Bosses Run Away

When the companies face the danger of bankruptcy, some entrepreneurs chose to flee and disappeared from the management positions, leaving the companies running their own courses and hundreds of workers unpaid. Why would they do that without letting their companies go bankrupt according to the law?

Guangdong-based South China Daily published a report on October 10, saying that the 600 more workers of Weiyi Shoemaking Factory found that their boss never appeared in front of them after the National Day. Neither could he be available in cells or emails. Therefore, the workers thought their boss had fled and immediately reported to the government of Yongkou village where the factory was located. However, the village government locked the factory’s doors and didn’t allow the workers to walk out. Some of the workers climbed over the wall and disclaimed that they “were starving to death for they hadn’t eaten anything for days”.

Mr. Wang, who was in charge of economic development of Yongkou village, denied that the government didn’t give the workers something to eat. According to him, the village government locked the workers inside the factory lest “they were irritated so that they could do something illegal”. He also said that the government arranged cooks to make food for the workers in the factory.

Then according to the sequel report, the government of Yongkou village had already made settlement on the case. They had confirmed the truth that the boss of the shoemaking factory had run away with all the assets of the factory. The government decided to give each worker the subsidy of 770 yuan (USD 112.75) each month in the next three months. According to Mr. Wang, the factory still owed the village government the property rentals of about 300 thousand yuan (USD 42.9 thousand).

This shoemaking factory is founded by a Taiwanese named Chen Guolong and the other two shareholders in 1992. According to the source, the three shareholders held different opinions about the development strategy, which resulted in the plight of the factory.

Under the influence of the financial crisis, many private-owned enterprises in China were trapped in trouble. “The running-away bosses” nearly became a popular phrase on the Internet. Behind those running-away bosses were the broken capital chains, unaffordable usuries, increasing bad debts of the banks and the workers asking for their salaries.

When the companies are on the verge of breaking down, why would the entrepreneurs choose to run away and leave a bad name rather than let their companies go bankrupt according to the law? Was the international financial crisis the only factor that drove the desperate bosses of private-owned enterprises in China to run away?

True or False Runaways

On October 15, 2008, the world largest toy subcontractor Hong Kong Hejun Group closed its two toy factories in Dongguan, Guangdong under the influence of the financial crisis. These two factories became the first entity enterprises going bankrupt due to the impact of financial crisis. On the morning of that day, workers of the two factories found that their bosses and the senior managers collectively disappeared without leaving any hints.

From then on, the news about “running-away bosses” can be continuously heard in China: in October 2008, Tao Shoulong, board chairman of a Shaoxing-based company disappeared secretly, but he was arrested two weeks later when he was trying to slip out of China. Before that, the Shaoxing government had already expropriated his passport. In the same month, a couple who ran a property company in Jinhua, Zhejiang ran away to a foreign country together with their company’s senior managers, leaving about 200-million-yuan banking loans unpaid. In March 2009, another Zhejiang-based company’s board chairman Mao Weiguo and his daughter fled to a foreign country with hundreds of million yuan. It was said that they owed the banks at least 200 million yuan (USD 29.29 million).

According to the data, in 2008, nearly 400 companies in Zhejiang saw their bosses fleeing to the foreign countries. That means every day more than one company’s boss fled from China to foreign countries. “This number equaled the one in the past ten years,” said a Zhejiang government official.

For a while, there was so much news about the “running-away bosses” that a boss was considered to “run away” if he hadn’t been seen or contacted for a certain while. For example, Huang Qiaoling, board chairman of a Hangzhou-based company, was said to disappear in last October, bringing a destructive blow to the company whose annual revenue was beyond 100 million yuan (USD 14.64 million). Fortunately, Huang “reappeared” in time and showed the media the documents from the banks, telling them that he had gone for a while to collect capital for his company. Even the Hangzhou government came out to help him clarify the truth.

Blind Expansion before Running away

According to the statistics, the bad performance of their enterprises and the broken capital chains were the two factors forcing the bosses to flee to the foreign countries. The data told us that 45% of the bosses chose to flee because their companies suffered great losses or went bankrupt; 20% of them chose to flee because of the huge liabilities or usuries.

The experts pointed out that fled bosses usually blindly invested in many fields after they accumulated certain wealth, especially in the stock market and property market. This brought the enterprises a large burden of liabilities and impaired the advantages of the companies in the fields they were previously good at. When the economy was in the booming period, nothing dangerous would happen. But if the economic situation deteriorated, these companies might suffer fatal blows and broke down immediately.

Mao Weiguo and his company previously specialized in aquatic products were the best examples. Mao Weiguo used to the richest people in Zhoushan, Zhejiang. How could he run away with 200-million-yuan debts unpaid? “If he was only engaged in the business of aquatic products, he could not be trapped in such a large amount of debts,” said a Zhoushan government official.

In 2004, some foreign countries set a trade barrier for the aquatic products from China with the reason of detecting chloramphenicol in the shrimps imported from China. In that situation, Mao Weiguo began to think about diversifying his company’s business. “When I began my business, the only aim was to earn money. But when my company grew bigger, I felt a kind of responsibility to continue the development in order to repay those who help me and work for me,” Mao once said when interviewed by a local media.

In June 2005, the government of Suqian, Jiangsu came to Zhoushan to recruit business. Taking this opportunity, Mao Weiguo led his way into Suqian by investing in the property industry. The first big project built by Mao was the symbolic structure in Suqian the Guotai Square, which covered 46.7 thousand m2. Mao put 500 million yuan (USD 73.22 million) in this project containing a five-star hotel, a shopping mall, five high-end residences and three commercial streets. Such a project was called “commercial giant” by the local media in Suqian because “it ended the period in which Suqian had no high-end retailing markets”.

“The square was far from the urban center. Mao Weiguo wanted to be the creator of urban complex. But he failed to master the core of this development pattern. Therefore, he was doomed to fail from the start,” said an expert. Because of the insufficient consumption power of Suqian resident and the inconvenient transportation, Guotai Square didn’t attract so many customers as Mao Weiguo expected.

According to Mao’s friend, he had not very much money. Most of his investment in Suqian came from the borrowings. Therefore, his investment had a poor anti-risk ability. The transformation based on this was quite risky. “He came to invest in a less developed place and was called ‘the star entrepreneur’. He felt arrogant and made some other big investments which all suffered failure,” said an entrepreneur in Zhoushan.

More Factors for the Runaways

The scholar Kong Shanguang thought that people should look into the detailed reasons of the fled bosses while blaming them. In recent years, the Chinese government increased the deposit reserve ratio for several times, forcing the banks to squeeze the amount of credit loans and they became more inclined to lend loans to the large state-owned enterprises. Therefore, it is quite difficult for the small- and medium-sized enterprises (SMEs) to borrow loans from the banks. Then they had to conduct financing through non-banking ways, which resulted in the infestation of illegal private banks and usuries. Some companies were just worn out by the usuries and went bankrupt because of the broken capital chains.

If they couldn’t pay the loans from the banks or the debts of the suppliers, their bosses could choose to make their companies go bankrupt according to the relevant laws instead of running away. But if the unaffordable debts came from the illegal private banks or usuries, the entrepreneurs could not avoid these liabilities even after the breaking down of their enterprises. Sometimes the security or even lives of them and their families could be in danger. Therefore, they had to flee to the foreign countries to avoid the legal or illegal “punishment”.

In addition, there was a systematic factor driving these entrepreneurs to flee the new Law of Labor Contract issued on January 1, 2008. According its 46th article, if the enterprises need to terminate the labor contracts because of the restructurings and bankruptcies as stipulated in the Law of Corporate Bankruptcy or serious problems in business operation, they should compensate the employees when the bankruptcies come into effect. Then it is stipulated in Article 47 that the economic compensation shall be paid to workers according to the number of years he has worked for the employer by the rate of one month’s salary for each full year he worked. Any period of above six months but less than one year shall be deemed as one year. The economic compensations that are paid to a worker for any period of less than six months shall be one-half of his monthly salary. If the monthly salary of a worker is three times higher than the average monthly salary of workers as announced last year by the people’s government at the municipal level directly under the central government or at the level of districted city where the entity is situated, the rate for the economic compensations paid to him shall be three times the average monthly salary of workers and may not exceed 12 years of work. Monthly salary as mentioned in this Article means the average monthly salary of the worker for the 12 months before the discharge or termination of the labor contract thereof.

Therefore, even though the entrepreneurs had ways to avoid the trouble from illegal private banks and usurers, they could not get rid of the compensation stipulated by the laws. Take one of the two toy factories of Hong Kong Hejun Group for example: if the boss applied for bankruptcy according to the old contract law, the total assets of his factory was 500 million yuan (USD 73.22 million). After paying the taxes, banking loans, suppliers’ payments and employees’ salaries, he could have 2 million yuan (USD 292.9 thousand) left, which he could use for restarting his business or supporting his life when he is old.

But according to the new contract law, if the average working period of the workers was 4 years and their average salary was 1,000 yuan (USD 146.43), the boss should compensate each employee 4,000 yuan (USD 585.73). The total number of workers was 7,000, which meant that the total compensation will be 28 million yuan (USD 4.1 million). In addition to the compensation for the workers’ social insurances which was estimated at 24 million yuan (USD 3.51 million), the boss had no money left for him.

But if he chose to flee, he could take the money within his hands away and enjoyed a happy life in the foreign countries.

The new stipulations about the compensation for the employees’ social insurances brought a big problem for the entrepreneurs since many of them didn’t buy the social insurances for their employees. The bosses of companies whose profits were quite limited could also be forced to flee if their employees asked for buying social insurances for them.

In Kong Shanguang’s opinion, many reasons could explain why the bosses chose to run away. He suggested that the Chinese government should help the SMEs in financing and enhance the enforcement of the laws and regulations to terminate the phenomenon forever.