The Rise of Corporate Bankruptcies in 2023: Risky Behavior, Debt Overload, and CEO Compensation
2023 has been a year marked by an alarming rise in corporate bankruptcies, the worst since the global financial crisis. The bankruptcies of major institutions like Silicon Valley Bank and Mutual have made headlines, but what’s more surprising is the increasing trend of companies using bankruptcy as a strategic move rather than viewing it as a failure. As the financial landscape shifts, small to medium enterprises (SMEs), which provide jobs for nearly half of all working Americans, have also been significantly impacted. Meanwhile, CEO compensation during bankruptcies continues to spark controversy, as executives are often rewarded handsomely even as their companies face liquidation. This article explores the rising corporate bankruptcies in 2023, the impact on smaller businesses, the types of bankruptcy that companies file for, and the troubling trend of excessive CEO pay during financial crises.
In 2023, corporate bankruptcies surged to record levels, marking a stark reminder of the risks companies face when they overextend themselves or fail to manage debt properly. Two of the largest bankruptcies in American history occurred this year alone, with companies like Silicon Valley Bank and Mutual collapsing under financial strain. These high-profile failures were exacerbated by a risky approach to investing and poor management decisions. However, what’s striking is that bankruptcy is increasingly seen not as the end of the road, but as a strategic tool for companies to shed debt, reorganize, and reset their financial health. This shift in perspective has made corporate bankruptcies more common, with companies now actively leveraging bankruptcy to avoid liquidation and continue operations, often under the protection of Chapter 11 bankruptcy.
While large corporations dominate the conversation, small and medium-sized businesses (SMEs), which represent the backbone of the American economy, are facing mounting challenges. SMEs employ nearly half of all working Americans, but many are increasingly unable to bear the financial pressure of rising costs, debt, and market volatility. As large companies like Amazon, Walmart, and WeWork continue to dominate the job market, smaller businesses are struggling to compete. Small businesses, burdened by expiring junk debt, are facing a critical period between 2024 and 2028, when trillions of dollars in junk debt are set to mature, further exacerbating their financial struggles.
The types of bankruptcy available to companies are critical to understanding how they navigate financial crises. Chapter 7 bankruptcy is often considered the end of the road for businesses, as it involves the liquidation of assets to pay off creditors and ceases operations entirely. This is seen as a “game over” scenario for many companies, with no opportunity to recover. In contrast, Chapter 11 bankruptcy allows businesses to reorganize and restructure their operations while continuing to function, usually under the guidance of court-appointed administrators. This option provides companies with the breathing room they need to negotiate debt, cut costs, and potentially return to profitability. As Chapter 11 filings continue to rise, bankruptcy has increasingly become a tool for companies to navigate financial difficulty rather than face liquidation.
A particularly concerning aspect of corporate bankruptcies is the compensation awarded to CEOs and executives during the process. Even as companies go bankrupt and their workers lose jobs, executives often walk away with millions in compensation. These retention bonuses are designed to incentivize CEOs to stay with the company during the restructuring process, but they raise ethical concerns when executives are rewarded for leading their companies into bankruptcy. Legislation aimed at curbing these retention bonuses often has loopholes, allowing executives to receive substantial payouts while employees and shareholders suffer. This discrepancy between executive compensation and the consequences for employees has led to growing criticism of the bankruptcy system.
The rising tide of bankruptcies in 2023 and the increasing reliance on bankruptcy as a strategic move underscores the growing complexity of today’s corporate landscape. Risky investment strategies, excessive debt, and poor financial management have led to widespread instability, with smaller businesses bearing the brunt of the fallout. Meanwhile, the lack of accountability for executives who are rewarded despite leading their companies into financial ruin has sparked outrage. As more companies take advantage of Chapter 11 to restructure and renegotiate debt, it’s crucial for investors, employees, and regulators to reassess the role of bankruptcy in the modern economy.
