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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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Information levels

In this 'possibilist' view of corporate- environmental influences, the stakeholder's perspective of environmental events and corporate actions is screened through layers of filters which differentiate the relevance of Information for the formation of expectations (Sage 1981). Eight different information levels related to the local plant closing context have been derived from the preceding conceptualization (for cursory 'headline' examples, see Table 2):

Approx. location of Table 2

1 Events in corporate environments

This Information may include price signals from competitive or oligopolistic product markets, changing trajectories in technological developments, turbulence in capital markets, ominously increasing activities of corporate raiders and other events on the merger and acquisition scene, unstable political conditions abroad, changes in foreign currency exchange relationships, an ambiguous regulatory environment at home, or varying labor relations climates in different parts of the corporate domain. These economic, social and political environments have become complexly intertwined and are in continuous, unpredictable motion (Campbell, 1988; Casti, 1979; Krumme, 1981b; 1984; Milliken, 1987). It should be noted that the WARN Act [1988, Sec.3(b)(2)] recognizes environmental complexities and turbulence by allowing plant closures "before the conclusion of the 60-day period if the closing ... is caused by business circumstances that were not reasonably foreseeable ... and by not requiring any notice if the closing "is due to any form of natural disaster..."

2 Interorganizational Transformations

This level addresses the likelihood of environmental effects on the focal corporation. The complexity and turbulence of corporate environments have made it exceedingly difficult to project the nature, timing and points of impact. For example, what factors condition whether and when the corporation will become a takeover target which eventually may "spell doom" for a particular division or production facility? Or what will influence the chances of one corporate division in the bidding for a prime- contract or, If unsuccessful, In the sharing of prime-contract benefits through subcontracts by another division, through joint ventures or a host of other Interorganizational alliances and forms of quasi-integration (Harrigan, 1987; Pfeffer, 1987)? Thus, stakeholders may also be interested in information about the quality of corporate inventiveness, boundary-spanning initiatives (which could also ultimately assist in finding alternative uses for plant facilities), attitudes toward risk and risk sharing, and the ability to innovate and utilize corporate resources Including information (i.e. nature and quality of entrepreneurship and R&D activities; corporate culture and ethics), the corporation's search, intelligence and resource acquisition activities, how well it has understood environmental cause and effect relationships, its own response possibilities, and the ultimate consequences of its responses (Campbell, 1988; Duncan and Weiss, 1979; Mintzberg, 1983).

3 The intra-organizational response

It is frequently argued that the ability to deploy corporate resources freely between divisions, product-lines, locations and outside investment opportunities lies at the core of the rationale and profitability of the modern industrial corporation. Business representatives have insisted that increased disclosure and advance notice requirements would stifle quick allocative responses, thereby further reducing the competitiveness of labor conditions in the U.S. and forcing business into international outsourcing or direct foreign investments. According to a spokesman for the wood-processing Weyerhaeuser Co., the advance notice requirement unnecessarily imposes restrictions on management options, including our ability to keep plants open" (Seattle Times, 1988a). A Boeing spokesman described the measure as "a very costly and disruptive intrusion into our operations and our relationship With employees and local government" (Seattle Times, 1988a).

If advance notice requirements indeed constitute plant closing restrictions and thereby reduce strategic flexibilities, managers are likely to respond by developing new packages of appropriate and cost- effective flexibilities. All other things equal, one would expect that firms In industries with particularly unstable demand operate with relatively high labor/capital ratios precisely because of a disproportionate reliance on employment flexibilities. One could argue that labor unions' long- lasting preoccupation with wages and work rules during the 'Fordist' era has favored the adoption of rigid, capital- Intensive technologies and organizational forms. Any reduction in employment flexibilities resulting from required longer planning (advance notice-) periods would, at least initially, tend to have two kinds of impacts, namely (a) promote more flexible forms of (temporary, part-time) employment relations, and (b) internalize needed flexibilities through changes in capital investments or organizational or technological innovations. There are many Indications that this restructuring of flexibilities Is well under way and that, in many industries, past capital and locational inertias and more recent drives for job security are overcome by new, flexible technologies and organizational forms, employment and job segmentation, changing union attitudes about on-the-job flexibilities and new multinational opportunities (Gertler, 1988).

In light of recent cases of job security clauses and, for specific conditions, even outright plant closing prohibitions in collective bargaining contracts, for example, in the automobile industry, one wonders why employers and business lobbyists argue so vehemently that advance notice requirements unacceptably reduce flexibility. While without notification requirements instant adjustments in employment levels and overnight plant closures are possible, it appears implausible that many firms would be able to make such consequential decisions without a preceding planning period, in spite of existing flexibilities. Unfortunately, little is known about internal lead times for plant shutdowns. (The results of a study undertaken 25 years ago suggest that such planning horizons may be much longer than is implied by today's business opposition. Based on a survey of 32 plant shutdown cases involving several states, it was found that the medium required planning time varied between 7 and 12 months; Weber and Taylor, 1963)

Inasmuch as advance notification may lead to increased procedural costs, plant closure delays or changes in Employment practices, one would expect these outcomes to vary with different time horizons:

(a) In the short run, costs resulting from advance notification will, at the margin, tend to delay closing action beyond the time when zero profits are made, inasmuch as such delays reduce interest costs on such closing related outlays. Of course, such considerations also interact with other factors, such as whether the freed-up assets can be disposed of rapidly. From an employment point of view, it would seem that advance notification favors "permanent" and full- time employees as opposed to largely unprotected temporaries and "part-timers" in cases of mass layoffs, while in cases of closures of entire plants, both groups would equally benefit from a publicized advance notice.

(b) In the medium run and in-situ, advance notice requirements should result in reduced hiring and diminished incentive for building up slack employment during good times. To circumvent advance notice laws, workers would be laid off earlier, more evenly across plants and more gradually. Such tendencies would reduce the overall demand for labor and encourage capital for labor substitutions or increases in backlogs (01, 1962; VanLong and Siebert, 1983).

(c) In the long run, firms will be less likely to make employment adjustments by closing entire plants. Maintaining 'swing plants' at which corporate employment adjustment capabilities are 'bundled' would become less attractive (Krumme, 1981a). Unavoidable capacity fluctuations are more likely to be accommodated in-situ and in a more gradual manner. Such a trend toward increased in-situ flexibility may, in turn, lead to further segmentation of the labor force based on job security. Firms will hire and fire less protected temporary workers and part-timers and reduce or at least stabilize employment levels of protected workers, possibly in order to keep the total number of such workers below the threshold levels of the WARN provisions. Thus, employment opportunities for short-term or part-time employees may improve, but more and more workers may be forced to switch to, or start out under, such less protected employment conditions.

The expected net effect should support the intuitive notion that advance notice requirements will tend to internalize labor adjustments and smoothen employment fluctuations, or, in terms of Galbraith's (1988) complaints about the "deteriorative tendencies" in the "intelligence and efficiency of the technostructure", reduce the cycle of relentless multiplication of personnel and recurrent dismissals by the modern corporation of large numbers of staff, always 'In the interest of efficiency'

4 Spatial-allocational transformations

This level includes considerations and actual planning of allocations of corporate resources to specific locations. The information most directly connected to the advance notification issue Involves the process of (1) distributing resources and production tasks among locations and (2) selecting plant(s) to be closed. Conceptually, reasons for discriminating for or against a particular corporate location may be found in (a) general organizational considerations (e.g. abandonment of a Product line in response to changes in the corporate environment); (b) plant-specific characteristics (e.g. age structure of plant) or (c) the local economic environment (e.g. changes in market accessibility). Spatial allocation decisions often appear to be subordinated to financial, Investment and organizational considerations In that they are not given the attention by management one might assume they deserve from a social Impact point of view. Findings by Howland (1988), Stafford (1989) and others clearly indicate that, in multi-locational firms, the selection of plants to be closed is based on corporate-internal factors including characteristics of specific plants, and has relatively little to do with local economic conditions, with the exception of labor climates and union activities. All-in-all, the inter- locational flexibilities are as much cherished by management as they are the basis for the difficulty of Interpreting information about this allocative stage, the seeming intra-corporate footlooseness of retrenchment, and thereby the external uncertainties of local stakeholders.

5 Corporate disclosure activities and media coverage

Here, the focus is on the timeliness, comprehensiveness and accuracy of corporate disclosures as well as the diffusion of disclosed Information through unions, local and national media, financial analysts and other channels. There is sufficient evidence to suggest that Information about the firm's environment, management's perception of it and the firm's activities and plans are not neutrally transmitted to stakeholders, but are subject to a variety of public relations filters, strategic manipulations and other behaviors, such as sheer neglect, which deserve attention.

It has been noted that the starting of operations at new locations, as opposed to expansion at established locations, has tended to become more difficult (Krumme, 1981a). For example, new operations are more severely affected by lead-time increases such as those associated with long environmental permit procedures or hostile responses from the public. Such experiences since the early 1970s were increasingly mirrored during the 1980s by the difficulty of closing plants. Unfavorable disclosures or specific plant closing notification to the public, similar to leaks and disclosures about plans for new plants, provide time for opposition groups to form, involve the media, and build public support (Storper et al., 1981) and are therefore unpopular with employers. A businessman admitted: If you notify in advance about a closing, you'll get unabated pressure... You get it from the church, the Governor, the laundryman. Lots of companies don't need that heat. They want to get out of town fast... (OTA, 1986, p.22).

Additional filters intervene via the behaviors of outside information intermediaries (media, financial analysts, forecasters etc.). Local media tend to shy away from unfavorable news associated with potentially disgruntled advertising customers and may also be concerned about the more general impact of negative news on the local economic climate. Underwood (1988) suggests that investigative reporting by local media may be less vigorous than that of some national papers; therefore locally important corporate developments potentially leading to the down-scaling or closure of the local plant, may be less than fully explored. However, it should also be noted that local media are occasionally attacked by readers who associate even more closely with the local corporation and who dislike any criticism of "their" firm (cf. Table 2).


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