Prof. Černius: Business, Employees & the State - Partners or Opponents? - MRU

22 April, 2020
Prof. Černius: Business, Employees & the State – Partners or Opponents?
Faculty of Public Governance and Business

Three weeks into the quarantine, it is clearly evident which companies, due to the coronavirus, experience cash flow problems, which were the life of the company. I would say it is necessary to emphasize changes in lifestyle, due to the coronavirus pandemic and not because of the quarantine period or announcement of the State of Emergency. The quarantine period is only a government means to contain the spread of the virus. If the quarantine were terminated, let’s say tomorrow, and restrictions removed, individuals for a certain time will be wary of large crowds, spending time in shopping centers or restaurants, until they feel assured that it is safe to return to the old way of life. Considering business perspectives and the imminent future or the “bright future” for business will not dawn until the next day after the quarantine period is terminated. That will occur when people start to live a normal life and start spending, like they did up to the pandemic. No one can say how long that will take. Academics are considering various scenarios regarding the size and the duration of the pandemic, but how long it will take for consumption to return to its original state within a country, pre-pandemic levels, is hard to say. The best prognosis would be “several months after the pandemic ends.” Because it is difficult to say the exact time this will occur, we can refer to it as day “X.” Therefore, even now companies come face to face with huge challenges because making decisions and determining outcomes is now necessary in a rather undefined situation. However, this does not mean that it is impossible to discuss any variants and recommend how business owners as well as employees should act or may act depending on the situation. It is now common to hear different union representatives, legal experts and other advisers warn hired employees not to agree with any employer’s offers to reduce salaries, change work conditions and other similar offers. In other words, they are concerned about the welfare of employees and protecting them from unscrupulous and dishonest employers who may take advantage of the current situation – the pandemic, and leaving employees at their mercy. Because finances are not an emotion-ridden science, let’s take a look at the situation some companies are now facing. First, some businesses now are experiencing a huge upswing. Food stores, package delivery services, food delivery companies and warehouses, where orders are filled, are the businesses that are thriving and not considering reducing employee salaries. In fact, quite the opposite is true. However, other businesses, such as restaurants, beauty salons, sports clubs, cinemas, concert halls, travel agencies, airlines are facing serious problems because their cash flow has been drastically reduced or their activities halted. Some of those businesses perhaps will not recover. It’s not because their services are no longer needed for their clients, when the pandemic ends. It’s simply because they will not survive. This is an objective phenomenon totally unrelated to someone’s fancy or finding fault with employers. Ok, so whose promises or prayers would help your flowers in your office survive for 3 weeks without no water? There may be promises to water the plants, but only when the quarantine period ends. So what are the chances for some businesses to survive? How much can the government, employers, or even employees themselves, help? If business has lost cash flows because it is unable to continue its activities, it is necessary to talk about how much financial resources such companies have at their disposal. The future actions of the heads of companies in this situation depend on this. If a company does not have financial resources stored away for a rainy day, then it is restricted in its decision-making. In this case, even if a company falls in the category of subsidized companies and could take advantage of government support for safeguarding work places, practically it is unable to do so. Despite this, the state agrees to contribute to employees’ salaries in companies that are standing idle – of 60 or 90% of salaries, the company is not able to take the pay out (even when paying out a reduced salary amount). Borrowing funds to cover the salaries of employees is risky, although it remains a possibility. However, in this case, it would be necessary to determine whether the companies would survive with a loan until the government awards a subsidy. The loan could be returned with the received subsidies. However, having received subsidies, the latter will not cover all, but only part of the paid employees’ salary. It is nevertheless necessary to answer the question – where to get money to return the remaining part of the loan. Also, having received a subsidy, such a company is obligated for another 3 months to pay its employees' salaries, to retain the subsidised work place. As previously mentioned, the termination of quarantine does not mean that clients will start to consume again and the company will restore its cash flows. This means that the company will face a shortage of cash. So, what to do? Borrow funds again? Maybe - if the state provides banks guarantees for such loans. In other terms, financial institutions will not borrow money, because such a loan will just be too risky for them. If the company does not receive loans, it will not be able to pay employees, providers and other partners. What then? The answer is obvious -bankruptcy. So for business owners, who foresee such a perspective and want to prevent bankruptcy it would be meaningful to completely halt activities and ask employees to leave their jobs. If the situation gets better, ask them to return. And this decision does not mean that employers are unsuitable, but that for objective reasons, the company will not be able to pay employees' salaries. In this case, the burden of all these fired employees rests on the state. Therefore, it is hoped that our state is well-prepared so that it is able for some time to support its citizens who have lost their jobs. So, for a financially-lean company in the current situation state support will not be of much help and the actions of its owners will be hard to forecast. Another situation is when a company has amassed enough financial resources. Then company owners can in various ways. The ideal case is when the company is financially sound and can, even without inflows of cash from activities, for some time survive independently. It is rather easy to determine the amount of funds needed for rent, salaries and utilities. If a company can survive for half a year without reducing its expenses, it can be held that such a company is especially stable and well prepared for any extraordinary situations. If owners take on all the problems related to the pandemic on their own shoulders, then comes a time when financial resources dissipate. If the business starts operations by then and the funds from activities are restores, then the company ad its employees are protected and can again further operate successfully because they do not have any debts. Then it is necessary only to amass financial resources up to the next crisis. That would be the ideal situation because the entire burden of the crisis would be shoulder day businessman thus not affecting employees nor the state. However, having financial resources but knowing that they may not be enough for survival to Day X, then there are other variants. If the owners of the business or the company can not reach out to the government for help, then the company can reduce expenditures which are connected with monetary outlays. First, this deals with salaries. Some employees may agree to temporary reductions in salaries until Day X. Then, they will be able work in the business again and receive their earlier salary, when the business restores normal operations. In this case, employees and employers each shoulder the burden of the crisis and thus do not ask the government for any help. It is nice to see that some Lithuanian businesses have taken such decisions, when they come to an agreement with employees, as if with business partners and seek together to preserve the business and work places. In some cases, government aid to business and some companies is useful and meaningful. It is important that they receive help when these companies are still “alive.” If there will be a delay and disagreements over details, then it may be too late. It is possible to keep watering a dried out flower, but it will not recover. At the same time, it is useful to share some uncertainty related to the list of companies, which are listed as having suffered from the pandemic. I have in mind large, financially strong companies whose owners are among the most distinguished and well-off citizens of Lithuania. These companies definitely have enough resources to survive until Day “X”. Weaker companies, on the other hand, may not receive necessary subsidies in a timely manner. Those that like conspiracy theories may say that government help to companies may be delayed, in order so weaker firms die out. We can return to 2008 and the financial crisis. At that time, the government infused huge financial resources to save banks to maintain liquidity. It is also helpful to recall the “golden parachutes” - huge sums of money, paid to bank chiefs as compensation for their departure instead of using these funds as allocated. There exists a risk that huge, but at the same time limited state funds would be allocated to large companies, which could also survive without the subsidies. Due to this, there will not be enough funds for smaller and middle-sized companies, which will not survive without these subsidies to Day “X.” That is why when the state is allocating subsidies to “the strong” it is well worth to take into consideration whether they need these funds. In summary, if the state, business and employees will work together as partners without demanding the impossible and acting responsibly towards each other in this crisis situation, then we have a real possibility to end this crisis having understood that strengthening this partnership will result in Partners who are important, meaningful and worthy of respect. Prof. Gintaras Černius is the Dean of Mykolas Romeris University’s Faculty of Economics and Business