Cal State Fullerton management professor Richard Parry

Richard Parry

JCPenney, The Hertz Corporation, J. Crew, Neiman Marcus, Gold’s Gym, Pier 1 Imports and the McClatchy Company are just a few of the major corporate names that have declared reorganization bankruptcy during the economic downturn accompanying the coronavirus pandemic.

While there are some cautious signs that the worst may be over for job markets as nationwide unemployment fell to 13.3% in May from 14.7% in April, most economists and business analysts anticipate a continued spate of business closures, as the economy transitions to a post-COVID-19 world and the full impact of the shutdown is felt, especially in fragile industries.

Richard Parry, management professor and business law and ethics expert at Cal State Fullerton’s Mihaylo College of Business and Economics, notes that many of these bankruptcies were years in the making, with the coronavirus pandemic the final straw.

Hertz: A Former Market Leader Was Losing Ground, and Then Came COVID-19

“These companies faced significant financial and competitive pressures even before the current pandemic,” he says. “For instance, Hertz’s nearly 700,000 vehicles had been largely idled because of the coronavirus, leaving the company $19 billion in debt, but Hertz has lost money for the past four consecutive years, including $58 million in 2019 for a variety of reasons.”

In Hertz’s case, the rise of ride-sharing apps and competition within the car rental space, conspired to upend the industry leader’s position in the minds of consumers focused on efficiency and ease.

“With Uber and Lyft, there is no need to sign a contract, all that needs to be done is open an app,” says Parry of the value-add these app-based businesses provide. “With Uber and Lyft, a customer doesn’t even need navigation.”

The final challenge for Hertz came in March 2020, when the company laid off 12,000 employees and furloughed an additional 4,000 due to travel restrictions and low demand, a trend observed throughout the transportation sector.

“The effect has been devastating not only on car rental companies, but airlines and other companies as well, including their suppliers,” says Parry. “As an example, Hertz bought and leased cars from a variety of carmakers. Those purchases have now stopped, which will not only hurt the automakers but all of their suppliers as well, such as tire manufacturers, brake suppliers, battery manufacturers and their various suppliers.

“Hertz, as well as other car rental companies, will be forced to sell significant numbers of their car rental fleet. This will have a significant effect on the value of used cars, and will affect individuals who have lost their jobs and must sell their cars. Creditors of the company will also be affected because they will be forced to accept reduced amounts in repayment of the debt as part of the reorganization.”

Executive Compensation in an Age of Bankruptcy

Ethicists have raised concerns about the executive bonuses that CEOs of the newly bankrupt companies have received, such as former Hertz executive Kathryn Marinello. In a regulatory filing for fiscal year 2019, she received more than $9.1 million in total compensation.

In JCPenney’s case, CEO Jil Soltau received a $4.5 million bonus, along with $1 million each to the other top executives, ahead of the iconic retailer’s bankruptcy filing.

Parry points to decisions made years before as the impetus for these surprising and controversial moves.

“The payouts to executives were presumably the result of contracts that the various companies, including Hertz, previously negotiated with these executives,” says Parry. “The companies did what they were contractually obligated to do. Those contracts presumably recognized the increasingly competitive environment that Hertz faced when those executives were hired. Kathryn Marinello of Hertz was hired in January 2017. The coronavirus wasn’t even a twinkle in anyone’s eye when that contract was signed. Breaching the contracts would have led to a lawsuit.”

The Long-Term Impact of Corporate Bankruptcies

Just as corporate bankruptcies defined the Great Recession of the late 2000s, Parry anticipates the same will be true in the present downturn, though the extent of the impact depends on a number of factors as the economy recovers – and potentially experiences a “W-shaped” recovery, according to the forecasts of Cal State Fullerton economists Anil Puri and Mira Farka.

“We are facing a steep decline in the economy, along with a rapid increase in unemployment. The effects of the unemployment have been mitigated by the government’s efforts to encourage companies to keep their employees through programs such as the Paycheck Protection Program,” says Parry. “How rapid the recovery occurs will depend on many factors, including the likelihood of a resurgence of the coronavirus as the quarantine is lifted.”

Though corporate bankruptcies can leave a lasting mark, Parry differentiates between liquidation bankruptcies of the Great Recession, such as Lehman Brothers, that sent the financial sector into a tailspin, and reorganization bankruptcies, such as those of automakers General Motors and Chrysler.

“Both Chrysler and GM reorganized as a result of the prior financial panic, and more than a decade later, both are still in business, though are smaller in size,” says Parry.

The hope is that a majority of the current bankruptcies will be similar to the automakers’ Great Recession experience, allowing some jobs to be retained and less disruption to markets.