as I kept getting paid” (branch manager, Outdoor)

However, managers and shop floor workers were unable to connect the immediate short term

changes to any longer term uncertainties such as the impact of these changes on their overall

remuneration package. Employees were unable to see how the competitive effects of distress

combined with a change of controlling stakeholder might create future uncertainties in

respect of access to pension contributions and redundancy payments. That is, employees

across all grades were unfamiliar with their contractual or statutory rights in employment, in

particular the impact of administration status on employee access to employment protection

legislation in the event that distress developed further into administration.

“I do pay into the scheme (pension scheme) I am not sure how it works or what effect our new owners will have on this (branch manager Outdoor)

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3.3 Controlling Stakeholder ‘Mind Set’ under Distress

The term management ‘mind set’ describes an immediate effect reported by all branch

managers interviewed across the five full cases. Administrators, intermediaries, advisory

teams or consultants put in place by new owners acted on behalf of investors and their lenders

not established stakeholders and had no qualms in doing so. In terms of the more abstract

argument developed in the paper they represented the interests of financial capitalists, that is,

the new investors not the previous owners. Following this, this sub-section inquires into the

impact of ‘new employers’ and their impact on operations. As the first two categories

demonstrate administrators, distressed owner-investors and their managerial intermediaries

‘hit the ground running’ giving incumbent managers only a short period of time to react to

and internalise a new competitive environment.

“After about a week I reached an ‘inflexion point’ which changed my ‘mind set’ - in-effect I now worked for a different employer with new aims and objectives. For example, there was an almost immediate decision to slim the purchase of quality outdoor apparel and footwear in favour of more casual outdoor footwear and clothing. This significantly reduced the training and ‘staff familiarity’ spend on product as more casual items are now displayed openly on racks for customers to serve themselves we don’t now bother too much with customer service” (branch manager Outdoor.)

Whilst initially confused by re-structuring and operational changes initiated by new

controlling stakeholders (new owners and investors) branch managers at Bingo, Outdoor and

Tea each revealed that they were now incentivized to consider cash flow and costs following

the introduction of new performance management systems which benchmark branch

performance nationally. Branch managers revealed that branch management rather than

customer service was now the core competency which performance management systems

measured.

“Now we have to respond to monthly targets our central concern is to get people in the hall and get them to spend as much money as possible but give them as little as we can. We keep going even though we are ‘out of business’ we now have new, new owners. I keep turning up

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to work and they keep paying me this [uncertainty] has been going on for over a year ” (Hall, manager Bingo)

At Outdoor and Bingo all attempts to measure customer service were terminated. Branch

managers and HR managers gradually slimmed the scale and scope of stakeholder interests:

employees, in the sense that they are now termed sales staff rather than advisors; customers,

in that they receive a lower level of customer service and the managers themselves in that

whilst they enact many of the changes and are incentivized to do so their decision making

status is significantly reduced as they are now in a reporting relationship to advisors and

consultants acting on behalf of distressed owners. Further in terms of employee uncertainty

whilst these changes may not create uncertainty of employment status many employees felt

uncertain in the short-term primarily because of the speed with which new controlling

stakeholders introduced changes. These findings illustrate how administrators or new

owners at bingo, estate agent and outdoor operate lawfully and unilaterally on behalf of their

investors. Legally administrators are not even disregarding the interests of previously

established stakeholders. Many of those who regard themselves as legitimate stakeholders for

example, suppliers and employees are not stakeholders but are alternatively, un-discharged

creditors.

To summarise, a change of controlling stakeholder had either no immediate visible changes

on employees or immediate clearly visible changes in the form of administration followed by

immediate downsizing and redundancies. However, whilst only two of the five case firms

exhibited immediate administration a majority of employees across the five firms

experienced uncertainty which was evident in use of advisors and consultants and the

issuance of new contracts of employment. These developments led to reductions in employee

entitlement but only one firm actively repudiated statutory redundancy projection as part of

the re-structuring process in the movement towards a more minimalist organization. The

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competitive effects of distress centred on distributional issues as investor interests were

clearly prioritised over those of a wider group of stakeholders. The primary competitive

effect was unilateral action by administrators and new owners and acceptance of this by

employees. This acceptance created considerable uncertainty for employees where the

majority felt they had no voice mechanism and were only consulted about the process of

change in a retrospective manner. In terms of ‘mind set’ under distress managers and line

workers reported that they experienced an inflexion point where in effect they were working

for a new employer where landlords, creditors, administrators, new investor-owners, each

provided strategic input into the firms and the management of the employment relationship.

Since Autumn 2011 the theoretical and empirical findings from the five detailed case studies

and the ‘fleet of foot’ method have been applied to the analysis of a further ten cases of

distress to further generalise these specific findings in distressed employers in the UK’s retail

sector.

The ten retailers have experienced at least one change of controlling stakeholder between

2010 and September 2012. Seven of the ten have been through administration and are now

more minimalist downsized going concerns and four of these seven entered into a pre-pack

administration. These four retailers (Aquascutum, Clinton’s cards, Game, and La Senza,)

were acquired by private equity investors. Three businesses remain as going concerns (HMV,

Mothercare and New Look) but each of these has downsized its presence on the high street

through a store closure programme. Two firms (Focus DIY and Woolworths) were wound up

and liquidated by administrators meaning that eight firms remain as more minimalist going

concerns. Turning to management mind set under administration, all seven firms which

entered administration witnessed immediate store closures, staff termination without notice,

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redundancy payment and in some cases non-payment of wages (Aquascutum, Game, La

Senza). La Senza’a Irish stores were occupied by sacked workers whereas at Woolworth’s the

USDAW union secured a declaration from an employment tribunal that the administrators

failed to consult with a recognised trade union. This victory was only partial because the

value of the compensation awards to workers formerly employed in stores of twenty or more

workers were capped at the insolvency service maximum which was available to these

workers as individual claimants. The GMB union at Aquascutum is seeking a similar award

for workers sacked without notice or consultation. In all seven cases of administration there

was no consultation with staff at all. Moreover in all seven cases there was no clash in goal

orientation between line managers, owners and the HR function prior to administration, that

is, one where the HR function allegedly places great emphasis on procedural fairness in the

firm as a going concern, (ACAS, 2012:45). More critically the HR function was evidently

complicit with owners before the announcement of administration. In the cases of pre-pack

administration HR staff worked actively with (future) administrators, incumbent managers

and new future owners to identify which stores and workers should remain in administration

once new owners had acquired the brand. It follows from this that whilst the HR function had

no active role in managing the seven cases of administration it is a question of definition of

what is meant by ‘active’. The HR function was inactive in a going concern stakeholder sense

within the managerial capitalism paradigm but quite active in representing the interests of

owners and investors, four of whom are emblematic of ‘new’ investor business models

associated with financial capitalism.

4. DISCUSSION AND CONCLUSION

Across the UK’s retail sector the priorities of financial capitalism and the impact of

financialization are grounded in the decision making process in firms that experience distress

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leading to a changing context for labour where established academic approaches to the

management of the employment relationship summarized as managerial capitalism are being

overtaken by events. The research questions posed by this study, its findings, conclusions and

scope inform three challenges to researchers concerned with employee interests in

contemporary capitalism. On the first question; and a substantive conclusion from this study,

the pressures of financialization and financial capitalism may witness a willful willingness to

secure or sustain investment opportunities for investors which undermine a firm as a going

concern resulting in the termination of legitimate stakeholder status to ‘employees’. As

several of the cases reported on here reveal where a firm is subject to a distressed sale,

seizure by creditors or other route into administration, financial engineering enables investors

to ‘socialize’ former stakeholder, in particular employee, interests at society’s expense.

On the second question; studies of HRM often focus narrowly on core employees whereas a

study focussed on more routine employment demonstrates how wider structural conditions

can impose a new approach to downsizing often actively supported by those employed in the

HR function. That is, it is likely to be the case that managers in firms supported by outside

investors will be attuned to the priorities of financial capitalism and not opposed to these

priorities. Hence empirical studies and theoretical frameworks need to evaluate the character

of the HR function under different types of owner- employer regime. By invoking investor

and shareholder value and the priorities of financial capitalism top corporate managers have

even more power than previously, particularly in cases of distress and administration because

they are unconstrained by a commitment to groups who previously held legitimate

stakeholder status. On the third research question – who are the decision makers? Where the

priorities of financial capitalism dominate the role of the HR function in managing

performance in the employment relationships is likely to be contingent on maintaining a firm

as a going concern but coming out of administration as a leaner more minimalist operation.

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For employees at distressed retailers the changing context for labour of widespread distress

emphasises market rationalism, where administration and distress prevail even if the

performance of retail units is exemplary in terms of performance management systems and

HR bench marks across a firm as was the case in La Senza , Game and several others in this

study. Irrespective of exemplary performance these firms experienced distress and then

administration where the location of decision making is executed by active assertive outside

consultants or administrators. The findings highlight the step change argument towards

financial capitalism. This demonstrates that finacialization weakens the coherence of

‘contractual, institutional and statutory complementarities’ in a specific sector of the British

economy and the links between these and firm strategies. Here established approaches to

managing the employment relationship are effectively ‘junked’ by the priorities of financial

capitalism which now govern many retailers.

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25

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