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Anticipating plant closures: the role of advance notification

(http://faculty.washington.edu/krumme/papers/warn.html)

GŁnter Krumme

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Selected larger contexts

Given the premise that there is the need to broaden the discussion of the informational dimension of the plant closure issue, two vantage points are suggested, namely (a) the perspective of the plant closing corporation and (b) that of the affected corporate "stakeholders".

CORPORATE STRATEGY CONTEXT: Plant closures and mass redundancies generally represent rather intrusive and insidious implications of multi- locational corporate adjustment strategies and flexibilities ( Bluestone and Harrison, 1982). Such events tend to be traumatic experiences for dismissed as well as continuing employees and for affected communities, and, in spite of existing flexibilities, are often cataclysmic and costly for the firm itself (Greenhalgh et al., 1988). A significant number of studies have looked into the closure histories of plants in different regions, industries and organizational contexts. Some of those studies have recently been reviewed by Howland (1988). Her own analyses indicate the dominance of plant closure as a cause for job loss and a remarkable homogeneity in plant closure rates across regions in the United States.

Decisions for plant closure in multi-plant corporations are at least as complex as those for investments at new locations (Krumme, 1969; Schmenner, 1984; Watts and Stafford, 1986). Such decisions are likely to be based on intricate combinations of internal investment and profitability considerations as well as external market and other environmental factors and conditions (Chiganti and Hamilton, 1984; Nishioka and Krumme, 1973). Not only do multi-plant enterprises, at the time of necessary retrenchment, benefit from being able to select among different investment packages and locations, they also "find themselves in the advantageous position of being able to compare operating costs at different locations" (Healey 1982, p.40). In addition, retrenchment in any one industry does not necessarily mean layoffs or plant closure, if investments and employee skills are sufficiently industry- nonspecific to retain productive value for the corporation (Perry, 1988).

Nevertheless, little is known about the specific reasoning underlying decisions for selective plant closures and differential employment reductions among corporate establishments and about the continually changing structure of the locational constraints and flexibilities within which such reasoning takes place (Krumme, 1981a). It is simply not enough to refer, in this context, to the superior resources of large corporations and the 'hypermobility of capital' (Harrison, 1984). We need to know more about the ways in which organizations with different types of ownership, forms of capitalization, spatial characteristics, corporate cultures and patterns of labor relations, local participation, contacts and commitments, and operating in different kinds of larger environments translate internal or external impulses into local employment strategies. Watts and Stafford's (1986) initial and more recently refined conceptualizations of the problem, along with some of their empirical findings from Sheffield and Cincinnati, respectively, may be a first step toward gaining this understanding (see table 1).

approx. location for Table 1. Plant closure typology

Disclosure strategies of firms

The advance notice issue should also be considered as part of corporate information and disclosure behavior. Under what conditions would employers routinely disclose the kind of information which enables employees to get a better understanding of the survival premises and probabilities of the plant and its employment opportunities, and thereby make advance notification a much less important issue? It appears that, at least in the United States (the 1988 WARN Act notwithstanding), information needs of investors and shareholders are better met than those of employees and other stakeholders either through voluntary or mandated disclosures (Ackoff, 1974, Hilton, 1978; Krumme, 1977).

A comprehensive disclosure decision theory covering the broadly conceived plant closure context does not exist. However, there are numerous theoretical propositions which would be of value in the construction of an explanatory framework (Diamond, 1985; Dye, 1985; Stevenson, 1980; Trueman, 1986; Vermaelen, 1986; Verrecchia, 1983). Presumably, the decision to release voluntarily locally significant, non-proprietary information and the timing of disclosure will likely depend on the nature of the information, corporate objectives and cultural factors, the organizational and locational milieu, the nature of present and expected demands for the corporation's resources, the structure and behaviors of the competition and other factors in the firm's environment.

The dynamic nature of the disclosing corporation is seen here as consisting of events and "episodes". Episodes refer to distinctive periods of corporate change while events constitute specific internal or environmental triggers or switches between episodes (Johansson and Nijkamp, 1987). Disclosures thus may relate to (a) the occurrence of past events; (b) information relevant to the assessment of the impacts of events on new corporate episodes; (c) information related to the likelihood of the occurrence of new events.

The following propositions include but a few of the many motivations for general or specific kinds of disclosure:

Disclosure may reduce the uncertainty of stakeholders about corporate events and episodes and thus affect the firm's ability to secure outside resources. In a narrow sense, there are disclosures targeted at specific well delineated stakeholder groups such as employees or their unions and designed to strengthen collective bargaining positions (Foley and Maunders, 1977; Gray, 1984). In a much broader sense, there are information releases associated with public relations or public affairs. Such releases have the much less tangible purpose of cultivating an image of social responsiveness or of forestalling stakeholder relations problems at the corporate-public interface (Bhambri and Sonnenfeld, 1988). In the face of a variety of cataclysmic public relations events a la Hoffman-La Roche's trichlorophenol accident near Seveso, Italy (1976), Three-Mile-Island (1979), Johnson & Johnson's Tylenol tampering case (1982), Union Carbide's Bhopal (1984), or Exxon's Valdez (1989), an increasing number of corporations have not only invested more resources in public affairs departments, but at least appear to adopt increasingly, if unevenly, glasnost mentalities in their public disclosure stands in such cases of extreme, uncontrolled turbulence (King, 1986). It appears that in these exceptional cases where the very survival of the firm is at stake, the corporate lawyers' preference for "no comment" in response to unwelcome questions has given way to a remarkable openness.

Plant closures in the large modern corporation are not likely to fall into this category of corporate events. While traumatic for affected stakeholders, they generally constitute merely the end of a corporate episode and do not threaten the survival of the firm itself. Therefore, one cannot a priori expect that the corporation will relinquish its strategic sense for secrecy and air its closure plans openly. Such plant closures may be part of complex financial manipulations or of strategies designed to switch to more profitable, or less unprofitable, locations and endeavors. The ultimate success of such strategies may depend on confidentiality. Of course, there may also be a real or alleged need for closing down capacities to avoid bankruptcies. Bluestone and Harrison (1982) suggest that while most plant shutdowns are the unplanned consequence of small firm failures, most layoffs occur in the planned closures involving large corporations. The accompanying unfavorable publicity of local social turbulence can usually be geographically contained, in spite of media coverage, thus making the development of a locally segmented social conscience less urgent.

A frequently used strategy designed to make a plant closure locally more acceptable is to blame the age and technological obsolescence of the plant in conjunction with unexpected increases in competition and to ignore the deliberate past neglect of plant maintenance, re-investment, process innovation, new (plant-specific) product developments or the continued cultivation of a regional market (Strohmeyer, 1986). Nevertheless, there are many indications that large corporations are becoming more sensitive to their social performance including environmental, product- and worker safety considerations. Albeit a significant part of this social conscience might have to be attributed to "enlightened self-interest" motivated by the threat of performance and disclosure legislation or the voice of large, particularly institutional, investors concerned about a corporation's capacity to respond to a broader set of social rather than just market forces (Crispo, 1975; Stevens, 1984).

It would also be unrealistic to assume that voluntary disclosures are neutral with respect to changes in economic performance; there is simply more good news to share with the media or other interested parties during good times (Diamond, 1985; Gray, 1984). Conversely, management will be motivated or pressured to suppress unfavorable news and may even discontinue previously routine disclosure strategies during less prosperous periods.

There may also be the desire to avoid alerting competitors or to redirect their attention. Another motive may be to contain expectations of stakeholders and thereby steer clear of increased claims against the corporation. Management might use 'selective' disclosures to fight such claims in the process of collective bargaining. Will the threat of plant closure and unemployment be used to trigger responses favorable to the corporation, if, as Offe (1985, p.88) asserts, anticipation of the possibility of being laid off results in a marked improvement in rates of sick leave, work discipline and of personal turnover"? It has been reported that, in Quebec, there were employers who never intended to implement the announced layoff but only wanted to use the threat as "a bargaining ploy or as a means of extorting subsidies or services from the Government" (Adell, 1982, p.43). Since such threats have been used even in the absence of advance notice legislation, they may now, with such legislation in place, be easier to apply and, due to higher awareness levels, more effective. It was also argued that firms would misuse the notification provision by giving excessive, possibly staggered, notices in order to retain subsequent flexibilities. It has been suggested that since there are no formal penalties for excessive use of prior notification, firms may be better off by over-, rather than under-, predicting layoffs (Stafford, 1981).

It would also be unrealistic to assume that voluntary disclosures are neutral with respect to changes in economic performance; there is simply more good news to share with the media or other interested parties during good times (Diamond, 1985; Gray, 1984). Conversely, management will be motivated or pressured to suppress unfavorable news and may even discontinue previously routine disclosure strategies during less prosperous periods.

There may also be the desire to avoid alerting competitors or to redirect their attention. Another motive may be to contain expectations of stakeholders and thereby steer clear of increased claims against the corporation. Management might use 'selective' disclosures to fight such claims in the process of collective bargaining. Will the threat of plant closure and unemployment be used to trigger responses favorable to the corporation, if, as Offe (1985, p.88) asserts "anticipation of the possibility of being laid off results in a marked improvement in rates of sick leave, work discipline and of personal turnover"? It has been reported that, in Quebec, there were employers who never intended to implement the announced layoff but only wanted to use the threat as "a bargaining ploy or as a means of extorting subsidies or services from the Government" (Adell, 1982, p.43). Since such threats have been used even in the absence of advance notice legislation, they may now, with such legislation in place, be easier to apply and, due to higher awareness levels, more effective. It was also argued that firms would misuse the notification provision by giving excessive, possibly staggered, notices in order to retain subsequent flexibilities. It has been suggested that since there are no formal penalties for excessive use of prior notification, firms may be better off by over-, rather than under-, predicting layoffs (Stafford, 1981).

One would also have to expect that executives may try to selectively either consolidate or segment disclosure channels by stakeholder groups (Krumme, 1989); consolidation (e.g. public announcements) appears to be the desirable strategy when different stakeholder groups Right influence each other to accept the plant closure as inevitable. Segmentation, on the other hand, would be preferable in cases where management intends to make concessions to certain stakeholder groups or discriminate geographically through selective plant closures. Segmentation, however, will be more difficult in more intimate local contexts and in cases of substantial media coverage.

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