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Weekly Report - 14 May 2020 (WR-20-19)

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CHILE: Government censures Cencosud

The decision by Chilean retail giant Cencosud SA to pay dividends to its stakeholders while at the same time benefiting from a government employee furlough scheme has been heavily criticised by the administration led by President Sebastián Piñera. With the government threatening to take Cencosud to court over the matter, the case has raised concerns that big business could be exploiting the emergency measures that the government has rolled out to safeguard jobs as it tries to overcome the coronavirus (Covid-19) pandemic and its economic fallout.

Under the recently approved ‘Ley de protección al empleo’, employees from firms that have been forced to suspend their operations due to the quarantine measures imposed to contain the Covid-19 outbreak are eligible to receive part of their salary from the national unemployment fund rather than from their employer. Employers are expected to continue paying employee’s social security, health insurance, and pension contributions, although firms are given the option of delaying paying these contributions if necessary. The initiative was designed to alleviate the financial pressure on firms obliged to suspend operations and ensure that they are not forced to close, leaving their employees without a job.

Some local Cencosud subsidiaries signed up to the furlough scheme and their employees’ salaries have been partly paid by the government since last month. But this incited controversy after it transpired that, in late April, Cencosud decided to pay US$109.7m in dividends (80% of the net profits it obtained in financial year 2019) to its stakeholders. Local trade unions and politicians from across the political spectrum slammed the decision, saying Cencosud should have used these funds to pay employee salaries and had abused the furlough scheme.

Cencosud defended its actions by pointing out that only 7,731 employees of the over 120,000 that the conglomerate employs have been enrolled in the furlough scheme, and that under Chilean legislation (Ley 18,046 on limited liability companies) firms that post profits must distribute at least 30% of these to their shareholders. However, the government took a dim view of this with Labour Minister María José Zaldívar censuring Cencosud’s actions during an appearance before the national congress on 5 May and threatening to file a suit against the firm.

  • Cencosud

“We find it completely incomprehensible that a firm that pays out dividends can take advantage of a law that seeks to provide relief for firms that are having financial problems,” Chile’s labour minister, María José Zaldívar, said. “It is at the very least a contradiction and the courts would have to resolve it,” Zaldívar said.

Faced with such a threat, Cencosud announced on 7 May that it would no longer subscribe to the furlough scheme and would return all the funds that it had received from it. Nevertheless, Chile’s congress has passed a bill amending the Ley de protección al empleo that bans beneficiary firms from paying out dividends. While this may resolve the issue in Chile, it is worthwhile noting that Cencosud has operations in Argentina, Brazil, Colombia, and Peru, and it is not clear if its subsidiaries have signed up to the similar furlough schemes implemented in those countries.