The Hindu Business Line : When companies go bust, employees suffer the most

The Satyam episode, as also the cases of accounting fraud that preceded it, has brought home the point that when a company fails, it is the employees who are worst hit. What are the career and financial lessons to be learnt from these events?

It is time employees became more aware about the options before them.

Rajalakshmi Sivam

Satyam Computer Services, a company that employs half-a-lakh people, is in deep crisis now, after it became evident that the company’s numbers were being falsified over the past several years. Employees are now keeping their fingers crossed on whether they would get their salaries. But that is not all that they should be worrying about. So, what are some of the career and financial lessons to be learnt from these events?

The Satyam episode, as also the cases of accounting fraud that preceded it, has brought home the point that when a company fails, it is the employees who are worst hit.

Taking the extreme case of bankruptcy, when a company declares that it has failed, employees rank on a par with a company’s creditors in the order of those who have a right to the company’s assets. But that is only with respect to their salary dues for the immediate period.

Even these dues may be only settled on a proportionate basis, if the cash realised from selling assets is insufficient. On in-sufficiency of funds, variable pay components such as bonus/incentive that were earlier promised may be the first casualty. There is also unlikely to be compensation for the job loss.

Enron Scandal

Take the case of Enron. It was a leading energy and a futures trading company in the US, that was embroiled in a scam for fraudulent disclosures and accounting. Consequent to its bankruptcy in 2001, thousands of employees lost their jobs. For them, it was not just loss of income, but also savings. For the company had invested 62 per cent of the retirement corpus in its own stock in the market.

Further, it came to light that the company’s directors sold their personal holdings, even while keeping employees assured of the good health of the company.

When the truth came to light and employees moved to sell their holdings, the value of the stock was reduced to nothing.

That drives home the point that earning a good portion of your compensation package in the form of employee stock options (ESOPs) may not be such a great thing after all!

In situations where the employer downs shutters, one loses not only his job, but also a good portion of his wealth. In situations such as the present, it would be wise for the husband and wife to pursue their careers in different companies, if not in different industries, so that the family’s income can be shielded to some extent from business cycles.

Blow to employees

When a case of corporate fraud comes to light, the implications can range from a decline in new orders for the business to deterioration of brand image. The latter can queer the pitch not only for the company, but also for employees seeking other avenues.

But for those with experience and technical knowledge, getting a new job may not be a cakewalk.

That makes a strong case for taking the effort to know the big picture of your company — its size, and how it is performing vis-À-vis its rivals.

A business failure can also make a company vulnerable to takeover or acquisition. While new management can turn around a business, in cases of corporate fraud, the transition is not likely to be easy.

Layoffs are quite common in takeover situations, especially where the acquirer is in the same line of business.

There is also the possibility that the troubled company’s employees may not be absorbed under the same terms or treated on a par with the employees of the acquirer.

Keep your options open

Also, as said earlier, if the company files for bankruptcy, the amount realised from the liquidation of assets will decide whether the employees will be made full or partial payment of their dues. Typically, for an IT company, fixed assets such as a land bank, plant and machinery or facilities do not constitute a chunk of the balance-sheet.

The realisations from the sale of physical assets may, thus, not be sufficient to pay all the workers if the employee base is really large.

This is not the first time that the corporate world has seen cases of management fraud — Enron Corporation, Global Trust Bank, DSQ Software and now Satyam Computers are all instances.

Therefore, it is time that employees became more aware about what their options are. In short:

If your company is in trouble, do your own research and get more information to find out what is the extent of the crisis. Don’t go just by internal assurances.

Don’t invest a big portion of your savings in the shares of your employer. That’s putting all your eggs in one basket.

Be proactive in keeping your career options open. Don’t wait for the axe to fall before you even dust off your CV.